TEST BANK FOR Foundations of MacroEconomics, 9e (Global Edition) By Robin Bade, Michael Parkin. NOTE by StudyGuide

Foundations of MacroEconomics, 9e (Global Edition) By Robin Bade, Michael Parkin (Test Bank All Chapters, 100% Original Verified, A+ Grade) Ch 18 missing (International Trade Policy) Foundations of Economics, 9e (Bade), GE Chapter 1 Getting Started 1.1 Definition and Questions 1) Scarcity exists because A) human wants exceed the resources available to satisfy them. B) some individuals have low income. C) the costs of production are high. D) some people make bad economic decisions. E) people take too much leisure time. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 2) Scarcity A) is the inability to satisfy all our wants. B) leads to higher prices. C) applies only to people living in poverty. D) is not something that affects very rich people. E) used to exist everywhere but has been eliminated in advanced economies. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 3) Scarcity requires that we A) produce efficiently. B) learn to limit our wants. C) have the most rapid economic growth possible. D) have unlimited resources. E) make choices about what goods and services to produce. Answer: E Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

4) Scarcity means that A) what we can produce with our resources is greater than our material wants. B) resources are unlimited. C) wants are greater than what we can produce with our resources. D) governments must make up for shortages in resources. E) choices made in self-interest cannot be the same as those made in the social interest. Answer: C Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 5) Because human wants are insatiable and unlimited while available resources are limited, people are said to face the problem of A) scarcity. B) why to produce. C) macroeconomics. D) microeconomics. E) social interest versus self-interest. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 6) Which of the following statements BEST describes the study of economics? Economics studies how A) to organize production so that scarcity does not occur. B) firms make profits. C) we make choices in the face of scarcity. D) to create incentives so that scarcity does not exist. E) businesses reach decisions. Answer: C Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

7) Scarcity forces people to A) choose among available alternatives. B) cheat and steal. C) be unwilling to help others. D) live at a low standard of living. E) consume as much as they can as quickly as they can. Answer: A Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 8) Scarcity means we must A) consume less. B) produce less. C) make choices. D) earn more. E) work more. Answer: C Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 9) What is the reason that all economic issues and problems occur? A) All nations use some form of money to buy and sell goods and services. B) Humans are always wasteful and inefficient in production and consumption. C) Powerful governments are able to control production and consumption. D) Human wants exceed the resources available to satisfy them. E) People seek only their own self-interest. Answer: D Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

10) The study of economics is best described as a study of A) the factors that influence the stock and bond markets. B) capitalism. C) the choices made in producing goods and services. D) coping with scarcity, and choices made as a result of scarcity in a society. E) how people earn a living. Answer: D Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 11) Which of the following statements BEST describes the study of economics? Economics studies how A) to organize production so that scarcity does not occur. B) firms make profits. C) we make choices in the face of scarcity. D) to create incentives so that scarcity does not exist. E) businesses reach decisions. Answer: C Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 12) Which of the following BEST defines economics? A) Economics teaches how to limit our wants. B) Economics studies how to choose the best alternative when coping with scarcity. C) Economics helps you earn as much money as possible. D) Economics analyzes all aspects of human behavior in general. E) Economics is concerned with prices and quantities of goods and services, both at the individual level and at the industry level. Answer: B Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

13) Economics is the social science that studies A) the real reasons people buy goods and services. B) the psychology of individuals and businesses. C) whether a nation has enough natural resources. D) how people make choices to cope with scarcity. E) how choices made in the social interest could eliminate scarcity. Answer: D Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 14) Economics is best defined as the social science that studies A) how a person can get everything he or she wants. B) the reason money exists. C) the way to eliminate choices in our decisions. D) the choices that societies, and the people and institutions that make up societies, make in dealing with the issue of scarcity. E) how choices made in the social interest must conflict with choices made in the self-interest. Answer: D Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 15) Microeconomics includes the study of the A) aggregate effects on the national economy. B) recessions and inflation in the global economy. C) choices made by individuals and businesses. D) reasons why the government changes interest rates. E) nationwide unemployment rate. Answer: C Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

16) The primary focus of microeconomics is A) to examine the operation of the entire (aggregate) economy. B) to examine the behavior and operation of the individual units or sectors that make up the economy. C) our government's monetary policy. D) the levels of employment and inflation. E) to study how we managed to eliminate scarcity. Answer: B Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 17) Which of the following is a microeconomic issue? A) The price of gasoline increases in the United States this year. B) The Brazilian economy experiences rapid economic growth. C) The unemployment rate soars in Spain. D) Inflation skyrockets in Russia. E) The U.S. government cuts taxes to combat a recession. Answer: A Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 18) Which of the following is a microeconomic issue? A) Growth in the U.S. economy slowed. B) Increased federal government expenditures have lowered the unemployment rate. C) The effect the COVID-19 pandemic has on the unemployment rate. D) The quantity of wheat grown in the United States increases this year. E) The U.S. government cuts taxes to combat a recession. Answer: D Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Revised AACSB: Reflective thinking

19) Which of the following is a microeconomic topic? i. K-Mart's decision to close stores that are not making a profit ii. Home Depot's choice to hire more full-time employees because its sales increased iii. Delta Airlines changes its fares. A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: E Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 20) Which of the following is a microeconomic topic? A) Northwest Airlines analyzes the benefits of adding one more flight to Salt Lake City. B) Unemployment soars as taxes increase. C) The government leaves interest rates unchanged as the economy improves. D) Germany's government increases taxes to avoid a budget deficit. E) Chinese economic growth slows. Answer: A Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 21) Which of the following is a microeconomic topic? i. Gas prices increase after a hurricane hits the gulf coast. ii. Xavier starts a new business designing web pages. iii. Abby decides to practice an extra hour of soccer instead of studying. A) i, ii and iii B) i only C) ii and iii D) ii only E) i and ii Answer: A Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

22) Macroeconomics is the study of A) the actions of individual consumers. B) national or global economies. C) the actions of individual businesses. D) the government. E) how ceteris paribus affects causation. Answer: B Topic: Macroeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 23) Which of the following BEST describes macroeconomics? A) It analyzes the aggregate effects on the national economy of the choices made by individuals, firms, and governments. B) It studies the choices that individuals and businesses make when coping with scarcity. C) It examines how the choices that individuals affect governments. D) It is not a social science because its predictions cannot be tested. E) Proving causation is never a problem for macroeconomics. Answer: A Topic: Macroeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 24) Which of the following is a topic studied in macroeconomics? A) the pricing decisions in the computer hardware industry B) the effect on economic growth if the government raises taxes C) how the wheat industry determines how much wheat to grow D) the impact of labor unions on wages E) the impact of higher prices for gasoline on the number of SUVs people buy Answer: B Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

25) Which of the following is a macroeconomic topic? A) The federal government's decision to spend more on environmental protection B) The county government's decision to increase the sales tax for your county C) Why did production and jobs expand rapidly in 2017? D) General Motors decides what prices to set for their new models. E) The effect of floods in agricultural areas on the price and quantity of wheat Answer: C Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Revised AACSB: Reflective thinking 26) Which of the following is a macroeconomic issue? A) The price of a ticket to Walt Disney World in Orlando is increased. B) The National Football League signs a new television contract. C) The number of jobs and production in Zimbabwe increase. D) The Iowa corn harvest is smaller than normal. E) Utilities are required to install more anti-pollution devices. Answer: C Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 27) Which of the following is a macroeconomic topic? i. China increases interest rates to slow its economic growth. ii. Congress lowers tax rates to try to lower the unemployment rate. iii. Nissan decides to produce more electric Leaf models and fewer Altima sedans. A) i and ii B) i, ii and iii C) iii only D) i and iii E) ii and iii Answer: A Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

28) When you make the decision to spend your time attending class, which economic question are you answering? A) What? B) How? C) For whom? D) Why? E) Is this in the social interest? Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 29) Of the three major economic questions, which of the following is the BEST example of a "What?" question? A) Should automobiles be produced using workers or robots? B) Should higher-income or lower-income people buy SUVs? C) Should we make faster microprocessors or pest-resistant corn? D) Should migrant workers or domestic workers be used to pick grapes? E) What should doctors be paid? Answer: C Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 30) When Ford decides to increase production of hybrid cars, it directly answers the ________ question. A) what B) how C) for whom D) where E) why Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

31) When Delta decides to quit flying to Lithuania, it directly answers the ________ question. A) what B) why C) for whom D) how E) when Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 32) The question of "What goods and services get produced?" most closely relates to which of the following issues? A) the distribution of goods and services in the economy B) producing goods and services in the least costly manner C) building a missile defense system, or putting a computer in every elementary school classroom D) obtaining specialized training to increase one's income E) taxing high income workers to give payments to poor households Answer: C Topic: Economic questions, what Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 33) When a home builder decides to computerize all of its production schedules, it directly answers the ________ question. A) for whom B) what C) where D) how E) why Answer: D Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

34) When Fresh Express Salads decides to mechanically pick all of its lettuce, it directly answers the ________ question. A) what B) how C) for whom D) where E) when Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 35) When the power company decides to use manpower to bury its lines, it directly answers the ________ question. A) what B) for whom C) how D) why E) when Answer: C Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 36) The question of "How are goods and services produced?" most closely addresses which of the following issues? A) Should Ford build SUVs or luxury cars? B) Should Ford use expensive industrial robots or inexpensive Mexican autoworkers to produce SUVs? C) Should contractors build residential housing or shopping malls? D) Is income distributed fairly in the United States? E) Why are Christmas trees popular only in December? Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

37) Of the three major economic questions, which of the following is the BEST example of a "How?" question? A) Should we produce more heavy fleece coats? B) Should we collect tolls on turnpikes using human toll collectors or mechanized toll machines? C) Should we build log homes or build factories from bricks? D) Should we spend more on health care? E) Should we eat more oatmeal? Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 38) Which economic question depends on the incomes that people earn and the prices they pay for goods and services? A) What? B) How? C) For whom? D) Why? E) Where? Answer: C Topic: Economic questions, for whom Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 39) When the federal government decides to pay senators more than it pays soldiers, it answers the ________ question. A) why B) how C) for whom D) what E) where Answer: C Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

40) When a third string NFL quarterback earns more than a police officer, society answers the ________ question. A) for whom B) what C) how D) why E) social interest vs. self-interest Answer: A Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 41) When unskilled teens earn less than college graduates, society answers the ________ question. A) how B) what C) for whom D) why E) social interest versus self-interest Answer: C Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 42) Canada has nationalized health care, so that everyone, regardless of their ability to pay, has some access to health care. Based on this observation, Canada has decided that "everyone, regardless of their ability to pay" is the answer to what microeconomic question? A) What type of health care will be produced and in what quantity? B) How will health care be produced? C) For whom will health care be produced? D) Why will we offer health care? E) Must we offer health care? Answer: C Topic: Economic questions, for whom Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Analytic skills

43) Choices that are best for the individuals that make them are choices in pursuit of A) the social interest. B) efficiency. C) incentives. D) self-interest. E) equity. Answer: D Topic: Self interest Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 44) Self interest A) reflects choices that are best for society as a whole. B) reflects choices that are best for the individual who makes them. C) has nothing to do with determining what goods are produced. D) occurs only when wants exceed available resources. E) cannot be used to determine how goods are produced. Answer: B Topic: Self interest Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 45) Choices that are best for the society as a whole are choices in pursuit of A) answering the "how" question. B) the social interest. C) self-interest. D) incentives. E) answering the "for whom" question. Answer: B Topic: Social interest Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

46) The characteristic from which all economic problems arise is A) political decisions. B) providing a minimal standard of living for every person. C) how to make a profit. D) hunger. E) scarcity. Answer: E Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 47) All economic questions and problems arise from A) the fact that society has more than it needs. B) turmoil in the stock market. C) the unequal distribution of income. D) a society's wants exceeding what its scarce resources can produce. E) the difference between self-interest and social interest. Answer: D Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 48) Scarcity results from the fact that A) people's wants exceed the resources available to satisfy them. B) not all goals are desirable. C) we cannot answer the major economic questions. D) choices made in self-interest are not always in the social interest. E) the population keeps growing. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

49) To economists, scarcity means that A) limited wants cannot be satisfied by the unlimited resources. B) a person looking for work is not able to find work. C) the number of people without jobs rises when economic times are bad. D) there can never be answers to the what, how or for whom questions. E) unlimited wants cannot be satisfied by the limited resources. Answer: E Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 50) Which of the following statements is TRUE regarding scarcity? A) Scarcity affects poorer countries only. B) An economy experiences scarcity only when the incomes of its citizens decline. C) Poor people experience scarcity more often than do rich people. D) All citizens in a wealthy economy experience scarcity. E) Scarcity could be overcome if people would make all choices in the social interest. Answer: D Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 51) People must make choices because A) most people enjoy shopping. B) of scarcity. C) there are many goods available. D) the question "What goods and services are produced?" is not adequately answered. E) making choices is in the social interest. Answer: B Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

52) Which of the following is a microeconomic issue? A) Why has unemployment risen nationwide? B) Why has economic growth been rapid in China? C) What is the impact on the quantity of Pepsi purchased if consumers' tastes change in favor of non-carbonated drinks? D) Why is the average income lower in Africa than in Latin America? E) Why did overall production increase within the United States last year? Answer: C Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 53) Microeconomics includes the study of A) how countries decide to fund their budget deficits. B) the choices that individuals and businesses make. C) how a nation promotes economic growth. D) the effect on the national economy of the choices that individuals make. E) the overall amount of production within the economy. Answer: B Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 54) The question "Should we produce LCD televisions or computer monitors?" is an example of a ________ question. A) what B) how C) for whom D) where E) why Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

55) When Ferrari decides to produce 1,200 360 Modenas each year, Ferrari is answering the ________ question. A) for whom B) how C) what D) why E) scarcity Answer: C Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 56) Whether a company produces fishing rods mostly by hand or using high-tech machinery is a question of A) "For whom will goods be produced?" B) "When will the goods be produced?" C) "Where will the goods be produced?" D) "How will the goods be produced?" E) "Why will the goods be produced?" Answer: D Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 57) When a landscaping company decides to use drafting software and computers instead of hiring designers to draw design plans by hand, it is answering the ________ question. A) how B) what C) for whom D) opportunity cost E) why Answer: A Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

58) The question "Should we produce houses using bricks or wood?" is an example of a ________ question. A) what B) how C) for whom D) where E) why Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 59) The question "Should economics majors or sociology majors earn more after they graduate?" is an example of a ________ question. A) what B) how C) for whom D) where E) why Answer: C Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 60) If a decision is made and it is the best choice for society, the decision is said to be A) a valid economic choice. B) made in self-interest. C) made in social interest. D) consistent with scarcity. E) a want-maximizing choice. Answer: C Topic: Social interest Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

1.2 The Economic Way of Thinking 1) In economics, cost is measured as ________, and benefit is measured as ________. A) what you must give up to get something; what you are willing to give up to get it B) what you are willing to give up to get it; what you must give up to get something C) the amount of money that you pay for something; the amount of money that someone else is willing to pay you D) what you are willing to pay on the margin; what the government pays you when you are unemployed or retired E) the amount of money that you pay on the margin; the amount of money that you receive on the margin Answer: A Topic: Benefits and costs Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 2) An opportunity cost is A) the dollar amount that is paid. B) anything the decision maker believes costs to be. C) the benefits of the highest-valued alternative forgone. D) whatever is paid out and cannot be reduced or reversed. E) another term for all the sunk costs. Answer: C Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 3) Economists measure opportunity cost A) only when it is on the margin. B) as the best thing given up. C) as the sum of all forgone opportunities. D) as the same as marginal benefit. E) as equal to the sum of all the sunk costs. Answer: B Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

4) The opportunity cost of a decision is measured in terms of A) time. B) the price of the alternative we choose. C) the next best thing given up. D) the price of a new opportunity that arises. E) sunk cost. Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 5) You have chosen to take a trip during spring break. If you had not gone, you would either have worked at a temporary job or studied for exams. The opportunity cost of your trip is A) the wages you would have earned from working. B) the lower grade earned by not studying. C) the wages you would have earned from working and the lower grade earned by not studying. D) the value of the trip. E) We cannot determine what the opportunity cost is without knowing which alternative, working or studying, you would have preferred. Answer: E Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 6) If Jessie studies economics for two hours instead of going to the movies with her friends, then A) the benefit of studying is the missed movie. B) the opportunity cost of studying is the missed movie. C) Jesse definitely is making a rational choice. D) Jessie is ignoring a sunk cost. E) Jessie is not responding to any incentives. Answer: B Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

7) The value of the best thing that a person must give up when making a decision is known as the ________ cost. A) direct B) benefit C) opportunity D) explicit E) sunk Answer: C Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 8) Ali decides to attend the one-hour review session for microeconomics instead of working at his job. His job pays him $10 per hour. Ali's opportunity cost of attending the review session is A) the $10 he could have earned at his job. B) the value of the session minus the $10 he could have earned at his job. C) nothing, because the review session does not cost anything. D) equal to the benefit he gets from the review session. E) the one-hour review session. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills 9) Suppose that, instead of taking this test, you could either have worked and earned income or partied and had a pleasurable time. Your opportunity cost of taking the test is the A) forgone work. B) forgone party. C) forgone working and partying. D) forgone working or partying, depending on which was your next best choice. E) test because you are taking it. Answer: D Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

10) The benefit from a good or service that you purchase is measured by A) the dollar amount that is paid for the good or service. B) the dollar amount you can get by selling the good or service. C) what you are willing to give up to obtain the good or service. D) how strong the incentives were that lead to buying the good or service. E) None of the above answers is correct because there is no way to measure the benefit you receive from purchasing a good or service. Answer: C Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 11) Suppose you take a trip during spring break. To determine the benefit of taking the trip, you A) calculate the opportunity cost of the trip. B) measure what you are willing to give up to take the trip. C) determine the sunk cost of taking the trip. D) calculate the value of the next best alternative foregone. E) must measure what the trip is worth to you and then subtract the cost of the trip. Answer: B Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 12) Rational choice A) is a choice that uses the available resources to best achieve the objective of the person making the choice. B) is always efficient. C) is what you must give up to get what you want. D) is made by comparing different incentives. E) provides the answer to only the "how" question. Answer: A Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

13) A rational choice is one that A) always turns out for the best for the decision maker. B) creates no costs for the decision maker. C) must be made with perfect information. D) uses the available resources to most effectively satisfy the wants of the person making the choice. E) is made in the social interest rather than the self-interest. Answer: D Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 14) What is NOT true about rational choice? A) It can result in different decisions for different individuals. B) It involves comparing costs and benefits. C) It might turn out not to have been the best choice after the event. D) It is a choice that uses the available resources to best achieve the objective of the person making the choice. E) It is the same for all individuals. Answer: E Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 15) The cost of a one-unit increase in an activity is called the A) opportunity benefit. B) rational cost. C) marginal cost. D) marginal benefit. E) margin. Answer: C Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

16) The opportunity cost of a one-unit increase in an activity A) is greater than the marginal benefit. B) is called rational cost. C) decreases as you do more of it. D) is called marginal cost. E) is measured by what the person is willing to give up to get one more unit of the activity. Answer: D Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 17) Mothers Against Drunk Drivers (MADD) campaigned to increase the legal penalties of drunk driving. This successful campaign ________ of drunk driving. A) increased the marginal benefit B) decreased the marginal benefit C) increased the marginal cost D) decreased the marginal cost E) had no effect on the marginal cost or marginal benefit but did affect the total benefit Answer: C Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 18) The marginal cost of an activity ________ as you do more of it. A) increases B) decreases C) doesn't change D) changes ONLY IF the marginal benefit of the activity does not change E) changes ONLY IF the marginal benefit of the activity changes Answer: A Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

19) A professor changes the penalty for cheating on exams from getting a 0 on the exam to getting an F in the course. The professor has A) increased the marginal cost of cheating. B) decreased the marginal benefit of cheating. C) made all the students act in the social interest. D) recognized that students don't respond to incentives. E) recognized that students don't make rational choices. Answer: A Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 20) The benefit of a one-unit increase in an activity A) is called marginal cost. B) is always greater than the opportunity cost of that activity. C) decreases as you do more of it. D) is measured by what you must give up. E) is called rational-choice benefit. Answer: C Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 21) Huey has eaten two hamburgers and is considering a third. The marginal benefit in his decision is the pleasure from consuming A) the two previous hamburgers. B) all three hamburgers. C) just the third hamburger. D) just the second hamburger. E) the third hamburger minus the pleasure from consuming zero hamburgers. Answer: C Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills

22) What typically happens to benefits as the amount of an activity is increased? A) Total benefits remain constant. B) Marginal benefit increases. C) Marginal benefit remains constant. D) Marginal benefit decreases. E) The marginal benefit changes ONLY IF the marginal cost changes. Answer: D Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 23) Suppose you eat two hamburgers for lunch. The marginal benefit of the first burger is ________ of the second burger. A) larger than the marginal benefit B) smaller than the marginal benefit C) equal to the marginal benefit D) not related to the marginal benefit E) equal to the marginal cost AND the marginal benefit Answer: A Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills 24) A choice made by comparing all relevant alternatives systematically and incrementally is A) an opportunity cost. B) a choice on the margin. C) a benefit. D) a sunk cost. E) a choice made in the social interest. Answer: B Topic: On the margin Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

25) Making choices on the margin means A) scribbling on the edges of your notebook paper. B) comparing all relevant alternatives systematically and incrementally. C) making a decision based on emotions. D) making decisions in the largest possible increments. E) taking account of all marginal benefits, all opportunity costs, and all sunk costs. Answer: B Topic: On the margin Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 26) Decision making on the margin involves A) comparing the marginal cost and marginal benefits when making a decision. B) comparing the total cost and the total benefit when making a decision. C) eliminating the additional cost when making a decision. D) determining the total benefits of a decision. E) comparing the benefits from the social interest to the benefits from the person's self-interest. Answer: A Topic: On the margin Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 27) In making your decision whether to take a trip during spring break, you compare all the other activities you could undertake. As a result, you A) are making a choice on the margin. B) limit the cost and the benefits you can gain. C) are not making a rational choice. D) do not face an opportunity cost. E) must have made a choice in the social interest. Answer: A Topic: On the margin Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

28) To make a rational choice, a person A) compares the extra benefits of one more unit to the extra costs of one more unit. B) adds the total benefits and the total costs and then compares the two totals. C) adds the total benefits to determine if the total is large enough. D) adds the total costs to determine if the total is small enough. E) takes account of all benefits and all opportunity costs, including both marginal costs and sunk costs. Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 29) In order to determine whether to major in economics, a rational individual compares the ________ of the decision. A) marginal benefit and marginal cost B) opportunity cost and the sunk cost C) positive benefits and normative costs D) normative benefits and positive costs E) self-interest and social-interest Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 30) In order to make a rational choice, people must A) only know what they want. B) be able to afford the choice decided upon. C) decide quickly without wasting time. D) compare marginal costs and marginal benefits. E) determine what is in the social interest. Answer: D Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

31) Instead of studying for an additional two hours for the economics final, Leann decides to watch a movie. Leann is making A) a decision that does not involve an opportunity cost. B) a rational decision if her marginal cost from the movie is greater than her marginal benefit. C) a rational decision if her marginal benefit from the movie is greater than her marginal cost. D) an irrational decision because studying is more important than watching a movie. E) a decision that is not on the margin because she will see the entire movie. Answer: C Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 32) When Gabriel made a rational choice to spend his entire allowance on candy bars, he did so by comparing the A) benefits of the candy bars to the desires he had for the candy bars. B) marginal benefits of the candy bars to the marginal costs of the candy bars. C) opportunity costs of the candy bars to the scarcity of the candy bars. D) benefits of the candy bars to the scarcity candy bars. E) self-interest to the social interest. Answer: B Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 33) As part of its proposal to win the 2012 Olympics, London developed a carbon offset plan to reduce the Games' impact on the environment. In 2011, the organizers decided to drop this plan to reduce emissions. We can conclude that A) the marginal cost of reducing emissions exceeded the marginal benefits of reducing emissions. B) the organizers are not making a rational decision. C) the organizers are ignoring a sunk cost. D) there are no incentives to reduce carbon emissions. E) it is difficult to calculate the cost of reducing emissions. Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

34) Going skiing will cost Adam $80 a day. He also loses $40 per day in wages because he has to take time off from work. Adam still decides to go skiing. A) His decision is rational if Adam's marginal benefit of spending a day skiing is greater than his marginal cost. B) The $80 price of skiing is not an opportunity cost and so did not affect Adam's decision. C) He loses a total of $120 per day, so his decision is irrational. D) Adam's lost $40 per day in wages is not an opportunity cost and so did not affect his decision. E) Adam is definitely making a decision that is in the social interest. Answer: A Topic: Making rational choices Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 35) The decision to go to graduate school is a rational one for a college student if the A) cost is not too great. B) marginal cost exceeds the marginal benefit of graduate school. C) marginal benefit of graduate school exceeds the marginal cost. D) opportunity cost of graduate school equals zero. E) student carefully compared the social benefits of this decision. Answer: C Topic: Making rational choices Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 36) An incentive is A) an inducement to take a particular action. B) the marginal cost of some course of action. C) the marginal benefit of some course of action. D) the net gain of some course of action. E) a constraint that society imposes on those who make self-interested choices. Answer: A Topic: Incentives Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

37) An incentive is A) a reward or a penalty that encourages or discourages an action. B) when people make rational choices by comparing costs and benefits. C) what you must give up to get something. D) a choice is made on the margin. E) a good or service that satisfies wants. Answer: A Topic: Incentives Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 38) A change in a marginal benefit or cost will A) increase consumption. B) decrease production. C) cause an individual to make a rational choice. D) increase sunk costs. E) change incentives. Answer: E Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 39) Proponents of cuts in income tax rates argue that when income tax rates are cut, workers have an incentive to increase their work hours. This argument is based on the assumption that A) workers are irrational. B) workers make decisions based on the marginal benefit of each hour worked compared to the marginal cost of work. C) the opportunity cost of working is negative. D) the marginal cost of each additional work hour is not important to most workers. E) workers make decisions based on the social interest. Answer: B Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

40) Your economics professor offers 10 points extra credit if you attend a review session before your next exam. This extra credit is an example of A) a decrease in marginal benefit to attend the review session. B) an increase in marginal cost to attend the review session. C) a rational choice. D) an incentive to attend the review session. E) None of the above answers is correct. Answer: D Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 41) If the marginal benefit of getting a college degree rises, rational people will A) attend college in greater numbers. B) drop out of college. C) not change their behavior. D) require that college get easier. E) raise the marginal cost of attending college. Answer: A Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 42) Opportunity cost is best defined as A) how much money is paid for something. B) how much money and time it takes to consume something. C) the value of the highest-valued alternative that is forgone in making a choice. D) the total of all other alternatives that are forgone in making a choice. E) the sunk cost of any decision. Answer: C Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

43) John has two hours of free time this evening. He ranked his alternatives, first go to a concert, second go to a movie, third study for an economics exam, and fourth answer his e-mail. What is the opportunity cost of attending the concert for John? A) attending a movie B) studying for an economics exam C) answering his e-mail D) attending a movie, studying for an economics exam, and answering his e-mail E) going to the concert because that is what John chooses to do Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills 44) Jamie has enough money to buy either a Mountain Dew, or a Pepsi, or a bag of chips. He chooses to buy the Mountain Dew. The opportunity cost of the Mountain Dew is A) the Pepsi and the bag of chips. B) the Pepsi or the bag of chips, whichever is the highest-valued alternative forgone. C) the Mountain Dew. D) the Pepsi because it is a drink, as is the Mountain Dew. E) zero because he enjoys the Mountain Dew. Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills 45) Amy can study for an hour or spend that hour sleeping or going out for dinner. If she decides to study for the hour, the opportunity cost of the hour spent studying is A) definitely going to sleep. B) studying, since this is the choice she opted for. C) sleeping or going out for dinner, whichever she would have preferred the most. D) sleeping and going out for dinner. E) definitely going out to dinner because she must eat at some time. Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills

46) If there is no scarcity A) the opportunity cost of an action would be greater than its sunk cost. B) an action would have zero opportunity cost. C) choices are no longer rational. D) marginal cost of an action is greater than its marginal benefit. E) all marginal benefits would equal zero. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills 47) The benefit of an activity is A) purely objective and measured in dollars. B) the gain or pleasure that it brings. C) the value of its opportunity cost. D) measured by what must be given up to get one more unit of the activity. E) not measurable on the margin. Answer: B Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 48) The ________ of something is the gain or pleasure that it brings. A) opportunity cost B) benefit C) marginal cost D) rational choice E) rational margin Answer: B Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

49) The cost of a one-unit increase in an activity A) is called the total one-unit cost. B) is called the marginal cost. C) decreases as more of the activity is done. D) is called the marginal benefit/cost. E) is called the unit cost. Answer: B Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 50) The marginal benefit of an activity is i. the benefit from a one-unit increase in the activity. ii. the benefit of a small, unimportant activity. iii. measured by what the person is willing to give up to get one additional unit of the activity. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: D Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 51) The additional benefit of increasing some activity by one-unit is called the A) marginal benefit. B) opportunity cost. C) total benefit. D) scarcity. E) unit cost/benefit. Answer: A Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

52) If the marginal benefit of the next slice of pizza exceeds the marginal cost, you will A) eat the slice of pizza. B) not eat the slice of pizza. C) be unable to choose between eating or not eating. D) eat half the slice. E) More information is needed about how much the marginal benefit exceeds the marginal cost to determine if you will or will not eat the slice. Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 53) When people make rational choices, they A) behave selfishly. B) do not consider their emotions. C) weigh the costs and benefits of their options and act to satisfy their wants. D) necessarily make a decision in the social interest. E) are necessarily making the best decision. Answer: C Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 54) By donating $1,000 to the Salvation Army, Caroline reduces her taxable income. To Caroline, the reduction in her taxable income is A) a marginal benefit. B) an opportunity cost. C) an incentive. D) a marginal cost. E) the margin. Answer: C Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

1.3 Economics As Social Science and Policy Tool 1) Correlation means A) "after this, therefore because of this." B) other things remaining the same. C) a natural experiment has been conducted. D) the tendency for the values of two variables to move in a predictable and related way. E) "on the margin." Answer: D Topic: Correlation Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 2) Correlation means A) holding everything else constant. B) after this, therefore because of this. C) the values of two variables move in a predictable and related way. D) making statements about how the world should be. E) the same as causation. Answer: C Topic: Correlation Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 3) In examining two variables, we find that as one variable changes, the other changes. These variables are said to be A) independent. B) correlated. C) statistics. D) significantly related. E) casually related. Answer: B Topic: Correlation Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

4) When economists use the term "correlation," they are referring to A) cause and effect relationships between variables. B) how two variables move together in a predictable way. C) positive economics. D) normative economics. E) economic policy. Answer: B Topic: Correlation Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 5) The tendency for the values of two variables to move in a predictable and related way is known as A) a natural experiment. B) a normative relationship. C) an economic model. D) correlation. E) a policy relationship. Answer: D Topic: Correlation Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 6) A positive statement i. makes a statement about how the world operates. ii. is a true statement. iii. can be tested against the facts. A) i and ii B) i and iii C) ii and iii D) i, ii and iii E) i only Answer: B Topic: Positive statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

7) Which of the following is a positive statement? A) An increase in college tuition is not fair to students. B) A recession leads to higher enrollments at universities. C) University bookstore prices are too high. D) Parking tickets on campus impose an excessive fee. E) The school needs more parking for students. Answer: B Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 8) The statement that "increases in the tax on gasoline increase the price of gasoline" is an example of a A) normative statement. B) positive statement. C) macroeconomic statement. D) rational-decision statement. E) marginal statement. Answer: B Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 9) "Lower ticket prices would lead to more people attending ball games." This statement is a A) statement assessing the social interest versus the private interest. B) normative statement. C) positive statement. D) macroeconomic statement. E) statement that confuses marginal cost and sunk cost. Answer: C Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

10) A statement that argues that "if taxes on gasoline increase, gasoline consumption will decrease" is an example of what kind of statement? A) a marginal statement B) a macroeconomic statement C) a normative statement D) a positive statement E) a statement that violates rational choice Answer: D Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 11) Which of the following statements is a positive statement? A) Our country must increase military spending. B) There should be a computer in every elementary school classroom. C) We need to spend less on luxury items for the wealthy, and more on necessities for the less fortunate. D) Online shopping increased by 50 percent this Christmas season. E) Too many people are unemployed. Answer: D Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 12) Which of the following is an example of a positive economic statement? A) Voter ID laws should be strictly enforced in all states. B) Illegal immigration is the biggest threat to national security that we face today. C) Medicare recipients should only be allowed to visit a doctor for non-emergency reasons on Mondays, Wednesdays, and Fridays. D) The death penalty is a strong deterrent to violent criminal activity. E) The Affordable Care Act should be repealed. Answer: D Topic: Positive and normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

13) Increasing income tax rates will solve the "Social Security time bomb issue" is an example of A) business economic policy. B) a positive economic statement. C) marginal cost exceeding marginal benefit. D) answering the "how" question. E) globalization. Answer: B Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 14) Which of the following is a positive statement? A) The rich should pay more in taxes. B) Everyone should have some knowledge of economics. C) Taxes on gasoline should be lower so that gasoline is more affordable to the poor. D) If we reduce welfare payments given to the poor, they will find jobs. E) Social Security must be reformed. Answer: D Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 15) Normative statements i. describe how the world is. ii. describe how the world ought to be. iii. depend on people's values and cannot be tested. A) i only. B) ii only. C) iii only. D) ii and iii. E) i and iii. Answer: D Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

16) A normative statement A) depends on someone's values. B) cannot use the word "should." C) says what is currently believed about the way the world operates. D) MUST be tested to determine if it is correct. E) CAN be tested to determine if it is correct. Answer: A Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 17) The important characteristic of normative statements is that they A) explain what really exists. B) are based on somebody's values and cannot be tested. C) explain what normally happens in the real world. D) help guide us to what will normally occur if some economic variable changes its value. E) do not use the ceteris paribus assumption. Answer: B Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 18) A normative statement i. can be tested as to whether it is true or false. ii. is considered negative. iii. depends on a person's values. A) i only B) iii only C) i and iii D) ii and iii E) i, ii, and iii Answer: B Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

19) Which of the following is a normative statement? A) Flood victims should pay for their own rebuilding. B) When the price of kiwi fruit increases, fewer people eat kiwi fruit. C) An increase in the supply of computers has caused computer prices to fall. D) Recessions lead to increases in the unemployment rate. E) Hurricanes strike mainly Florida and North Carolina. Answer: A Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 20) Which of the following is an example of a normative economic statement? A) Universal access to quality health insurance is the most important domestic policy issue of our time. B) Extending the time in which laid-off workers are eligible to receive government unemployment compensation has increased the unemployment rate. C) Lowering marginal income tax rates depresses consumer spending. D) Prices rise when the government prints too much money. E) Interest rates rise when the government runs persistent budget deficits. Answer: A Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 21) A statement that "All children should receive free health care" is an example of what kind of statement? A) a fair statement B) a natural experiment statement C) a normative statement D) a positive statement E) a statement on the margin Answer: C Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

22) Which of the following statements is a normative statement? A) Inflation has been at an all-time low this year. B) The minimum wage should be increased to $8.50 per hour. C) Unemployment this month has increased by less than 0.5 percentage point. D) Additional spending on education has not produced any rise in test scores. E) Pepsi is less expensive than Coke this week. Answer: B Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 23) Which of the following is an example of a normative statement? A) If cars become more expensive, fewer people will buy them. B) Car prices should be affordable. C) If wages increase, firms will fire some workers. D) Fewer people die in larger cars than in smaller cars. E) Cars emit pollution. Answer: B Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 24) Which of the following statements is a normative statement? A) Every American household should have health care insurance coverage. B) Military spending as a percent of government spending decreased by 5 percent in the 1990s. C) Welfare reform has decreased the amount the government spends on welfare. D) The price of computers fell last year. E) Fewer people are unemployed this year than last year. Answer: A Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

25) Congress and the President passed a national health care policy. This is an example of A) the government using economic tools to make policy decisions. B) answering the "how" question. C) increasing the marginal cost of health care. D) increasing the marginal benefit of health care. E) normative versus positive economics. Answer: A Topic: Government economic policy Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 26) When the Dallas Cowboys score more than 30 points in a game, they win the game. This is an example of A) an economic theory. B) a correlation. C) an incentive to win the game. D) a normative statement. E) a statement on the margin. Answer: B Topic: Correlation Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 27) A positive statement A) must always be right. B) cannot be tested. C) might be right or wrong. D) depends on someone's value judgment. E) cannot be negative. Answer: C Topic: Positive statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

28) Which of the following is a positive statement? A) Taxes should be lower because then people get to keep more of what they earn, so they will work more. B) My economics class should last for two terms because it is my favorite class. C) A 10 percent increase in income leads to a 4 percent increase in the consumption of beef. D) Given their negative impact on productivity, the government should eliminate labor unions. E) The class average on this test should be more than 80 percent. Answer: C Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 29) Which of the following is NOT a normative economic statement? A) States should reduce the tax on heating fuel oil during the winter. B) People over the age of 75 should not be allowed to drive cars. C) Teenagers are responsible for most driving fatalities. D) We don't spend enough money on anti-smoking campaigns. E) The price of gasoline is too high. Answer: C Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 1.4 Economics As a Life Skill and Job Skill 1) Economics graduates do NOT A) work in private firms. B) work in the government. C) work in international organizations. D) pursue graduate programs in law. E) None of the above are correct because economics graduates do all of the opportunities. Answer: E Topic: Economics as a job skill and work skill Skill: Level 1: Definition Section: Checkpoint 1.4 Status: New AACSB: Reflective thinking

2) According to the online website payscale.com, economics majors have a median salary of about A) $18,000. B) $36,000. C) $72,000. D) $102,000. E) $122,000. Answer: C Topic: Economics as a job skill and work skill Skill: Level 1: Definition Section: Checkpoint 1.4 Status: New AACSB: Reflective thinking 3) Sort the following majors according to mid-career income, from highest to lowest. i. Economics ii. Business iii. Chemical Engineering iv. Sociology A) i, ii, iii, iv B) iii, i, ii, iv C) ii, iii, i, iv D) ii, i, iii, iv E) i, iv, iii, ii Answer: B Topic: Economics as a job skill and work skill Skill: Level 1: Definition Section: Checkpoint 1.4 Status: New AACSB: Reflective thinking 1.5 Appendix: Making and Using Graphs 1) The horizontal axis in a graph A) measures time on a scatter diagram. B) measures the quality of a variable. C) is named the y-axis. D) is named the x-axis. E) is called the origin. Answer: D Topic: Axes Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

2) Most economic graphs have two lines perpendicular to each other. The vertical line is called the A) origin. B) y-axis. C) x-axis. D) variable. E) time axis. Answer: B Topic: Axes Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 3) The vertical axis in a graph A) is named the y-axis. B) is named the x-axis. C) measures time in a cross-section and time series graph. D) has no origin. E) measures time ONLY in a time series graph. Answer: A Topic: Axes Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 4) Most economic graphs have two lines perpendicular to each other. Where these lines meet is called the A) origin. B) y-axis. C) x-axis. D) variable. E) point of beginning. Answer: A Topic: Origin Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

5) A graph of the value of one variable against the value of another variable is known as a A) two-dimensional graph. B) three-dimensional graph. C) time-series graph. D) scatter diagram. E) two-variable graph. Answer: D Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 6) A scatter diagram can be used to see A) if the value of a variable is rising or falling. B) the value of a variable for different groups in a population. C) if a relationship exists between two variables. D) how a variable behaves over time. E) whether a variable is positively or negatively related to itself. Answer: C Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 7) To show how a variable ________, we typically use a ________. A) relates to another variable; time series graph B) relates to another variable; pie chart C) changes over time; time series graph D) changes over time; cross section graph E) changes over time; cross time chart Answer: C Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

8) Which type of graph is most useful in determining if two variables are correlated? A) time-series B) scatter diagram C) cross-section D) variable-correlation figure E) None of the above answers is correct. Answer: B Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

9) The figure above shows a A) time-series graph. B) scatter diagram. C) cross-section graph. D) slope. E) trend diagram. Answer: B Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

10) A time-series graph measures A) the value of one variable against the value of another variable. B) the value of an economic variable for different groups in a population at a point in time. C) time on the x-axis and the variable or variables in which we are interested on the y-axis. D) time on the y-axis and the variable or variables in which we are interested on the x-axis. E) time on both the x-axis and y-axis and the variable or variables in which we are interested in the rest of the figure. Answer: C Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 11) A time series graph A) shows how a variable changes over time. B) uses bars rather than lines. C) shows points in a scatter diagram. D) is similar to a cross-section graph because both can show trends over time. E) is in the shape of a pie. Answer: A Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 12) A steep slope in a time series graph means the variable is A) high. B) falling. C) rising or falling quickly. D) rising or falling slowly. E) very close to its trend point. Answer: C Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

13) Which type of economic graph reveals trends in data? A) cross-section graph B) time-series graph C) scatter diagram D) Answers A and C are correct. E) Answers A, B, and C are all correct. Answer: B Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 14) A time series graph A) shows how a certain variable changes over time. B) uses bars rather than lines. C) shows points that are scattered. D) depicts a series of good economic times a nation had. E) is not useful if the goal is to determine a variable's trend. Answer: A Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 15) A time-series graph displays the price of gold. The slope of the line is negative for periods when the A) price of gold is falling. B) price of gold is rising. C) quantity of gold is falling. D) price of gold is low and not changing. E) price of gold fluctuates. Answer: A Topic: Time-series graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

16) A graph shows the wage rate of factory workers. The slope of the line is positive for periods when the wage rate is A) falling. B) rising. C) high and not changing. D) low and falling. E) high and falling. Answer: B Topic: Time-series graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 17) A trend is A) a measure of closeness on a scatter diagram. B) a general tendency for a variable to rise or fall. C) the maximum value of a variable. D) the minimum value of a variable. E) the difference between the maximum value of a variable and the minimum value of the variable. Answer: B Topic: Trend Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 18) A time series graph reveals whether there is a ________, which represents ________. A) trend in a variable; a general tendency for the variable to rise or fall B) relationship between two variables; a cross-section relationship C) trends in two variables; unrelated variables D) relationship between two variables; a trend in a variable E) cross-section relationship; a general tendency for the variables to rise or fall Answer: A Topic: Trend Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

19) Trend refers to A) the scale used on the x- and y-axes. B) increases but not decreases of a variable. C) decreases but not increases of a variable. D) a general tendency for a variable to rise or fall. E) the difference between the maximum value of the variable and the minimum value of the variable. Answer: D Topic: Trend Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

20) In the above figure, the diagram shows A) a downward trend in x. B) an upward trend in x. C) a scatter diagram. D) a two-variable scatter diagram. E) a cross-section graph between x and time. Answer: A Topic: Trend Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

21) A cross-section graph A) is divided into different sections. B) shows the values of an economic variable for different groups in a population at a point in time. C) measures time on the x-axis and the variable in which we are interested on the y-axis. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 22) A graph that shows the value of an economic variable for different groups in a population at a given time is called a A) scatter diagram. B) time-series graph. C) pie chart. D) cross-section graph. E) fixed-time diagram. Answer: D Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 23) A graph shows the average wage of various demographic groups in 2012. The kind of graph used to show these data would be a A) scatter diagram. B) time-series graph. C) cross-section graph. D) Venn diagram. E) fixed-year figure. Answer: C Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

24) A graph showing the values of an economic variable for different groups in a population at a point in time is called a A) cross-section graph. B) time-series graph. C) scatter diagram. D) Venn diagram. E) None of the above answers is correct. Answer: A Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 25) ________ shows the values of a variable for different groups in the population at a certain point in time. A) A time-series graph B) The origin C) A cross-section graph D) A scatter plot E) A trend-line graph Answer: C Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 26) A cross-section graph A) is divided into different sections. B) shows values of an economic variable for different groups in a population at a point in time. C) measures time on the x-axis and the variable in which we are interested on the y-axis. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: B Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

27) You have data for the amount of rainfall in 50 cities for the month of June. The type of graph to best display these data would be a A) time-series graph. B) multi-variable time series graph. C) cross-section graph. D) scatter diagram. E) trend-line diagram. Answer: C Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 28) You have data for sales of pizza for each of the 50 states in 2011. The type of graph to best display these data would be a A) cross-section graph. B) time-series graph. C) scatter diagram. D) multi-variable time-series graph. E) trend-line diagram. Answer: A Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 29) A graph shows the average SAT scores for males and females in 2012. The kind of graph used to show these data would be a A) scatter diagram. B) time-series graph. C) cross-section graph. D) time-stationary graph. E) trend figure. Answer: C Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

30) Demonstrating how an economic variable changes from one year to the next is best illustrated by a A) scatter diagram. B) time-series graph. C) linear graph. D) cross-section graph. E) Venn diagram. Answer: B Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 31) To show the values of an economic variable for different groups in a population at a point in time, it is best to use a A) scatter diagram. B) time-series graph. C) linear graph. D) cross-section graph. E) trend-section diagram. Answer: D Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 32) A graph that shows how the amount of advertising expenditure differs among various industries can be shown A) by a cross-section graph. B) by a time-series graph. C) as a trend. D) by a scatter diagram. E) by a trend-section graph. Answer: A Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

33) A linear relationship A) when graphed, is a straight line. B) when graphed, is a line whose slope changes. C) can be a positive or a negative relationship. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: D Topic: Linear relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 34) A positive relationship exists between two variables if A) one variable has "positively" no effect on the other variable. B) a decrease in one variable is associated with an increase in the other variable. C) a decrease in one variable is associated with a decrease in the other variable. D) an increase in one variable is associated with both a decrease and an increase in the other variable. E) None of the above answers is correct. Answer: C Topic: Positive relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 35) If two variables are positively related, then A) one variable causes the other. B) an increase in one variable is accompanied by a decrease in the other. C) an increase in one variable is accompanied by an increase in the other. D) they change together, but not necessarily in the same direction. E) neither variable can be positively related to any other variable. Answer: C Topic: Positive relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

36) As a person increases his or her caloric intake, the person's weight increases, ceteris paribus. The relationship between the person's caloric intake and the person's weight is an example of A) unrelated variables. B) a positive relationship. C) a negative relationship. D) a single point on a graph. E) a trended relationship. Answer: B Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 37) If there is a positive relationship between two variables A) the graph of the relationship will be upward sloping. B) the graph of the relationship will be downward sloping. C) the slope of the line graphing the relationship will be negative. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 38) If the change in y = 10 and the change in x = 3, there is A) a positive relationship between y and x. B) a negative relationship between y and x. C) an independent relationship between y and x. D) no relationship between y and x. E) a +0.33 relationship between the two variables. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

39) Whenever people's incomes increase, they buy more guitars. Hence a scatter diagram shows that the relationship between income and guitars purchased is A) a positive relationship. B) a linear relationship. C) a negative relationship. D) some sort of relationship, but whether it is positive or negative depends on whether income is plotted on the vertical or horizontal axis. E) a U-shaped relationship. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 40) Which of the following statements is correct? A) When a line slopes downwards moving to the right, the variable measured on the x-axis and the variable measured on the y-axis are directly related. B) When a line slopes upwards moving to the right, the variable measured on the x-axis and the variable measured on the y-axis are directly related. C) The higher the temperature, the more ice cream people consume. Thus the temperature and ice cream consumption are inversely related. D) If two variables are directly related, a graph of the two variables has a negative slope. E) None of the above statements is correct. Answer: B Topic: Positive and negative relationships Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 41) If x increases whenever y decreases, then x and y are A) not related. B) positively related. C) directly related. D) negatively related. E) related but whether positively or negatively related depends on whether the x variable or the y variable is plotted on the vertical axis. Answer: D Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

42) Whenever one variable increases, another variable decreases. The two variables are A) definitely related through a third variable. B) negatively related. C) positively related. D) unrelated to each other. E) related but whether positively or negatively related depends on which variable is plotted on the vertical axis. Answer: B Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 43) If x increases and as a result y decreases, then x and y are A) not related because the relationship is a causal one. B) positively related. C) negatively related. D) directly related. E) trend-line related. Answer: C Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 44) "As the price of gasoline increases, fewer people buy cars that are gas guzzlers." A graph showing this relationship would A) have a negative slope. B) have a positive relationship. C) have a direct relationship. D) be a horizontal line. E) be a vertical line. Answer: A Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

45) As the number of days without rain increases, the amount of wheat grown per acre declines. A graph showing this relationship shows A) a horizontal line. B) a vertical line. C) a positive relationship. D) a line with a positive slope. E) None of the above answers is correct. Answer: E Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 46) As the price of home heating oil rises, families buy less home heating oil. Hence a scatter diagram with the price of home heating oil on the vertical axis and the quantity purchased on the horizontal axis reveals a ________ relationship. A) positive B) linear C) time-series D) negative E) cross-sectional Answer: D Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 47) If the change in y = -4 and the change in x = 2, there is A) an independent relationship between y and x. B) a positive relationship between y and x. C) a negative relationship between y and x. D) no relationship between y and x. E) a relationship between x and y but more information is needed to determine if it is a negative or positive relationship. Answer: C Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

48) An independent relationship between two variables is shown in a graph by A) an upward-sloping line. B) a horizontal or a vertical line. C) a downward-sloping line. D) a steeply sloped line. E) any straight line curve. Answer: B Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 49) If two variables are unrelated, their graph is A) either a horizontal or a vertical line. B) a downward-sloping line. C) an upward-sloping line. D) a curved line. E) None of the above answers is correct because it is not possible to graph unrelated variables. Answer: A Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 50) Consider a diagram in which the variable measured on the y-axis remains constant while the variable measured on the x-axis increases. The graph of these two variables is A) a vertical line. B) a horizontal line. C) a line that has positive slope. D) a line that has a negative slope. E) non-existent because the two variables are not related. Answer: B Topic: Unrelated variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

51) A graph shows the price of a pound of cucumbers on the vertical axis and the quantity of new cars sold by Honda on the horizontal axis. The price of a pound of cucumbers remains constant as the quantity of new cars sold increases. The graph of these data is a A) horizontal line. B) vertical line. C) curve with a maximum. D) positively sloped line. E) negatively sloped line. Answer: A Topic: Unrelated variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 52) Matt pays a $50 a month membership fee at Bruno's Gym. He can exercise at the gym as many times as he wishes. If the membership fee is measured along the vertical axis and the number of times he exercises is measured along the horizontal axis, the graph between his membership fee and the number of times he exercises will A) be a horizontal line. B) be positively sloped. C) be negatively sloped. D) be a vertical line. E) start out positively sloped and then, as Matt loses interest, become negatively sloped. Answer: A Topic: Unrelated variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

53) In the above figure, as the y variable increases A) the x variable is constant. B) the x variable increases. C) the x variable decreases. D) the x variable at first increases but then decreases. E) the x variable probably changes, but more information is needed to determine if it increases, decreases, or stays the same. Answer: A Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

54) In the above figure, a negative relationship between x and y is shown in Figure A) A. B) B. C) C. D) D. E) B and Figure C. Answer: B Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

55) In the above figure, no relationship between x and y is shown in Figure A) A. B) B. C) C. D) D. E) A and Figure B. Answer: C Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

56) In the diagram above, which figure(s) show(s) a direct relationship between the variables? A) both B and C B) both A and C C) only A D) only D E) only B Answer: B Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

57) In the diagram above, which figure(s) show(s) an inverse relationship between the variables? A) both B and C B) only B C) both A and C D) only D E) only C Answer: B Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 58) In the diagram above, which figure(s) show(s) no relationship between the variables? A) both B and C B) only B C) both A and C D) only D E) both A and B Answer: D Topic: Unrelated variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 59) If a curve rises and then falls, it has a A) maximum. B) minimum. C) linear relationship. D) constant slope relationship. E) slope that is negative and then positive. Answer: A Topic: Maximum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

60) As a shoe factory adds more workers, shoe production grows, reaches a maximum, and then shrinks. In a diagram that has the number of workers on the horizontal axis and the number of shoes on the vertical axis, the relationship between the number of workers and the number of shoes starts as ________ and then, after the maximum point, is ________. A) positive; negative B) negative; positive C) linear; negative D) positive; linear E) positive; nonexistent Answer: A Topic: Maximum Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 61) As a curve approaches a maximum point, the slope will A) be positive and then negative after the maximum point. B) be negative and then positive after the maximum point. C) remain constant on either side of the maximum point. D) increase before and after the maximum point. E) decrease before and after the maximum point. Answer: A Topic: Maximum Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

62) In the figure above, the relationship between the x variable and the y variable A) is positive. B) is negative. C) starts by being positive and then becomes negative. D) starts by being negative and then becomes positive. E) is non-existent because the two variables are unrelated. Answer: C Topic: Maximum Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 63) If a curve falls and then rises, it A) has a maximum. B) has a minimum. C) has a linear relationship. D) has a constant slope relationship. E) shows no relationship between the two variables. Answer: B Topic: Minimum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

64) Moving from left to right, a U-shaped curve starts with a A) positive slope, reaches a maximum, then ends with a negative slope. B) positive slope, reaches a minimum, then ends with a negative slope. C) negative slope, reaches a maximum, then ends with a positive slope. D) negative slope, reaches a minimum, then ends with a positive slope. E) negative slope, reaches a minimum, then ends with a negative slope. Answer: D Topic: Minimum Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 65) The minimum point of a U-shaped curve A) is a point where the variable is neither increasing nor decreasing. B) has a slope equal to zero. C) has the maximum slope possible. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Minimum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 66) An economist observed that as more computers are added to a factory, the costs of production initially decline, reach a minimum, and then rise. In a diagram that has costs on the vertical axis and the number of computers on the horizontal axis, the relationship always is A) negative and then linear after the minimum point. B) positive and then negative after the minimum point. C) negative and then positive after the minimum point. D) linear and then positive after the minimum point. E) negative both before and after the minimum point. Answer: C Topic: Minimum Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

67) If whenever one variable increases, another variable also increases, then these two variables are ________ related. A) positively B) negatively C) inversely D) cross-sectionally E) trend-line Answer: A Topic: Positive relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

68) The graph shows a A) positive relationship that becomes steeper. B) negative relationship that becomes steeper. C) positive relationship that becomes less steep. D) negative relationship that become less steep. E) negative trend between the total cost of a cake and the output of cakes. Answer: A Topic: Positive relationship Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

69) A graph of the relationship between two variables is a line that slopes down to the right. These two variables are ________ related. A) positively B) directly C) negatively D) not E) trend-line Answer: C Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 70) A graph shows that the number of U.S. tourists visiting a Caribbean island increases as the temperature in the northeastern United States falls. The graph shows A) a positive relationship. B) a direct relationship. C) a negative relationship. D) no relationship. E) an invalid relationship. Answer: C Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

71) The graph shows a A) positive relationship that becomes less steep. B) negative relationship that is linear. C) positive relationship that is linear. D) negative relationship that become less steep. E) None of the above answers is correct. Answer: B Topic: Negative relationship Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

72) The graph shows A) a relationship with a minimum. B) a relationship with a maximum. C) no relationship. D) a linear relationship. E) a cross-section relationship. Answer: B Topic: Maximum Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

73) The graph shows A) a relationship with a minimum. B) a relationship with a maximum. C) no relationship. D) a relationship that becomes less steep. E) a cross-section relationship. Answer: A Topic: Minimum Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 74) Two variables are unrelated if their graph is i. a vertical line. ii. a 45 degree line. iii. a horizontal line. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

75) The graph shows A) a positive relationship that becomes less steep. B) a negative relationship that is linear. C) a positive relationship that is linear. D) no relationship between the variables. E) a trend relationship between the variables. Answer: D Topic: Unrelated variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 76) A slope is measured as the A) value of the variable measured on the y-axis divided by the value of the variable measured on the x-axis. B) value of the variable measured on the x-axis divided by the value of the variable measured on the y-axis. C) change in the value of variable on the y-axis divided by the change in the value of the variable on the x-axis. D) value of the variable measured on the y-axis minus the value of the variable measured on the x-axis. E) change in the value of variable on the x-axis divided by the change in the value of the variable on the y-axis. Answer: C Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 81 Copyright © 2023 Pearson Education Ltd.

77) A slope is measured as the A) value of the variable measured on the y-axis divided by the value of the variable measured on the x-axis. B) value of the variable measured on the x-axis divided by the value of the variable measured on the y-axis. C) change in the value of variable on the y-axis divided by the change in the value of the variable on the x-axis. D) value of the variable measured on the y-axis minus the value of the variable measured on the x-axis. E) value of the variable measured on the x-axis minus the value of the variable measured on the y-axis. Answer: C Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 78) "The change in the value of the variable measured on the y-axis divided by the change in the value of the variable measured on the x-axis" is the definition of A) a graph. B) slope. C) a curve. D) a relationship. E) a trend. Answer: B Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 79) The slope of a line equals the change in the variable measured along the A) x-axis divided by the change in the variable measured along the y-axis. B) y-axis divided by the change in the variable measured along the x-axis. C) x-axis minus the change in the variable measured along the y-axis. D) x-axis multiplied by the change in the variable measured along the y-axis. E) y-axis minus the change in the variable measured along the x-axis. Answer: B Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

80) The slope A) of a straight line is the same regardless of where on the line it is calculated. B) equals the change in the value of the variable measured on the x-axis divided by the change in the variable measured on the y-axis. C) will be small if a large change in the variable measured on the y-axis is associated with a small change in the variable measured on the x-axis. D) equals the change in the value of the variable measured on the y-axis minus the change in the variable measured on the x-axis. E) falls as the x variable increases if the line has a negative slope. Answer: A Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 81) With y measured on the vertical axis and x measured on the horizontal axis, the slope of a straight line is defined as A) y/x. B) x/y. C) (change in y)/(change in x). D) (change in x)/(change in y). E) y - x. Answer: C Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 82) In a graph, a straight line has a negative slope if the line A) is vertical. B) is horizontal. C) falls from left to right. D) rises from left to right. E) shows a trend. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

83) A curve with a positive but decreasing slope represents a relationship where, every time the variable measured along the horizontal axis increases by one unit, the variable measured along the vertical axis A) increases by a constant amount. B) increases by an increasing amount. C) increases by a decreasing amount. D) decreases. E) does not change by much. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 84) The slope A) of a straight line is the same regardless of where on the line it is calculated. B) equals the change in the value of the variable measured on the vertical axis divided by the change in the variable measured along the horizontal axis. C) will be small if a large change in the variable measured on the vertical axis is associated with a small change in the variable measured along the horizontal axis. D) Answers A and B are correct. E) Answers A and C are correct. Answer: D Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 85) Which of the following statements is correct? A) The slope of a straight line changes depending where on the line it is calculated. B) The slope of a curved line is not defined because it is impossible to calculate the slope along a curved line. C) A straight line that slopes upward moving to the right has a positive slope. D) Answers A and B are correct. E) Answers A and C are correct. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

86) If a small change in the x variable results in a large change in the y variable, the curve will be A) positively sloped. B) negatively sloped. C) steep. D) flat. E) trended. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 87) Suppose the relationship between a person's age and his or her height is plotted with the age measured along the x-axis and the height measured along the y-axis. Then, the curve showing this relationship is A) a straight line with a positive slope. B) positively sloped and becoming less steep. C) a straight line with a negative slope. D) negatively sloped and becoming less steep. E) positively sloped and becoming more steep. Answer: B Topic: Positive slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 88) If the quantity of the variable on the y-axis increases by 10 when the quantity of the variable on the x-axis decreases by 2, then the slope of the curve equals A) 2. B) -10. C) 10. D) -5. E) None of the above answers is correct. Answer: D Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

89) If the quantity of the variable on the y-axis increases by 3 when the quantity of the variable on the x-axis increases by 4, then the slope of the curve equals A) 3. B) 4. C) 3/4. D) 4/3. E) 1. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

90) The above figure shows the relationship between the price of a slice of pizza and how many slices of pizza Ricardo buys in a week. Between points A and B, the slope of the line equals A) -5. B) -4. C) -3. D) -1. E) -2. Answer: D Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

91) The above figure shows the relationship between the price of a slice of pizza and how many slices of pizza Ricardo buys in a week. Between points A and B, the slope of the line is ________ the slope of the line between points B and C. A) greater than B) equal to C) less than D) unrelated to E) not comparable to Answer: B Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 92) Moving rightward along a straight line, the slope of the line A) always increases. B) always decreases. C) stays the same. D) increases if the line slopes upward to the right. E) decreases if the line slopes downward to the right. Answer: C Topic: Slope of a straight line Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 93) A straight line falls when moving rightward along it. Hence the slope of the line is A) positive. B) negative. C) undefined. D) zero because it is a straight line. E) perhaps positive, negative, or zero, but without more information it is impossible to determine. Answer: B Topic: Slope of a straight line Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

94) The table above shows data on two variables. If these data were graphed, the slope of the line would be A) 1/2. B) 4/3. C) 2/3. D) 3/4. E) 2. Answer: D Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

95) The slope of the line shown in the above figure is A) -1/3. B) -5. C) -1. D) -3. E) -10. Answer: D Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 88 Copyright © 2023 Pearson Education Ltd.

96) The slope of the line shown in the above figure is A) 5. B) 2/5. C) 2/3. D) 5/2. E) 2. Answer: B Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

97) The slope of the line shown in the above figure is A) -1 1/3. B) -1 2/3. C) -1.25. D) -0.80. E) 5. Answer: C Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

98) The figure above shows the relationship between the time a student spends studying and the student's GPA that semester. The slope of the relationship at point A equals A) 3. B) 3/20 C) 2/20. D) 1/20. E) 0. Answer: D Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

99) In the above figure, which of the figures shows a relationship between x and y with a negative slope? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure A and Figure B Answer: B Topic: Negative slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

100) In the above figure, which of the figures show(s) a relationships between x and y with a positive slope? A) Figure A and Figure D B) Figure B and Figure C C) Figure C only D) Figure D only E) Figure A and Figure B Answer: A Topic: Positive slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

101) The figure above shows the relationship between the time a student spends studying and the student's GPA that semester. This figure shows ________ relationship between the time spent studying and the GPA. A) a positive but not linear B) a negative C) no D) a positive, linear E) a cross-sectionally trended Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

102) The figure above shows the relationship between the time a student spends studying and the student's GPA that semester. The slope of the relationship at point A ________ the slope at point B. A) is greater than B) is less than C) is equal to D) cannot be compared to E) can be compared but more information is needed to determine whether the slope is greater than, less than, or equal to Answer: A Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

103) In the above, which figure(s) show relationship between the variables that is always positive? A) Figure A only B) Figures C and D C) Figures A and C D) Figures A, C, and D E) Figures A and B Answer: C Topic: Positive relationship Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

104) In the above, which figure(s) show a relationship between the variables that is always negative? A) Figure A only B) Figure D only C) Figures A and C D) Figures A, C, and D E) Figure B only Answer: B Topic: Negative relationship Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 105) In the above, which figure shows both a positive and a negative relationship between the variables? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A, B, and D Answer: B Topic: Positive and negative relationships Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 106) In the above, which figure(s) has (have) at least one point at which the slope equals zero? A) Figure B only B) Figures A and C C) Figure D only D) Figures A, C, and D E) Figures A and D Answer: A Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

107) In the above, in which figure(s) is the slope the same at every point? A) Figure A only B) Figures A and C C) Figure B only D) Figures A, C, and D E) Figures C and D Answer: A Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

108) The figure above shows the relationship between the price of a dozen roses and the quantity of roses a florist can sell. The relationship between the price and the quantity the florist can sell is A) positive. B) negative. C) nonexistent. D) linear. E) cross-sectionally trended. Answer: B Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

109) The figure above shows the relationship between the price of a dozen roses and the quantity of roses a florist can sell. The slope between points A and B is A) 20. B) 16. C) 2. D) 4 E) nonexistent because at point A, no roses are sold. Answer: C Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 110) The figure above shows the relationship between the price of a dozen roses and the quantity of roses a florist can sell. The slope between points B and C equals A) 16. B) 8. C) 4. D) 2. E) 14. Answer: C Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 111) The figure above shows the relationship between the price of a dozen roses and the quantity of roses a florist can sell. The slope between points C and D equals A) 8. B) 4. C) 2. D) 1. E) 12. Answer: D Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

112) In the figure above, between points A and B, what is the slope of the line? A) 4 B) 1 C) 3 D) -3 E) 0 Answer: D Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

113) What is the slope of the line in the graph? A) +1/2 B) -1/2 C) + 2 D) -2 E) -3/4 Answer: A Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

114) The slope of the curve at point B A) is greater than the slope at point A. B) is less than the slope at point A. C) is equal to the slope at point A. D) cannot be compared with the slope at point A. E) can be compared with the slope at point A, but more information is needed to determine if the slope is greater than, less than, or equal to the slope at point A. Answer: B Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 115) The Latin term "ceteris paribus" means A) "false unless proven true." B) "other things remaining the same." C) "after this, therefore because of this." D) "what is true of the whole is not necessarily true of the parts." E) "obviously true." Answer: B Topic: Ceteris paribus Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Reflective thinking

116) Which of the following statements is the best example of the term ceteris paribus? A) An economist holds other factors constant when he examines the relationship between tax rates and tax revenues. B) More money should be spent on cleaning up the environment. C) The government budget surplus was $200 billion in 2000 because the economy was growing. D) An increase in the budget surplus after an increase in tax rates implies that tax rate increases cause budget surpluses. E) When studying the effects of a budget deficit, an economist must take account of all the factors involved. Answer: A Topic: Ceteris paribus Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Reflective thinking 117) To graph a relationship involving more than two variables, we use which assumption? A) linear assumption B) positive relationship assumption C) marginal analysis D) ceteris paribus E) trend assumption Answer: D Topic: Ceteris paribus Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 118) To graph a relationship among several variables, we hold all but ________ variable(s) constant and use the ________ assumption. A) one; scarcity B) two; ceteris paribus C) three; scarcity D) one; ceteris paribus E) one; absence of trend Answer: B Topic: Relationships among more than two variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

119) We are investigating the relationship among three variables. We have graphed two of them. Suppose that the variable that is not measured on the x-axis or the y-axis changes. Then, there is A) a movement along the plotted curve. B) a shift in the plotted curve. C) no impact on the plotted curve because the variable is not measured on either of the axes. D) an omitted variable. E) a violation of the absence of trend assumption. Answer: B Topic: Relationships among more than two variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 120) When analyzing graphically the relationship between more than two variables, which of the following must be used? A) positive slope assumption B) assumption of little change C) ceteris paribus D) negative slope assumption E) the assumption that only relevant factors change Answer: C Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 121) Ceteris paribus when graphing a relationship refers to A) letting all the variables change at once. B) changing the origin of the graph. C) holding constant all but two variables. D) rescaling the coordinates. E) swapping the axes so that the x-axis is the vertical axis and the y-axis is the horizontal axis. Answer: C Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

122) When two variables in a graph are related to a third, changing the third causes A) a movement along the curve. B) a shift of the curve. C) no change in the curve because the third variable isn't on the axes. D) either a shift or a movement in the curve but more information is needed to determine which occurs. E) None of the above answers is correct. Answer: B Topic: Relationships among more than two variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 123) On a graph showing the relationship between x and y, the ceteris paribus condition implies that A) no other variables are related to x and y. B) the value of x is held constant. C) the value of y is held constant. D) other variables not shown are held constant. E) the value of x and the value of y are held constant. Answer: D Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 124) Three variables are related and two of them are plotted in a figure. If the variable that is not measured on either the x-axis or the y-axis changes, then there is A) a movement along the drawn curve. B) a shift in the curve. C) no impact on the curve because the variable is not measured on either of the axes. D) either a shift in the curve or a movement along the curve, but more information is needed to determine which. E) None of the above answers is correct. Answer: B Topic: Changes in third variable Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

125) The above figure shows how many pounds of peanuts farmers are willing to sell at different prices per pound of peanuts. If the price of a pound of peanuts is $1 and the price of a pound of pecans is $2, peanut farmers are willing to sell A) no peanuts. B) 1,000 pounds of peanuts. C) 2,000 pounds of peanuts. D) 4,000 pounds of peanuts. E) more than 4,000 pounds of peanuts. Answer: A Topic: Relationships among more than two variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 126) In the above figure, while drawing the line showing the relationship between the price of a pound of peanuts and the quantity sold, the A) price of a pound of pecans does not change. B) price of a pound of peanuts does not change. C) the quantity of peanuts that farmers supply does not change. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: A Topic: Ceteris paribus Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

127) In the figure above, suppose the price of a pound of pecans is negatively related to the quantity of peanuts that farmers are willing to supply. If the price of pecans increases A) the curve will shift rightward. B) the curve will shift leftward. C) there is a movement along the curve. D) the curve will be unaffected. E) None of the above answers is correct because the graph assumes that the price of pecans does not change. Answer: B Topic: Relationships among more than two variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 128) To graph a relationship that involves more than two variables, we use A) a positive relationship. B) a direct relationship. C) a negative relationship. D) ceteris paribus. E) movement up along one of the lines showing the relationship between x and y. Answer: D Topic: Relationships among more than two variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

129) In the figure above, an increase in z leads to a A) movement up along one of the lines showing the relationship between x and y. B) movement down along one of the lines showing the relationship between x and y. C) rightward shift of the line showing the relationship between x and y. D) leftward shift of the line showing the relationship between x and y. E) trend change in both x and y. Answer: D Topic: Relationships among more than two variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 130) In the figure above, ceteris paribus, an increase in x is associated with A) an increase in y. B) a decrease in y. C) an increase in z. D) a random change in z. E) no change in either y or z. Answer: B Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

1.6 Integrative Questions 1) Suppose you decide to attend summer school and that this is considered a rational choice. When making this choice A) you must ignore the problem of scarcity. B) you considered the marginal cost and marginal benefit of your choice. C) you have used the ceteris paribus assumption. D) you have made a positive statement. E) you must have considered the social interest. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 2) John decides to leave college early and play professional sports. Which of the following economic principles does John use? i. personal economic policies ii. marginal cost versus marginal benefit analysis iii. normative versus positive economics A) i and ii B) i, ii and iii C) ii only D) i and iii E) ii and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

3) Which of the following is TRUE? i. A rational choice is always made in the pursuit of social interest. ii. Economics is a social science. iii. Economists try to understand how the economic world works by testing positive statements. A) ii and iii B) only i C) only ii D) only iii E) i and ii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 4) Which of the following is TRUE? i. A rational choice is made on the margin. ii. Microeconomics is the study of the national economy while macroeconomics is the study of the global economy. iii. Economists try to understand how the economic world works by testing normative statements. A) only i B) i and iii C) only ii D) only iii E) i and ii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

5) Will, Bill, and Phil decide to study an extra hour for an exam. Instead of studying, they could have gone out to eat, played football, or watched TV. Which of the following statements is correct? A) The benefit the three students receive must be the same because they all make the same choice. B) The students made a rational choice as long as they face no scarcity. C) The students could each have different opportunity costs. D) The marginal cost of the decision is the same if they make the same score on the exam. E) Going out to eat, playing football, and watching TV are all called sunk costs. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 6) Which of the following is TRUE regarding a normative statement? i. It uses the ceteris paribus assumption. ii. It is a value judgment. iii. It accounts for opportunity costs. A) i and iii B) ii and iii C) i only D) ii only E) i, ii, and iii Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 7) To help unscramble cause and effect, economists A) use the concept of opportunity costs. B) must use the ceteris paribus assumption. C) answer the "what" question. D) answer the "how" question. E) must use normative statements. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

8) Which of the following is TRUE regarding this statement? "The president's decision to spend more money on national defense is smart." A) This is a normative statement. B) The federal government does not face scarcity. C) This topic would be studied in microeconomics. D) Social interest must always be more important than self-interest. E) Ceteris paribus does not apply to the government. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 9) Gregory is considering attending a concert with a ticket price of $40. He estimates that the cost of driving to the concert and parking there will add an additional $20. In order to attend the concert, Gregory will have to take time off from his part-time job. He estimates that he will lose 5 hours at work, at a wage of $8 per hour. In terms of dollars, Gregory's opportunity cost of attending the concert equals A) $80. B) $100. C) $40. D) $60. E) $20. Answer: B Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Application of knowledge

10) Kevin is re-finishing an antique grandfather clock that he purchased at a flea market for $300. He expects to be able to sell the clock for $450. At the last minute, Kevin discovers that he needs to repair the gears at a cost of $175 to make the clock worth $450 to potential buyers. It turns out that he could also sell the clock now, without completing the additional repairs, for $250. What should Kevin do? A) He should sell the clock now for $250. B) He should keep the clock but not make the repairs since the original $300 is a sunk cost. C) He should complete the additional repairs and sell the clock for $450. D) He should keep the clock after making the repairs since it is not rational to spend a total of $475 on an item that can only be sold for $450. E) Kevin is indifferent between selling the clock as is or selling it after completing the repairs. Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Application of knowledge 11) Which of the following scenarios describes an action that is NOT rational from an economic point of view? A) After drinking one martini (shaken, not stirred), James buys and drinks a second martini even though the marginal benefit of the second martini is lower than the marginal benefit of the first. B) Eric buys a replacement ticket to the basketball game after he realizes that he accidentally left his original ticket at home. C) Emily chooses to attend a social event on Tuesday night instead of studying even though she has an important exam on Wednesday morning. D) US Airways sells a last minute ticket to Don for $50 even though its average cost per passenger is $250. E) none of the above Answer: E Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Application of knowledge

12) Because resources are scarce, economists would say that A) the best things in life are always free. B) people's wants are unlimited. C) every choice has an opportunity cost. D) anything worth doing is worth doing well. E) there are no benefits from cooperation. Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking 13) Wichita is building a convention center and financing it with revenues raised from a city hotel tax. Local politicians assert that the convention center is essentially free for Wichita residents because out-of-town visitors are paying for it. Someone who is practicing the economic way of thinking would disagree because A) they believe that Wichita does not need a new convention center. B) there are other projects that could be undertaken with the tax funds. C) the convention center may not pass a marginal cost-benefit test. D) the hotel tax may lead to a decline in visits to Wichita. E) the hotel tax may reduce commercial property values in the area. Answer: B Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking

14) Suppose that your public library charges a fixed monthly membership fee of $12. Members are allowed to check out as many books as they want under this plan. The average member checks out 4 books per month. Suppose that your public library changes its policy. Now each book costs $3 to check out but there is no longer a monthly membership fee. What effect do you think the new policy will have on the total number of books checked out from your library each month? The new policy is likely to ________ the number of booked checked out because ________. A) leave unchanged; members have already shown that they are willing to pay $12 to check out 4 books per month B) leave unchanged; the average cost of the library service is the same under both plans C) reduce; the marginal benefit of checking out books is now lower under the new policy D) reduce; the marginal cost of checking out books is now higher under the new policy E) increase; the average benefit of checking out more than 4 books is now higher under the new policy Answer: A Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Application of knowledge 15) In New York City, when he was the mayor Michael Bloomberg recommended that the city, with the help of private donors, make cash payments to poor and underprivileged parents who can certify that their children are attending school on a regular basis. The payments would start after third grade and go through high school, rising each year as dropout rates get higher and a child's forgone earning potential is higher. What economic concept does this policy represent? A) public goods B) technological progress C) externalities D) the "invisible hand" E) incentives Answer: E Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking

16) Nathan drinks three cups of coffee per day. The marginal benefit that he enjoys from drinking the third cup is A) less than the marginal benefit that he receives from drinking the second cup. B) the same as the total benefit from drinking all three cups minus the total benefit of drinking the first two cups. C) both A and B. D) greater than the marginal benefit that he receives from drinking the second cup. E) none of the above. Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking 1.7 Chapter Figures

1) The relationship between distance traveled in 5 hours and speed shown in the figure above is A) direct, linear. B) inverse, linear. C) direct, non-linear. D) inverse, positive. E) direct, negative. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

2) The relationship between distance traveled in five hours and speed shown in the figure above is A) positive. B) negative. C) inverse. D) cross-sectional. E) multilateral. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

3) The figure above shows the relationship between distance sprinted and recovery time. The curve becomes steeper because as the distance sprinted increases A) the extra recovery time needed from sprinting another 100 yards increases. B) the extra recovery time needed from sprinting another 100 yards decreases. C) the recovery time increases. D) the recovery time decreases. E) the relationship between distance sprinted and recovery time becomes more inverse. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

4) The figure above shows the relationship between study time and the number of problems worked. The curve becomes less steep because as you study more A) study time becomes less effective. B) study time becomes more effective. C) the number of problems worked increases. D) the number of problems worked decreases. E) the relationship between study time and the number of problems worked changes from direct to inverse. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

5) The figure above shows the relationship between the journey length and the cost of trip per mile. The curve becomes flatter because as the journey length increases A) the fall in the cost per mile becomes smaller. B) the fall in the cost per mile becomes greater. C) the cost per mile decreases. D) the cost per mile increases. E) the cost per mile remains unchanged. Answer: A Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

6) What is the slope of the line in the figure above? A) 0.75 B) -0.75 C) 1.33 D) -1.33 E) zero Answer: A Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

7) What is the slope of the line in the figure above? A) 0.75 B) -0.75 C) 1.33 D) -1.33 E) zero Answer: B Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

8) In the figure above, what is the slope of the curve at point A? A) 0.75 B) -0.75 C) 1.33 D) -1.33 E) zero Answer: B Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 1.8 Essay: Definition and Questions 1) What is the relationship between wants, resources, scarcity, and choices? Discuss the relationship for an individual and for a society. Answer: A person faces scarcity whenever his or her wants exceed what he or she can obtain using his or her resources. Because the person cannot fulfill all of his or her wants, the person is forced to choose which wants will be satisfied and which wants will remain unsatisfied. The same results hold true for a society. All societies face scarcity because people's wants are essentially infinite, so that the resources available are not sufficient to fulfill everyone's wants. Because of this fact, societies must make choices about which (and whose) wants will be satisfied and which (and whose) wants will remain unsatisfied. Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

2) Why do economists say that even very rich people face scarcity? Answer: A person faces scarcity whenever his or her wants exceed what he or she can obtain using his or her resources. Even very rich people want things that they cannot have. An older rich person, for instance, might want to have all of his or her youthful energy, but medical science cannot (yet) provide this service. Alternatively, another rich person might enjoy life so much that he or she wants 25 hours in a day in order to have more time for more enjoyment. But, such a want is impossible. By way of another, perhaps more realistic example, Malcolm Forbes was the founder of Forbes magazine and was very rich. However, he did not win every piece of art that he bid upon at auctions. Even though Mr. Forbes was very rich, he still passed on some art when the price got so high that he thought given his resources, the price exceeded what he was willing to pay. Mr. Forbes wanted the art, but he was not willing to bid higher in order to win it. Mr. Forbes faced scarcity. Topic: Scarcity Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 3) What do economists mean when they discuss "scarcity"? Answer: Scarcity occurs whenever people's wants exceed the ability of the available resources to meet these wants. Because people's wants are effectively infinite-it is always possible to imagine more good things to want to have-wants will always exceed what can be produced with the available resources, and so scarcity will always be present. Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 4) Define economics and describe its branches of study. Answer: Economics is the social science that studies the choices made by individuals, businesses, government, and entire societies as they cope with scarcity. It has two branches, microeconomics and macroeconomics. Microeconomics is the study of the choices made by individuals and businesses, the way they interact, and the influence that governments exert on these choices. Macroeconomics is the study of the aggregate (total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make. Topic: Definition of economics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

5) Why does scarcity lead to the what, how, and for whom questions? Answer: Human wants exceed the resources available to satisfy them, thereby creating the problem of scarcity of goods and services. Everyone wants more than he or she can have, be it a student dreaming of a faster computer or an extraordinarily rich business leader wishing for more vacation time. Because not all wants can be satisfied, people must make choices about which wants to satisfy. The choices resulting from scarcity mean that people must decide what gets produced, how are the products produced, and for whom are the products produced. Topic: Scarcity and economic questions Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 6) List and explain the three fundamental economic questions that must be answered by all economic systems. Answer: First, all economic systems must answer the question of "what goods and services get produced and in what quantities?" In other words, among the near infinite types of goods and services, society must decide what will be produced and how much of each good and service will be produced. Next, every economic system must decide, "how are goods and services produced?" This question needs to be answered because there are always many ways to produce a particular good or service (for instance, using a lot of workers and only a little machinery, or a lot of machinery and fewer workers), so the method that will be used must be decided. Finally, once the goods and services are produced the society must decide "for whom are the various goods and services produced?" In other words, societies must decide whether the goods and services are distributed so that everyone gets about the same amount or whether they are distributed so that some people get more than others. Topic: Economic questions Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 7) Pumpkins are grown in New Mexico with the aid of fertilizer. Hence, fertilizer is a partial answer to which of the three economic question? Answer: Fertilizer is used to help produce the pumpkins, so it is a partial answer to the "How are goods and services produced?" question. Topic: Economic questions, how Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

8) Different nations answer the what, how, and for whom questions differently. China, for instance, builds dams using many workers and only a little capital equipment. The United States builds dams using a few workers and a lot of capital equipment. Which economic question are these two nations answering and why do the answers differ? Answer: The nations are answering the "how" question because they are determining how to produce a dam. In the main part, the answers differ because the nations have different amounts of capital equipment and labor. China has more people and less capital equipment. Hence it makes sense for China to build dams using many workers and only a little capital equipment. The U.S. has more capital equipment and less labor. Thus it makes sense for the United States to build dams using a lot of capital equipment and only a few workers. Topic: Economic questions, how Skill: Level 4: Applying models Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 9) The question "Will doctors or lawyers have higher annual incomes?" represents which of the three basic economic questions? Answer: The amount of goods and services a person can purchase depends on the person's income. Hence the question of who should be paid more, lawyers or doctors, essentially asks whether lawyers or doctors will be able to buy more goods and services. Thus the question is a microeconomic "For whom?" question. Topic: Economic questions, for whom Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 1.9 Essay: The Economic Way of Thinking 1) What is the difference between microeconomics and macroeconomics? Answer: Microeconomics studies the decisions of smaller economic actors, such as individual consumers or individual firms, and how the government can affect these decisions, say through how it regulates an industry. Macroeconomics studies the aggregate, or economy-wide, consequences of the decisions made by individuals and firms. Macroeconomics also studies the aggregate effects of government policies, such as the Federal Reserve's decisions to raise or lower interest rates. Topic: Microeconomics and macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

2) What is an opportunity cost? Give an example. Answer: An opportunity cost of something is the best thing you must give up to get it. For example, the cost of attending class might be the extra hour of sleep you lose, or the opportunity cost of buying a taco might be the soda you can no longer buy. Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication 3) Your friend is preparing for this exam and in your practice session makes the following statement: "Instead of attending microeconomics class for two hours, Kiki could have played tennis or watched a movie. Therefore, the opportunity cost of attending class is the tennis and the movie she had to give up." Is your friend's analysis correct or not? Explain your answer. Answer: Your friend's analysis is incorrect. The opportunity cost of an action is the (single) best thing she had to give up, not ALL the things she had to give up. Kiki's opportunity cost of studying for her exam is either the tennis or the movie, whichever she would have done had she not studied. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication 4) Rather than go out to eat by yourself, you decide to stay at home and fix dinner for yourself and your two roommates. Your roommates applaud your decision. Your roommates tell you that your decision to eat at home has no opportunity cost because you already have all the dinner ingredients in your pantry. Is this comment correct? Answer: Your roommates' comment is incorrect. The opportunity cost of preparing dinner at home is whatever is the best thing you give up, which, given your choice boiled down to staying home or going out, is going out to eat. Hence the opportunity cost of fixing dinner at home is going out to eat. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

5) Shaniq can spend the next hour studying for a finance test, hiking along the Oregon coast, watching reruns of Lost on television, or napping. If she decides to study, what is the opportunity cost of her choice: hiking, watching television, or napping? Answer: With the information given, it is impossible to determine the opportunity cost. The opportunity cost is the highest-valued alternative forgone and the problem does not give Shaniq's ranking of the options. For instance, if Shaniq thinks that if she had not studied she would have watched Lost, then watching Lost is the opportunity cost. However, if Shaniq thinks that if she were not studying, she would be strolling along the beach, then the beach walk is the opportunity cost. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication 6) For spring break, Melanie will either stay home or go to Daytona Beach. At home, Melanie pays $10 per day for food and earns $90 a day at her job. At Daytona Beach, Melanie will stay with friends and so has no lodging cost. She will pay $20 per day for food. In terms of dollars, Melanie's opportunity cost per day of going to Daytona Beach is how much? Answer: Melanie's opportunity cost of going to Daytona Beach is $100 per day. If she goes, she spends $10 extra for food and loses $90 income from her job, for a total opportunity cost of $100. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 7) Why is the benefit of something measured by what you are willing to give up? Answer: The benefit of a good or service, say a slice of pizza, is the pleasure it brings the consumer. But it is impossible to measure someone's pleasure. In order to measure the benefit of the slice of pizza, we need something that we can measure. Thus, to measure the benefit of the slice of pizza, we ask the consumer what he or she is willing to give up to get the slice of pizza. So, if the consumer was willing to give up, say, three hot dogs to get the slice of pizza, we can determine that the benefit of the slice of pizza to the consumer is three hot dogs. Topic: Benefit Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

8) Define marginal cost and marginal benefit. Answer: Marginal cost is the opportunity cost of a one-unit increase in an activity. Marginal benefit is the benefit of a one-unit increase in an activity. Topic: Marginal benefit, marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 9) In New State, the bottling law requires that people get a refund of five cents when they return an empty bottle or can. Why does the state pay people to return bottles? In your answer, be sure to mention the role played by rational choice. Answer: Policy makers know that people making rational choices respond to incentives. Instead of throwing away bottles and cans, people will now bring the used bottles and cans to the designated areas for recycling in order to receive their payment. Thus policy makers have taken advantage of people's rational decision making in order to reduce litter and clean the environment. Topic: Incentives Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication 10) Must a rational choice always work out well? In other words, is it possible for someone to regret a rational decision? Answer: It is not necessarily the case that a rational choice always works out well; sometimes people will come to regret a rational decision. Decisions are made based on the information at hand. Sometimes that information is incomplete. For instance, when faced with a math midterm on Thursday, on Wednesday night a student might believe that he or she has a strong grasp of the subject and hence rationally decide to go to a movie rather than study. When the test reveals that the student actually understood little about the math and the student earns a low score, he or she likely regrets not studying. But the regret does not imply that the decision to see the movie was irrational. Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

11) Discuss what is necessary to make rational decisions. Be sure to mention opportunity cost, marginal cost, and marginal benefit. Answer: Economists assume that people act rationally, making choices in increments and comparing marginal costs and benefits. Costs are measured as opportunity cost, which is the value of the best thing that must be given up. Benefits are subjective, measured by what you are willing to give up. Marginal cost is the additional cost of one more unit of the good and marginal benefit is the additional benefit of one more unit. Marginal cost increases and marginal benefit decreases as more of the activity is considered. A rational decision compares the marginal benefit of the decision to its marginal cost. If the marginal benefit exceeds the marginal cost, the (rational) decision is to undertake the action being contemplated. If the marginal benefit is less than the marginal cost, the (rational) decision is to not undertake the action being considered. Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication 1.10 Essay: Economics As A Life Skill and Job Skill 1) What is a positive statement? Give an example. Answer: A positive statement addresses "what is" and can be tested. An example of a positive statement is "An increase in the price of gasoline decreases the quantity of gasoline demanded." Topic: Positive statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 2) What is the difference between positive and normative statements? Answer: Positive statements tell what is and normative statements tell what ought to be. Positive statements can be tested to determine if they are correct or not, while normative statements use value judgments and so cannot be tested. For example, two economists might agree on the positive assertion that if the government spent its funds purchasing pharmaceutical drugs for poor older Americans rather than poor children, then poor older Americans would use more drugs and poor children would use fewer. But they might disagree on the normative conclusion of whether the government should pursue this policy. One economist might argue "It is not fair to have senior citizens suffer because they cannot afford medicine" and the other economist might argue "It is not fair to have children suffer because their parents cannot afford medicine." Topic: Positive and normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Written and oral communication

3) Two economists can agree that raising the minimum wage creates unemployment yet one might argue that raising the minimum wage is a good policy and the other that it is a bad policy. Why can this difference exist? Be sure to use the terms positive and normative in your answer. Answer: Positive statements are statements that describe how the world is. Positive statements can be tested and so, ultimately, any disagreements about positive statements should be resolved. The statement that "Raising the minimum wage creates unemployment" is a positive statement and, on the basis of repeated testing, most economists agree that it is a correct positive statement. Normative statements, however, are statements that describe how the world ought to be. Normative statements depend on people's values and cannot be tested. So one economist might argue that raising the minimum wage is a good policy because this economist thinks that, although it is unfortunate that some people lose their jobs, the fact that others retain their jobs and their wages rise more than outweighs the harm created by the unemployment. Another economist might strongly differ because the second economist thinks that the harm inflicted on people who lose their jobs more than outweighs any good from some workers being paid more. This difference of opinion can last indefinitely because there is no way to test the two economists' beliefs to determine which is correct. Topic: Positive and normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Written and oral communication 4) Explain whether the statement, "There is life on Mars," is a normative or positive statement. Answer: The statement is a positive statement because it does not depend on a value judgment. Instead, it is a statement that tries to describe "what is" and hence is testable. Of course, in order to test the assertion, it would be necessary to go to Mars to ascertain if there is life present. While it is difficult (!) at present to actually carry out the test, nonetheless the statement is testable and hence is a positive statement. Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Written and oral communication 5) Explain whether the statement, "Hillary Clinton was elected President of the United States in 2016," is a normative or positive statement. Answer: The statement is a positive statement because it does not depend on a value judgment. Instead, it is a statement that tries to describe "what is" and hence is testable. Now, it is indeed the case that Hillary Clinton was not elected president in 2016, so when we test the statement we discover that it is incorrect. But, whether the statement is correct or not has no bearing on whether the statement is positive or normative. Thus, the statement "Hillary Clinton was elected President in 2016" is a positive, albeit incorrect, statement. Topic: Positive statements Skill: Level 3: Using models Section: Checkpoint 1.3 Status: Old AACSB: Written and oral communication 129 Copyright © 2023 Pearson Education Ltd.

6) What is a normative statement? Give an example. Answer: A normative statement is a statement about what ought to be. It is a value judgment or opinion and so cannot be proven true or false. An example of a normative statement is "Students should attend school year round to receive a better education." Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 7) Explain whether the statement "The government should increase tariffs on Japanese cars to protect the American car industry from competition," is a normative or positive statement. Answer: The statement is normative. The statement is a normative statement because it depends on a value judgment, namely that the government should protect the American car industry from competition. Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 1.11 Essay: Appendix: Making and Using Graphs 1) Why do economists use graphs? Answer: Graphs help economists, and others, to visualize the relationships between economic variables. Graphs that plot variables together help economists understand if the variables are related and how they are related. Graphs also help provide a visual picture of economic models that link different variables. Indeed, many other disciplines use such visual models. For example, architects work with blueprints (their model) and the blueprints represent every detail of a building. Economists' models do not reflect of every detail of the real world, but the graphs that they use nonetheless are valuable because they help clarify the linkages between the variables. Topic: Basic idea Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

2) What kind of information is conveyed in a time-series graph? Answer: A time series graph reveals four types of information. First, it shows the actual value of the variable or variables at each point in time. Second, it shows whether the variable or variables are rising or falling as time passes. Third, it shows the speed with which the variable or variables are changing. Finally, it shows the presence or absence of a trend. Topic: Time-series graph Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 3) In the diagram below, label the x-axis, the y-axis, and the origin.

Answer:

The figure above has the x-axis, the y-axis, and the origin labeled. Topic: Basic idea Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 131 Copyright © 2023 Pearson Education Ltd.

4) The table above shows how many blouses Katie and Kim will purchase at different prices for a blouse. In the figure, label the axes and put the price on the y-axis and the quantity of blouses on the x-axis. Plot the data for Katie in the figure. Then, plot the data for Kim in the figure.

Answer:

The figure above shows the labeled axes and has drawn in it the relationships between the price and the quantity of blouses purchased for Katie and Kim. Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 132 Copyright © 2023 Pearson Education Ltd.

5) The figure above shows the price of a DVD player from 1996 to 2000. a. What type of graph is illustrated above? b. What is the trend in the price of a DVD player? Answer: a. The graph is a time-series graph because it plots time along the horizontal axis and the price of a DVD player along the vertical axis. b. The trend in the price of a DVD player is negative, that is, the price of a DVD player has generally decreased from one year to the next. Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 6) What are the two different types of relationships that variables can have? Explain each. What do these relationships look like when they are graphed? Answer: Variables can have two relationships: positive (or direct) and negative (or inverse). A positive relationship occurs when the variables move in the same direction, so that when one increases, the other also increases. A negative relationship occurs when the variables move in the opposite direction, so that when one increases, the other decreases. When a positive relationship is graphed, the line slopes upward to the right. When a negative relationship is graphed, the line slopes downward to the right. Topic: Relationships Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

7) What is the difference between a positive and a negative relationship? Answer: Two variables are positively related when an increase (decrease) in one is associated with an increase (decrease) in the other. In this case, the variables move together, in the same direction. Two variables are negatively related when an increase (decrease) in one is associated with a decrease (increase) in the other. In this case, the variables move in the opposite direction. Topic: Relationships Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 8) A graph of two variables is a vertical line. What is the interpretation of this result? Answer: When the graph of two variables is a vertical line, the variables are not related because, with this graph, whenever the variable measured along the vertical axis changes, the variable measured along the horizontal axis does not change. Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

9) The figure above shows how the sales of the video game "Tomb Raider—Lara Retires" change when the advertising spent on the game changes. Is the relationship between advertising and the number of games sold positive, negative, or neither? Explain your answer. Answer: The figure shows that there is a positive relationship between advertising and the number of video games sold. The relationship is positive because the two variables move together: If advertising increases, so, too, does the number of games sold. Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 134 Copyright © 2023 Pearson Education Ltd.

10) The figure above shows how the relationship between the number of hours per week a high school student spends on the web and the student's SAT score. Is the relationship between hours on the web and the SAT score positive, negative, neither? Explain your answer. Answer: The figure shows that there is a negative relationship between hours on the web and the student's SAT score. The relationship is negative because the two variables move in opposite directions: If hours on the web increase, the SAT score decreases. Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

11) A graph has a point that is either a maximum or a minimum. To the left of the point, the slope of relationship is positive. To the right of the point, the slope is negative. Is the point a maximum point or a minimum point? Be sure to draw a figure that supports your answer. Answer:

The point is a maximum point. Examine the figure above. The slope of a curved line at any point equals the slope of a straight line that touches the curved line at only that one point. Thus to the left of the maximum point, take point A. The slope of the straight line that touches the curved line at only point A is positive, so the slope of the relationship is positive. Similarly, take point B to the right of the maximum point. As the straight line shows, the slope of the relationship at point B is negative. Indeed, whenever there is a maximum point, the slope of the relationship to the left of the maximum is positive and the slope to the right is negative. Topic: Maximum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 12) What does the slope of a straight line equal? How is the slope of a curved line calculated? Answer: The slope of a straight line is calculated between two points on the line. Between the two points on the line, the slope equals the change in the value of the variable measured on the vertical axis (the y-axis) divided by the change in the value of the variable measured on the horizontal axis (the x-axis). The slope of a curved line is calculated at a point on the line. At that point on the curved line, draw a straight line that touches the curved line at only that point. Then, calculate the slope of the straight line. The slope of the curved line at that point equals the slope of the straight line. Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

13) In the figure above, what can you deduce about the slope of the curve? Answer: The slope is positive and increasing in size as we move rightward along the curve. Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

14) The table above shows how the number of books Katie buys each year depends on her income. a. What kind of relationship exists between Katie's income and the number of books she purchases?

b. Plot the relationship between Katie's income and the number of books she purchases in the above figure. Measure income along the vertical axis and the number of books along the horizontal axis. Be sure to label the axes. c. What is the slope of the relationship between $50,000 and $70,000 of income? d. What is the slope of the relationship between $90,000 and $110,000 of income? e. Comment on the similarity or dissimilarity of your answers to parts (c) and (d).

Answer: a. There is a positive relationship. When Katie's income increases, so too does her purchase of books.

b. The relationship is plotted in the figure above. c. The slope equals the change in the value of the variable measured on the vertical axis, income, divided by the change in the value of the variable measured along the horizontal axis, the number of books. Between $50,000 and $70,000 of income, the number of books purchased increases from 14 to 16. Hence income increases by $20,000 and the number of books increases by 2, so the slope equals $20,000/2 = 10,000. d. As with the previous answer, the slope equals the change in income divided by the change in books. Between $90,000 and $110,000 of income, the number of books purchased increases from 18 to 20. Hence income increases by $20,000 and the number of books increases by 2, so the slope equals $20,000/2 = 10,000. e. The slopes in parts (c) and (d) are equal. But, they MUST be equal because the relationship between Katie's income and the number of books she purchases is linear. For a linear relationship, the slope is the same regardless of where it is measured. Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

15) Graph the data in the table above in the figure. Label the axes.

a. Is the relationship between X and Y positive or negative? b. What is the slope when X = 4? c. What is the slope when X = 8? Answer:

The figure labels the axes and graphs the relationship. a. The relationship between X and Y is negative. b. The slope equals -2. c. The slope equals -2. Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 140 Copyright © 2023 Pearson Education Ltd.

16) In the diagram below, draw a straight line with a slope of zero.

Answer:

A horizontal line has a slope of zero. The figure above shows a horizontal line with a slope of zero. Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

17) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or Topic: Slope of a straight line Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

18) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or Topic: Slope of a straight line Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 142 Copyright © 2023 Pearson Education Ltd.

19) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or Topic: Slope of a straight line Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

20) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or Topic: Slope of a straight line Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

21) What does the slope of the curved line at point A shown in the above figure equal? Answer: The slope of a curved line equals the slope of a straight line that touches the curved line at only that point. And, the slope of a straight line equals the change in variable on the y-axis divided by the change in the variable on the x-axis. Measure the slope of the straight line from point A to where the line crosses the x-axis, at 15. Thus the straight line has a slope of Therefore the curve line at point A also has a slope equal to -6. Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 22) "It is impossible to represent a three variable relationship in a two-dimensional graph." Is this statement true or false? Explain your answer. Answer: The statement is false because it is possible to represent a three variable relationship in a two dimensional graph. To do so, start by focusing on two of the variables. Assume that the third variable does not change (the ceteris paribus assumption) and then graph the relationship between the two variables. The graph shows how these two variables are related when the third variable does not change. When the third variable does change, then the entire relationship between the two graphed variables changes. In other words, the line showing the relationship between the two graphed variables shifts so that it becomes an entirely new line. The shift in the line shows how the third variable influences the other two. Topic: Relationships among more than two variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

23) Jamie is preparing to take his SAT tests. The table above shows how Jamie's score depends on the number of hours a week Jamie studies a. Plot the relationship in the figure, putting the hours studied on the horizontal axis.

b. Is the relationship you plotted positive or negative? c. What happens to the slope of the relationship as hours studied increase? d. Suppose Jamie can enroll in an SAT prep course and, by so doing, for every possible number of hours he studies, his score will be 100 points higher. Plot the new relationship between the number of hours studied and Jamie's SAT score in the figure. e. How many variables are involved in the figure you just completed?

Answer:

a. The figure above plots the relationship between the number of hours Jamie studies and his SAT score. b. The relationship is positive: As Jamie increases the hours he studies, his SAT score increases. c. The relationship is nonlinear, so the slope of the relationship changes as the number of hours studied changes. In the figure, the slope of the relationship decreases in size as the number of hours studied increases. d. The figure above also plots the relationship between the hours Jamie studies and his SAT score if Jamie takes an SAT preparation course. e. There are three variables: The number of hours Jamie studies, whether or not he takes an SAT preparation course, and his SAT score. Topic: Relationships among more than two variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

Foundations of Economics, 9e (Bade), GE Chapter 2 The U.S. and Global Economies 2.1 What, How, and For Whom? 1) Items that are purchased by individuals for their own enjoyment are called A) consumption goods and services. B) capital goods. C) government goods and services. D) exports of goods and services. E) private goods. Answer: A Topic: Consumption goods and services Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 2) Items bought by individuals to provide personal enjoyment are termed A) consumption goods. B) personal goods. C) consumption or investment goods. D) standard goods. E) pleasure goods. Answer: A Topic: Consumption goods and services Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 3) What would be an example of a consumption good? A) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. B) The local driver's license office purchases a new digital camera and printer. C) Rhianna gets a haircut. D) Jake buys an iPhone. E) Donald Trump purchases furniture for his office. Answer: D Topic: What we produce Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

4) Which of the following is a consumption good or service? A) a personal computer purchased in order to play games at home B) a United Airline ticket counter C) the Starship, SpaceX's proposed human-carrying rocket D) a United Parcel Service truck delivering Christmas gifts E) a satellite dish installed by Cox Cable to download programs that are then distributed through its cable system Answer: A Topic: Consumption goods and services Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 5) What would be an example of a consumption service? A) Rhianna gets a haircut. B) Jake buys an iPhone. C) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. D) The local driver's license office purchases a new digital camera and printer. E) Donald Trump purchases furniture for his office. Answer: A Topic: Consumption goods and services Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 6) The largest share of total production in the United States is A) consumption goods and services. B) capital goods. C) government goods and services. D) exported goods and services. E) imported goods and services. Answer: A Topic: Consumption goods and services Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

7) Items bought by businesses to help produce other goods and services are called A) consumption goods and services. B) capital goods. C) government goods and services. D) exports of goods and services. E) productive goods. Answer: B Topic: Capital goods Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 8) Which of the following is NOT a consumption good? A) Nike swimming trunks B) marriage counseling services C) a UPS truck D) a Subway sandwich E) a U.S. government bond Answer: C Topic: Capital goods Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Application of knowledge 9) An item that is purchased to increase businesses' productive resources is A) an export. B) a government good. C) a capital good. D) a consumption good. E) a productive good. Answer: C Topic: Capital goods Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

10) What would be an example of capital good? A) Jeanette buys a new dress. B) The local driver's license office purchases a new digital camera and printer. C) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. D) Apple sells computers to Japan. E) Rhianna gets a haircut. Answer: C Topic: Capital goods Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 11) The difference between consumption and capital goods is that A) only big corporations can afford capital goods. B) capital goods are used to produce additional goods while consumption goods are not. C) capital goods are provided by the government. D) consumption goods can be enjoyed by many people at the same time. E) it is illegal to export capital goods. Answer: B Topic: Consumption and capital goods Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 12) Which of the following is NOT an example of a capital good? A) a miner's cap B) a GPS tracking device C) an airport kiosk D) a U.S. government bond E) a stethoscope Answer: D Topic: Capital goods Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Application of knowledge

13) Which of the following is NOT considered one of the factors of production? A) land B) labor C) capital D) technology E) entrepreneurship Answer: D Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 14) Which of the following correctly lists the categories of factors of production? A) land, labor, capital, and entrepreneurship B) land, buildings, capital, and entrepreneurship C) labor, machines, buildings, capital, and entrepreneurship D) forests, fish, buildings, capital, and entrepreneurship E) labor, money, stocks, and bonds Answer: A Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 15) Which of the following is NOT a factor of production? A) money B) capital C) land D) entrepreneurial ideas E) labor Answer: A Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

16) Goods and services are produced by using four factors of production A) land, labor, capital, and entrepreneurship. B) land, labor, money, and equipment. C) natural resources, human resources, financial assets, and entrepreneurial resources. D) labor, human capital, physical capital, and financial capital. E) land, labor, capital, and money. Answer: A Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 17) Factors of production are the A) goods that are bought by individuals and used to provide personal enjoyment. B) goods that are bought by businesses to produce productive resources. C) productive resources used to produce goods and services. D) productive resources used by government to increase the productivity of consumption. E) goods and services produced by the economy. Answer: C Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 18) The productive resource that includes all the "gifts of nature" is called A) land. B) labor. C) capital. D) entrepreneurship. E) land if undeveloped and capital if developed. Answer: A Topic: Land Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

19) Economists classify energy and water as part of which factor of production? A) land B) labor C) capital D) entrepreneurship E) land if undeveloped and capital if developed Answer: A Topic: Land Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 20) As a factor of production, oil reserves are counted as A) land. B) labor. C) capital. D) entrepreneurship. E) financial capital. Answer: A Topic: Land Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 21) Which of the following has been the largest contributor to increases in the quantity of labor in the United States during the past 50 years? A) The proportion of men taking paid jobs has increased. B) The proportion of women taking paid jobs has increased. C) The proportion of young adults entering college has decreased. D) The proportion of seniors taking early retirement has decreased. E) None of the above because the quantity of labor has actually decreased. Answer: B Topic: Labor Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

22) The concept of human capital describes A) human skills, that is, the quality of labor. B) human population, that is, the quantity of labor. C) the number of machines per employed worker. D) the number of workers per operating machine. E) the number of machines (capital) that have been produced by people (humans). Answer: A Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 23) Which factor of production does human capital enhance? i. land ii. labor iii. capital A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: B Topic: Labor, human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 24) Human capital can be increased through A) investment in new technology. B) education, on-the-job training, and work experience. C) investment in new machinery. D) decreases in population. E) increasing the nation's production of consumption goods. Answer: B Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

25) The United States possesses a large amount of human capital. As a result of this fact, in the United States there is a A) large amount of machinery and equipment. B) large number of people and a great deal of land. C) highly skilled and educated labor force. D) large number of kind and generous humans. E) large amount of machinery (capital) that is run by people (humans). Answer: C Topic: Labor, human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 26) Jan is attending college and studying to be an investment broker. To improve her chances of employment following college, she has interned at a top brokerage firm during the last two summers. Jan's internship has increased her A) natural labor. B) human capital. C) consumption services. D) natural resources. E) entrepreneurship capital. Answer: B Topic: Labor, human capital Skill: Level 4: Applying models Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 27) Which of the following is NOT directly related to human capital? A) a college education B) a summer internship C) knowledge of computer programing D) an MRI machine E) an understanding of real estate markets Answer: D Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Application of knowledge

28) Human capital ________ as you work. As a result, the ________ of goods and services ________. A) increases; quantity; increases B) declines; quality; increases C) improves; quality; does not change D) does not change; quality; does not change E) decreases; quantity; decreases Answer: A Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 29) Capital, as a factor of production, refers to A) money, stocks, and bonds. B) the production technology used by firms. C) the tools and instruments used to produce other goods and services. D) the production factors imported from abroad. E) stocks and bonds, but not money. Answer: C Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 30) The total value of capital in the United States is around A) $60 trillion. B) $10 trillion. C) $79 trillion. D) $100 trillion. E) $145 trillion. Answer: A Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

31) Capital is a factor of production. Which of the following is an example of capital? i. $1,000 in money ii. 100 shares of Microsoft stock iii. $10,000 in bonds issued by General Motors iv. a drill press in your local machine shop A) i and ii B) ii only C) iii only D) iv only E) ii and iii Answer: D Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 32) Capital is a factor of production. An example of capital as a factor of production is A) money. B) stocks. C) bonds. D) machines. E) education. Answer: D Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 33) One of the productive resources is capital. Capital includes A) money borrowed from a bank. B) a company's stocks and bonds. C) tools, buildings, and machine tools. D) toys, t-shirts, CD players, and pencils. E) money in a savings account at a bank. Answer: C Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

34) A newspaper printing press is an example of A) a capital good. B) a factor of production. C) something that influences labor productivity. D) a good that was once an output of the production process. E) All of the above are correct. Answer: E Topic: Capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Application of knowledge 35) Which of the following is NOT considered capital? A) an assembly line at a General Motors plant B) a computer used by your instructor for presentations in class C) stocks and bonds that are sold by Pepsico D) the furniture in the President's office E) a nail gun used for building houses Answer: C Topic: How do we produce? Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 36) Entrepreneurship, as a factor of production, refers to A) the technology used by firms. B) the human capital accumulated by workers. C) the value of the firm's stock. D) the human resource that organizes labor, land, and capital. E) the capital the firm uses. Answer: D Topic: Entrepreneurship Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

37) The productive resource that organizes labor, land, and capital is A) human capital. B) financial capital. C) entrepreneurship. D) government. E) capital. Answer: C Topic: Entrepreneurship Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 38) Payments to the factors of production are A) rent, mortgage, interest, and bonds. B) rent, interest, bonds, and profit or loss. C) rent, wages, interest, and profit or loss. D) rent, wages, profit or loss, and bonus. E) land, labor, capital, and entrepreneurship. Answer: C Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 39) ________ paid for the use of land; ________ paid for the services of labor; and ________ paid for the use of capital. A) Rent is; wages are; interest is B) Rent is; interest is; wages are C) Interest is; wages are; profit is D) Mortgages are; interest is; wages are E) Rent is; wages are; profit is Answer: A Topic: Resource payments Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

40) The income paid for the use of land is called A) rent. B) wages. C) interest. D) profit. E) land capital. Answer: A Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 41) The income paid to labor is called A) rent. B) wages. C) interest. D) profit. E) human capital. Answer: B Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 42) Which factor of production is paid "interest"? A) land B) labor C) capital D) entrepreneurship E) human capital Answer: C Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

43) The owners of the resource ________ are paid ________. A) land; wages B) labor; profit C) capital; rent D) capital; interest E) entrepreneurship; wages Answer: D Topic: Resource payments Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 44) Which factor of production is paid "profit"? A) land B) labor C) capital D) entrepreneurship E) human capital Answer: D Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 45) The functional distribution of income measures which of the following? A) how federal tax revenues are related to the business function that employs taxpayers B) the distribution of earnings by the factors of production C) the proportion of income generated by the four types of expenditures on goods and services D) the distribution of income among households E) the distribution of income among nations Answer: B Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

46) In the United States, the productive factor that, as a group, receives the largest fraction of the nation's total income is A) labor. B) capital. C) consumption goods and services. D) entrepreneurship. E) land. Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 47) According to the functional distribution of income, in the United States A) capital earns most of the income. B) labor earns most of the income. C) land earns most of the income. D) entrepreneurs earn most of the income. E) the income earned by capital and labor are approximately equal. Answer: B Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 48) The data show that more than 60 percent of the total income earned in the United States goes to A) labor. B) land. C) capital. D) entrepreneurship. E) profit. Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

49) The majority of the income earned in the United States is paid in A) rent. B) wages. C) interest. D) profit. E) dividends. Answer: B Topic: Functional distribution of income Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 50) The personal distribution of income measures which of the following? A) how federal tax revenues are related to the type of businesses that employs the taxpayers B) the distribution of earnings by the factors of production C) proportion of income generated by the four types of expenditures on goods and services D) the distribution of income among households E) the distribution of income among nations Answer: D Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 51) In the United States, the poorest 20 percent of households earn roughly ________ percent of total income. A) 20 B) 10 C) 15 D) 3 E) 0.5 Answer: D Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

52) The personal distribution of income in the United States shows that A) income is equally distributed. B) the poorest 20 percent of individuals receive approximately 20 percent of total income. C) the richest 20 percent of individuals receive approximately 50 percent of total income. D) the poorest 60 percent of individuals receive approximately 50 percent of total income. E) the richest 20 percent of individuals receive approximately 25 percent of total income. Answer: C Topic: Personal distribution of income Skill: Level 3: Using models Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 53) The richest 20 percent of individuals in the United States receive about ________ of the nation's total income. A) 21 percent B) 51 percent C) 91 percent D) 99 percent E) 23 percent Answer: B Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 54) When the total U.S. production of goods and services is divided into consumption goods and services, capital goods, government goods and services, and export goods and services, the largest component is A) consumption goods and services. B) capital goods. C) government goods and services. D) export goods and services. E) capital goods and government goods and services tie for the largest component. Answer: A Topic: What we produce Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

55) An example of a capital good is A) a fiber optic cable TV system. B) an insurance policy. C) a haircut. D) an iPod. E) a slice of pizza. Answer: A Topic: What we produce Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 56) Which of the following correctly lists the categories of factors of production? A) machines, buildings, land, and money B) hardware, software, land, and money C) capital, money, and labor D) owners, workers, and consumers E) land, labor, capital, and entrepreneurship Answer: E Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 57) In economics, the factor of production "land" includes all of the following EXCEPT A) energy. B) plastics. C) wild plants. D) animals, birds, and fish. E) oil. Answer: B Topic: Land Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

58) Human capital is A) solely the innate ability we are born with. B) the money humans have saved. C) the knowledge humans accumulate through education and experience. D) machinery that needs human supervision. E) any type of machinery. Answer: C Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 59) When Ethan continues his education beyond high school, he is increasing his A) capital. B) wage rate. C) human capital. D) quantity of labor. E) rent. Answer: C Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 60) ________ is the human resource that organizes labor, land, and capital. A) Human capital B) Human skill C) A gift of nature D) Entrepreneurship E) Profit Answer: D Topic: Entrepreneurship Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

61) Wages are paid to ________ and interest is paid to ________. A) entrepreneurs; capital B) labor; capital C) labor; land D) entrepreneurs; land E) labor; entrepreneurs Answer: B Topic: Payments for the factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 62) The income earned by entrepreneurs is A) interest. B) wages. C) profit or loss. D) rent, wages, and interest. E) a mixture of rent, wages, interest, and profit. Answer: C Topic: Profit Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 63) Dividing the nation's income among the factors of production, the largest percentage is paid to A) labor. B) land. C) capital. D) entrepreneurship. E) labor and capital, with each receiving about 41 percent of the total income. Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

64) ________ earned the highest amount of income among the factors of production in the United States. A) Labor B) Capital C) Land D) Entrepreneurship E) Investment Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 65) In the United States, the richest 20 percent of households receive about ________ percent of total income. A) 4 B) 15 C) 23 D) 50 E) 33 Answer: D Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 66) In the United States, the poorest 20 percent of households receive about ________ percent of total income. A) 3 B) 15 C) 23 D) 49 E) 20 Answer: A Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

67) The personal distribution of income shows A) that labor receives the largest percentage of total income. B) how profit accounts for the largest fraction of total income. C) that the richest 20 percent of households receive 23 percent of total income. D) that interest accounts for most of the income of the richest 20 percent of households. E) that the poorest 20 percent of households receive less than 4 percent of total income. Answer: E Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 2.2 The Global Economy 1) Compared to the world, the rate of U.S. population growth is A) slower than in the world as a whole. B) about the same as in the world as a whole. C) much faster than in the world as a whole. D) incomparable because U.S. residents are born with a much greater chance of accumulating a lot of human capital. E) incomparable because we do not have accurate world population statistics. Answer: A Topic: World population Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 2) Approximately ________ people live in the United States and ________ people live in the world. A) 430 million; 8.6 billion B) 330 million; 7.6 billion C) 230 million; 5.6 billion D) 330 million; 3.6 billion E) 230 million; 6.6 billion Answer: B Topic: The people Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

3) The most people live in ________ economies and the fewest people live in ________ economies. A) developing; emerging market B) advanced; emerging market C) advanced; developing D) emerging market; developing E) developing; advanced Answer: A Topic: The countries Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 4) When describing the IMF broad country classification, the most accurate statement is that A) the category with the greatest number of countries is the advanced economies. B) the emerging market economies are countries that were, until the early 1990s, part of the Soviet Union or its satellites in Central and Eastern Europe and Asia. C) most of the nations in Western Europe are considered emerging market economies. D) most of the world's population lives in advanced economies. E) about 50 percent of the world's population live in the advanced economies and the other 50 percent live in the emerging market and developing economies. Answer: B Topic: Classification of economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 5) Which of the following is NOT classified as an advanced economy? A) South Korea B) Australia C) Russia D) Hong Kong E) the United Kingdom Answer: C Topic: Advanced economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

6) Canada is classified by the International Monetary Fund as A) an advanced economy. B) a developing economy. C) a transition economy. D) an emerging market economy. E) a natural-resource based economy. Answer: A Topic: Advanced economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 7) ________ economies include ________. A) Advanced; France, Australia and South Korea B) Advanced; the United States, Taiwan and Russia C) Advanced; Russia, Canada and Singapore D) Emerging; Taiwan, Russia and Singapore E) Emerging; Saudi Arabia, Poland and Taiwan Answer: A Topic: Advanced economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 8) Most countries in the world are classified as A) advanced. B) in transition. C) developing. D) industrialized. E) emerging market. Answer: C Topic: Developing economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

9) Most of the world's population lives in A) advanced economies. B) developing economies. C) transition economies. D) emerging market economies. E) island nations. Answer: B Topic: Developing economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 10) Which of the following is TRUE? i. The advanced economies account for more than half of global production. ii. Almost four out of every five people in the world live in the developing economies. iii. In the advanced economies, agriculture accounts for a larger part of total production than in the developing economies. A) only i and ii B) only ii and iii C) only i and iii D) only i E) i, ii, and iii Answer: A Topic: Developing economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 11) Nigeria would be classified by the International Monetary Fund as A) an advanced economy. B) a developing economy. C) a transition economy. D) an emerging market economy. E) a resource-based economy. Answer: B Topic: Developing economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

12) ________ economies include ________. A) Developing; Saudi Arabia and South Africa B) Developing; Poland and Russia C) Developing; China and Poland D) Emerging; Poland and Brazil E) Emerging; China and Canada Answer: A Topic: Developing economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 13) Poland is classified as A) an advanced economy. B) a developing economy. C) a transition economy. D) an emerging market economy. E) private economy. Answer: D Topic: Emerging market economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 14) The majority of the value of production in the world economy is produced in A) all of the developing economies taken together. B) all of Africa and the Middle East taken together. C) China and other Asian developing economies. D) all of the advanced economies taken together. E) all of the emerging market economies taken together. Answer: D Topic: What in the global economy Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

15) Which of the following correctly describes how the "global pie is baked"? A) Advanced economies account for about 40 percent of the value of the world's production. B) The United States' share of economic pie is increasing while China's share is decreasing. C) The increase in manufacturing has taken place in mainly the advanced economies. D) Asia accounts for about 40 percent of the global pie. E) Emerging economies account for about 25 percent of the global pie. Answer: A Topic: What in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 16) Physical capital differences across countries can be seen in the fact that A) more advanced economies typically have more sophisticated technology. B) furniture factories in China use machines like those in North Carolina. C) students in India study the same subjects as those in the United States. D) advanced economies produce 53 percent of the world's income. E) the iPhone's components are produced in 30 countries. Answer: A Topic: How in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 17) The charitable organization Creating Hope International trains women in Afghanistan to become tailors. This effort reduces A) physical capital differences between advanced and developing economies. B) entrepreneurship differences between advanced and developing economies. C) agricultural differences between advanced and developing economies. D) manufacturing differences between advanced and developing economies. E) human capital differences between advanced and developing economies. Answer: E Topic: How in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

18) Which of the following is an example of an effort to decrease physical capital differences between an advanced and a developing economy? A) American troops build roads in Afghanistan. B) Through World Vision, women and children in Africa receive education. C) Peace Corps volunteers teach English around the world. D) Creating Hope International trains women in Afghanistan to become tailors. E) Habitat for Humanity builds houses for low income families in the United States. Answer: A Topic: How in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 19) Of the following, the country with the highest average income per day in the world is A) Russia. B) the United States. C) Brazil. D) India. E) China. Answer: B Topic: Income in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 20) Income equality has A) increased within countries but has narrowed across countries. B) not changed in the advanced economies over the past 50 years. C) narrowed within countries but increased across countries. D) increased in developing economies as manufacturing has decreased. E) decreased in the United States as manufacturing has increased. Answer: A Topic: Income in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

21) The world population is approximately ________ people. A) 7.6 million B) 2 trillion C) 7.6 billion D) 7.6 trillion E) 760 million Answer: C Topic: Population Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 22) Which of the following statements is TRUE? A) Income inequality within most countries has increased during the past 20 years. B) Income inequality across the entire world has decreased during the past 20 years. C) Income inequality within most countries and across the entire world has not changed much during the past 20 years. D) Both A and B are correct. E) None of the above is correct. Answer: D Topic: Income in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 23) The percentage of the world's population that lives in the advanced economies is A) more than 71 percent. B) between 51 percent and 70 percent. C) between 31 percent and 50 percent. D) between 20 percent and 30 percent. E) less than 20 percent. Answer: E Topic: Population Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

24) The emerging market economies are A) the largest grouping including the nations of China and India. B) in transition from state-owned production to free markets. C) most of the nations of Western Europe. D) the nations that are currently agricultural in nature. E) the nations with the highest standards of living. Answer: B Topic: Emerging market economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 25) Compared to the developing economies, the advanced economies have ________ human capital and ________ physical capital. A) more; more B) more; less C) the same; the same D) less; more E) less; less Answer: A Topic: Advanced economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 26) In the advanced economies, ________ of the factories use advanced capital equipment, and in the developing economies, ________ of the factories use advanced capital equipment. A) virtually all; virtually all B) some; some C) virtually all; none D) some; none of E) virtually all; some Answer: E Topic: Advanced economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

2.3 The Circular Flows 1) ________ the owners of the factors of production, while ________ what amounts of those factors to hire. A) Households are; firms determine B) Households are; the government determines C) The government is; firms determine D) Firms are; households determine E) Firms are; the government determines Answer: A Topic: Households vs. firms Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 2) What two groups of decision makers are represented in the basic circular flow model? A) governments and financial institutions B) lenders and borrowers C) wholesalers and retailers D) bankers and regulators E) households and firms Answer: E Topic: Circular flow Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 3) Dan missed class the day the professor covered the circular flow model. Dan asked his friend Joan to explain markets to him. Joan correctly stated that a market A) requires a physical location for buyers and sellers to get together. B) is any arrangement that brings buyers and sellers together. C) must include a written contract between buyers and sellers. D) is only a place to purchase groceries. E) must have many buyers and only one seller, who is willing to sell to all the buyers. Answer: B Topic: Markets Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

4) The decisions of firms and households are A) coordinated by markets. B) made independently of one another. C) controlled by but not totally coordinated by the government. D) unexplainable by the circular flow model. E) coordinated by but not totally controlled by the government. Answer: A Topic: Markets Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 5) The circular flow model is used to show the A) flow of renewable natural resources. B) recycling process of production materials. C) expansions and contractions of economic activity. D) flow of expenditures and incomes in the economy. E) flow of supply and the flow of demand. Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 6) The circular flow model shows the A) distribution of income and consumption goods across income levels. B) combinations of the factors of production needed to produce goods and services. C) flow of expenditure and incomes that arise from the households', firms', and governments' decisions. D) flow of natural resources from firms to the private market to government and back to firms. E) distribution of income to the different factors of production. Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

7) The circular flow model shows the flow of A) expenditure and income throughout the economy. B) only money throughout the economy. C) only funds in stock and bond markets. D) only tax payments and government expenditures. E) goods markets and factor markets as they move through the economy. Answer: A Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 8) In the circular flow model, there are generally two types of markets: the ________ market and the ________ market. A) producers; consumers B) households; firms C) service; goods D) goods; factor E) supply; demand Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 9) In the circular flow model, consumption goods are bought and sold in the A) goods market. B) financial market. C) factor markets. D) government market. E) monetary flows. Answer: A Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

10) In the circular flow model, which of the following is on the buying side in the goods market? i. firms ii. households iii. federal, state, and local governments A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: E Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 11) In the circular flow model, which of the following is on the selling side in the goods market? A) federal, state, and local governments B) only households C) exporters D) only firms E) both firms and households Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 12) The circular flow model shows that goods and services flow from A) businesses to households. B) households to business. C) the factor market to businesses. D) the goods market to businesses. E) the factor markets to the goods markets. Answer: A Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

13) As the circular flow model points out, a choice that households make is how A) many resources a firm will hire. B) many goods and services are produced. C) many goods and services are purchased. D) much labor is hired. E) much the government will collect in taxes and how much the government will spend on transfer payments. Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 14) In the circular flow model, which of the following owns the factors of production? A) only federal, state, and local governments B) only households C) only firms D) both firms and households E) firms, households, and all levels of government Answer: B Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 15) In the circular flow model, the factor markets are the markets in which A) consumption goods and services are bought and sold. B) government goods and services are provided. C) land, labor, capital, and entrepreneurship are bought and sold. D) investment goods and services are bought and sold. E) governments impose all their taxes. Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

16) A money flow in the circular flow diagram is i. the government's collection of taxes. ii. Chevrolet's production of SUVs. iii. Nike's payment of wages to its workers. A) i and iii B) i, ii and iii C) i only D) ii only E) ii and iii Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 17) A real flow in the circular flow diagram is i. a firm's payments of wages to its workers. ii. a household's purchase of a new car. iii. a farmer's use of land to grow corn. A) ii and iii B) i only C) i and iii D) ii only E) i, ii and iii Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 18) An example of a real flow in the circular flow diagram is A) a household's supply of work effort at its new business. B) the government's payment of wages to a soldier. C) Nike's payment of wages to workers in China. D) your county's collection of property taxes. E) a teacher's salary at the local high school. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

19) An example of a money flow in the circular flow diagram is A) a student's payment of tuition to her university. B) the government's operation of the court system. C) the government's financing of the national debt. D) a firm's production of goods to sell to a foreign country. E) a farmer's use of land to grow wheat. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 20) As the circular flow model shows, the factors of production flow from A) firms to households through the factor market. B) households to firms through the factor market. C) firms to households through the goods market. D) households to firms through the goods market. E) the goods market through firms to the factor markets. Answer: B Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 21) In the circular flow model, the factors of production flow in the A) same direction as do the rents, wages, interest, and profits. B) opposite direction as do the rents, wages, interest, and profits. C) opposite direction as does the government. D) same direction as does the goods market. E) opposite direction as does the goods market. Answer: B Topic: Circular flow model Skill: Level 4: Applying models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

22) In the goods market, firms ________ and households ________. A) purchase goods and services; supply goods and services B) supply land, labor, capital, and entrepreneurship services; hire land, labor, capital, and entrepreneurship services C) pay rent, wages, interest, and profit; earn rent, wages, interest, and profit D) supply goods and services; purchase goods and services E) hire land, labor, capital, and entrepreneurship services; supply goods and services Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 23) In the factor market, firms ________ and households ________. A) hire land, labor, capital, and entrepreneurship services; purchase goods and services B) supply land, labor, capital, and entrepreneurship services; hire land, labor, capital, and entrepreneurship services C) pay rent, wages, interest, and profit; earn rent, wages, interest, and profit D) purchase goods and services; supply goods and services E) supply goods and services; purchase goods and services Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 24) Which of the following transactions takes place in factor markets? A) Henry receives a commission from his employer for selling a new automobile. B) Jake purchases 1,000 shares of stock in the Walmart Corporation through his online trading account. C) Sam enters the winning bid on a grand piano at a local auction. D) Justin receives $30 in exchange for mowing his neighbor's lawn. E) Lucille receives a $500 check from the U.S. Social Security Administration. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Application of knowledge

25) Which markets are depicted in the basic circular flow model? A) the goods market and the stock market B) the factor market and the bond market C) the goods market and the factor market D) the money market and the foreign exchange market E) the stock market and the bond market Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 26) In the circular flow model, which of the following flows in the opposite direction from the flow of factors of production? A) finished goods and services B) wages, rent, interest, and profit C) interests payments of Federal, state, and local governments D) firm's profit incentives E) the goods market Answer: B Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 27) Terri is enrolled in her first economics course. She is required to give a presentation about the circular flow. Which of the following statements should she include in her presentation? A) Households choose the amount of the factors of production to provide the firms. B) Firms choose the amount of the factors of production to provide households. C) Households receive wages for the amount of entrepreneurship they provide firms. D) Firms pay wages for the amount of entrepreneurship they provide households. E) The flows of goods and services and payments for the goods and services flow in the same direction. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

28) Aaron locked himself out of his house and had to pay $40 to Brianna, who works for Lucky Locksmith, to open his door. Based on this transaction in the economy and using concepts from the circular flow model, which of the following is TRUE? A) Brianna earned income from supplying her labor services. B) Aaron earned income from supplying his labor services. C) Brianna purchased goods and services. D) Aaron acted as a firm in this transaction. E) Aaron supplied goods and services. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 29) In the circular flow model A) the government is represented as a separate market. B) the government buys goods and services from firms. C) goods and services are sold by households and purchased by firms. D) factor markets are where goods rather than services are bought and sold. E) the government has no direct interaction with either households or firms. Answer: B Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 30) In the circular flow model with the government sector, transfers A) flow in the same direction as do taxes. B) flow in the opposite direction as do taxes. C) to households flow in the same direction as do expenditures on goods and services. D) to firms flow in the same direction as do rent, wages, interest, and profits. E) flow only through the goods market. Answer: B Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

31) What would be an example of a government good? A) Jake buys an iPhone. B) The local driver's license office purchases a new digital camera and printer. C) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. D) Donald Trump purchases furniture for his office. E) Rhianna gets a haircut. Answer: B Topic: Government goods and services Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 32) In the circular flow model with the government sector, taxes A) flow in the opposite direction as do transfers. B) flow in the same direction as do transfers. C) on households flow in the same direction as do the goods and services. D) on firms flow in the same direction as do factors of production. E) flow from the goods market to the factor markets. Answer: A Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 33) Which of the following is NOT shown explicitly in the circular flow model? A) the government's purchases in the goods market B) the taxes the government collects from households C) the government's interaction with firms D) the legal system E) the transfers the government makes to households Answer: D Topic: Circular flow and the government Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

34) Which of the following is a function of the U.S. federal government? A) providing the legal and social framework for economic activity B) distributing private goods and services C) deciding for whom firms should produce goods and services D) deciding how much to produce of private goods and services E) determining what wages firms will pay their workers Answer: A Topic: Federal government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 35) Which of the following is NOT a function of the federal government? A) collecting property taxes B) making social security and welfare payments C) making transfers to state and local governments D) providing public goods and services E) imposing a personal income tax Answer: A Topic: Functions of the federal government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 36) Households and firms in the U.S. economy interact with those in the rest of the world in the ________ market and in the ________ market. A) goods; factor B) goods; financial C) government; goods D) financial; factor E) firm; government Answer: B Topic: Circular flow model, international flows Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

37) An example of a U.S. export is A) a TV made in China sold to a buyer in Azerbaijan. B) matchbooks made in Mexico sold to a buyer in New Jersey. C) pasta made in Italy sold to buyers in Spain. D) diamonds mined in Africa sold to buyers in South America. E) a washing machine made in Indiana sold to a buyer in France. Answer: E Topic: Circular flow model, international flows Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 38) Goods produced in the United States and sold in other countries are called A) exports. B) imports. C) foreign goods. D) capital goods. E) capital account goods. Answer: A Topic: Exports Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 39) An export good is a good produced A) in the United States and sold to foreigners living in the United States. B) by foreigners in the United States and purchased by U.S. households. C) in another country and purchased by U.S. residents. D) in the United States and sold in other countries. E) in another country and purchased by foreigners not residing in the United States. Answer: D Topic: Exports Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

40) Computers and insurance coverage produced in the United States and sold to people in other nations are categorized as A) U.S. consumption goods and services. B) foreign capital goods. C) U.S. government goods and services. D) U.S. exports of goods and services. E) U.S. imports of goods and services. Answer: D Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 41) The Colorado Ski Shop sold 60 ski jackets to a Belgian company's headquarters located in Paris, France. The ski jackets are a A) U.S. export good. B) capital good. C) government good. D) U.S. consumption service. E) U.S. import. Answer: A Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 42) A market is defined as A) the physical place where goods (but not services) are sold. B) the physical place where goods and services are sold. C) any arrangement that brings buyers and sellers together. D) a place where money is exchanged for goods. E) another name for a store. Answer: C Topic: Markets Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

43) In the circular flow model A) only firms sell in markets. B) only households buy from markets. C) some firms only sell and some firms only buy. D) the money used to buy goods and the goods themselves travel in the same direction. E) both firms and households buy or sell in different markets. Answer: E Topic: Markets Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 44) ________ choose(s) the quantities of goods and services to produce, while ________ choose(s) the quantities of goods and services to buy A) Households; firms B) Firms; households and the government C) The government; firms D) Firms; only households E) Households; the government Answer: B Topic: Households vs. firms Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 45) ________ choose the quantities of factors of production to hire and ________ choose the quantities of goods and services to produce. A) Entrepreneurs; firms B) Firms; firms C) Markets; markets D) Factor markets; goods markets E) Firms; households Answer: B Topic: Households vs. firms Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

46) In the circular flow model, rent, wages, interest, and profit paid flow from ________ through ________ to ________. A) households; goods markets; firms as payment for goods B) firms; factor markets; households C) firms; goods markets; households D) households; factor markets; firms E) firms; goods markets; firms Answer: B Topic: Households vs. firms Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 47) A circular flow model shows the interrelationship between the ________ markets and the ________ markets. A) household; goods B) household; factor C) business; household D) expenditure; income E) goods; factor Answer: E Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 48) In the circular flow model, the expenditures on goods and services flow in the A) same direction as goods and services in all cases. B) same direction as goods and services ONLY IF they both flow through the goods market. C) same direction as goods and services ONLY IF they both flow through the factor market. D) opposite direction as goods and services. E) same direction as factor markets. Answer: D Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

49) Households receive transfers from ________, and firms receive transfers from ________. A) government; government B) firms; households C) government; government and households D) firms and government; government E) government; no one Answer: A Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 50) U.S. exports of goods and services flow to households and firms in ________, and U.S. financial inflows of capital flow to households and firms in ________. A) the United States; the United States B) the United States; the rest of the world C) the rest of the world; the United States D) the rest of the world; the rest of the world E) the United States; the rest of the world and the United States Answer: C Topic: Circular flow model, international flows Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 2.4 Integrative Questions 1) If a product becomes more popular and consumers want more produced, which of the following best describes what happens to move more factors of production into that industry? A) An agency of the Federal government directs the movement of factors. B) The chief executive officers or presidents of corporations require that factors leave one industry and move to the other industry. C) Factor owners voluntarily move their factors because they want to satisfy the interests of consumers. D) Wages, rent, interest, and profit increase in that industry, thereby giving factors the incentive to move to that industry. E) Consumers increase their demand for the products and, as a result, the taxes the producers must pay decrease enabling the producers to hire more factors of production. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 48 Copyright © 2023 Pearson Education Ltd.

2) What determines the income flows that households receive? A) an agency of the Federal government B) what they choose to produce, how much is sold, and the price received when sold C) their ownership of factors of production, how much they sell in the factor markets, and the prices received when sold D) financial institutions such as banks E) what they choose to consume Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 3) What determines the revenue flows received by businesses? A) an agency of the Federal government B) what they choose to produce, how much is sold, and the price received when sold C) their ownership of factors of production, how much they sell in the factor markets, and the prices received when sold D) financial institutions such as banks E) what they pay the factors of production they employ Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

2.5 Chapter Figures

The figure above shows the circular flow model. 1) In the figure above, which of the following represents a real flow of a factor of production? A) labor B) wages C) goods bought D) services sold E) firms' expenditures on factors of production Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

2) In the figure above, which of the following represents a money flow? A) goods purchased B) interest C) capital D) services sold E) goods supplied Answer: B Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 3) In the figure above, which of the following represents a real flow? A) expenditures on real estate services B) profit C) capital D) wages E) both B and D Answer: C Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 4) In the figure above, which of the following transactions take place in the factor markets? i. Michael, a student, orders a computer from Dell online. ii. Peter gets a job at a Walmart store. iii. Apple Computer opens a new store in Georgia. A) ii and iii B) only i C) only ii D) only iii E) i and ii Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

5) Margo orders a MacBook Pro computer from The Apple Store online to use it in her graphic design business. How will this be reflected in the figure above? A) as a flow of a factor of production B) as a flow of goods and services bought C) as expenditures on goods and services D) as goods and services supplied E) It won't be shown in the figure because this transaction takes place neither in goods markets nor in factor markets. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

The figure above shows governments in the circular flow. 6) In the figure above, households A) receive transfers directly from governments. B) buy goods and services from governments in goods markets. C) receive transfers from governments through factor markets. D) sell factors of production to governments. E) pay taxes to governments through factor markets. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

7) In the figure above, firms A) pay taxes directly to governments. B) sell goods and services to governments in goods markets. C) receive transfers from governments through factor markets. D) own factors of production. E) do all of the above. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 8) In the figure above, governments A) collect taxes. B) coordinate economic activities of households and firms. C) hire factors of production. D) own factors of production. E) sell goods and services to household. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 9) In the figure above, which of the following is TRUE? i. Governments coordinate economic activities of households and firms. ii. Governments buy goods and services in goods markets. iii. Households pay taxes directly to firms. A) only ii B) only i C) only iii D) i and ii E) ii and iii Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

10) Social Security tax is deducted from your paycheck. In the figure above, this will be shown as A) taxes flowing from households to governments. B) taxes flowing from firms to governments. C) taxes flowing from households to firms. D) wages flowing from firms to households. E) wages flowing from firms to governments. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 2.6 Essay: What, How, and For Whom? 1) Explain the difference between consumption and capital goods. Answer: A difference lies in the identity of the purchaser. Consumption goods (and services) are purchased by households and investment goods are purchased by firms. Households buy consumption goods to use for personal enjoyment. They contribute to the person's standard of living. Firms buy capital goods to use as a factor of production. Capital goods are used along with the other factors of production, to help produce additional goods and services. Topic: Consumption and capital goods Skill: Level 3: Using models Section: Checkpoint 2.1 Status: Old AACSB: Written and oral communication 2) Identify the four factors of production, and tell what type of income is earned by each factor. Answer: The factors of production are land, which represents all the gifts of nature; labor, the work effort people put into producing goods and service; capital, goods that have been produced and are used as a productive resource to help produce other goods and services; and entrepreneurship, the human resource that organizes all the other factors of production. Land earns rent, labor earns wages, capital earns interest, and entrepreneurship earns profit or losses. Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

3) What are the payments each factor of production receives? Answer: Rent is paid for the use of land. Wages are paid for the services of labor. Interest is paid for the use of productive capital. Entrepreneurs earn a profit. Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 4) What is meant by the term "human capital"? Answer: Human capital refers to the skills people possess. These skills help increase the quality of labor. Human capital can be increased through education, on the job training, and experience. The knowledge and skill gained from these improvements are called human capital. Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 5) What effect, if any, will a good college education have on your human capital? Explain your answer. Answer: Human capital refers to the skills people possess. These skills can be gained through education, on the job training, and experience. Thus your college education is increasing your human capital. Topic: Human capital Skill: Level 3: Using models Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 6) Explain the differences between "human capital," "financial capital," and "capital." Answer: Human capital is the knowledge and skills people obtain from education, on-the-job training, and work experience. Financial capital is money, stocks, and bonds. Capital is tools, instruments, machines, buildings, and anything that had to be produced prior to production of the desired goods and services. Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

7) What is the difference between "capital" and "financial capital"? Which is a factor of production? Answer: "Capital" is the actual physical good, such as a factory, an assembly line, or a computer server. "Financial capital" is stocks, bonds, or money. Financial capital is used to fund the purchase of the (physical) capital. Financial capital is NOT a factor of production because it is not used to help produce goods and services. Capital, however, is a factor of production because capital is used to help produce goods and services. Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 8) What is the difference between the functional and the personal distribution of income? Answer: The functional distribution of income shows how total income is divided among the factors of production. The personal distribution of income shows how total income is divided among households. Topic: Distributions of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 9) In the United States, which factor of production earns the largest share of the nation's total income? Answer: The largest fraction of the nation's total income is earned by labor. In the United States, wages paid to labor account for about 68 percent of the nation's total income. Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 10) In the United States, how does the income received by the richest 20 percent of individuals compare with the income received by the other 80 percent? Answer: In the United States, the richest 20 percent of individuals receive about 51 percent of the nation's total income. Thus the other 80 percent of individuals receive the remainder, about 49 percent of the nation's income. So the richest 20 percent of the individuals receive almost the same amount as the other 80 percent of people. Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

2.7 Essay: The Global Economy 1) Compare and contrast the world population with that of the United States. Is the United States becoming a larger or a smaller part of the world's population? Answer: The U.S. population was approximately 329 million in 20199 It is growing at a rate of about one person in every 15 seconds. The world population in 2011 was about 7.6 billion and is growing at a rate of 30 people in the same 15 seconds. Hence the United States is becoming a smaller fraction of the world's population. Topic: Population Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 2) How many and what fraction of the world's people live in advanced economies? In emerging market and developing economies? Answer: There are approximately 7.6 billion people in the world. Of the 7.6 billion people, almost 1 billion or 15 percent, live in advanced economies. About 80 percent, or nearly 5.5 billion people live in developing economies. Topic: Population Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 3) The International Monetary Fund divides nations into three groups. What are the three groups and what are the characteristics of each group? Answer: The International Monetary Fund divides nations into "advanced economies," "developing economies," and "emerging market economies." Advanced economies are the countries or regions that have the highest living standards. Industrialized nations such as the United States, Canada, and Japan are included, as are the newly industrialized Asian economies. Developing economies are the countries that have yet to achieve a high standard of living. Nations in Africa, Central America, and South America fall into this category. The emerging market economies are nations that are changing how they organize their economies. In the past, their economic system relied upon state-ownership of capital and direct government management of the economy. They now are moving to more reliance upon a system of free enterprise, that is, a system similar to what exists in the United States. Emerging market economies are Russia and the other nations in Eastern and Central Europe that used to be Russian satellites. Topic: Classification of countries Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication

4) Discuss the distribution of income around the world. Which countries have the highest average incomes? Which countries have the lowest average incomes? How has the distribution of income changed in recent years? Answer: Income is distributed unequally, with residents in the advanced economies having the highest average incomes. The highest living standard is in the United States, where the average income is $129 per day. Canada, Japan, the United Kingdom, and the Euro zone are close behind. In the poorest regions of the world, India and Africa, incomes are much lower. The average income is only $3 per day in India. The distribution of world income has become more equal in recent years because income in some very poor nations, especially China, has grown rapidly. Topic: Distributions of income Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication 5) Discuss the differences between developing and emerging market economies. Answer: Although the average income in emerging market economies is less than that in advanced economies, developing countries generally have lower levels of income than emerging market economies. Emerging market economies are in some ways as developed as the advanced economies because they often have a well-trained labor force and a reasonable capital stock, both of which are typically missing in developing economies. But emerging market economies are struggling to raise their living standards. The main difference between emerging market economies and other economies is their economic system. Emerging market economies operated under state-owned production for many years and are now moving towards a free market system. Developing economies generally do not have the same history of a very long period of time operating under a system of state-owned production. Topic: Developing and emerging market economies Skill: Level 5: Critical thinking Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication 2.8 Essay: The Circular Flows 1) What is a market? Must a market have a single physical location? Answer: A market is any arrangement that allows buyers and sellers to get together and transact their business. Although some markets have a physical location, such as a farmers' market where buyers and sellers of fresh corn can meet face-to-face, markets do not require an actual location. Indeed, many markets, such as the local market for apartments, do not have a single physical location. Nonetheless, buyers and sellers (tenants and landlords) arrange purchases and sales (the rental of apartments and houses) through means other than meeting in one central location. Topic: Markets Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication 59 Copyright © 2023 Pearson Education Ltd.

2) Explain the structure of the circular flow model. Answer: Households own the factors of production and sell the services from them to firms in the factor market. Income earned by households in the factor market is used to purchase goods and services from firms in the goods market. And the revenue the firms gain by selling the goods and services in the goods market is used to pay for the services of the factors of production they hire in the factor markets. Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication 3) How are the roles of the household different in the goods market and in the factor markets? Answer: In the goods market, households are buyers. They purchase the goods and services produced by the firms. In exchange for the goods and services, households pay firms. In the factor market, households are sellers. They provide the services from land, labor, capital, and entrepreneurship to the firms. In the factor markets, households receive payments from firms. Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication 4) Describe the circular flow of the economy by discussing the two markets where households and firms meet. Answer: Firms and households meet in two markets: the goods market and the factors market. In the goods markets, households buy the goods and services that firms sell. In this market, households give firms money in exchange for the goods and services. In the factors market, households sell the services of the factors of production to firms, which buy the services of these factors. In the factors market, firms pay households money in exchange for the productive resources. Hence households earn their incomes in the factors market and spend their incomes in the goods market. And firms earn their revenue in the goods market and pay their costs in the factors market. Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication

5) Describe the government's flows in the circular flow model of the economy. Answer: The government has several flows in the circular flow model. First, the government taxes households and firms. Hence, funds flow from households and firms to the government. Second, the government transfers income back to households, via payments such as social security. In this case, funds flow from the government to households. The government also purchases goods and services from firms in the goods market. In this case, goods and services flow to the government and payments flow to firms. Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication

6) Label the flows in the simplified circular flow diagram that ignores the government.

Answer:

The figure above shows the labeled flows. Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

7) Draw a circular flow diagram with households and firms and without government. Label the markets and the flows in the circular flow diagram. Answer:

A circular flow diagram with the markets and flows labeled is in the figure above. Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

Foundations of Economics, 9e (Bade), GE Chapter 3 The Economic Problem 3.1 Production Possibilities 1) The United States produced approximately ________ worth of goods and services in 2019. A) $21 trillion B) $21 billion C) $210 trillion D) $210 billion E) $2,100 trillion Answer: A Topic: Production possibilities Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Revised AACSB: Reflective thinking 2) Which of the following is an assumption used when drawing a production possibilities frontier? i. Human wants and desires are limited to what is available. ii. Only two goods are considered. iii. The level of technology is fixed and unchanging. A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: D Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

3) In the production possibilities model, the vertical axis measures ________ and the horizontal axis measures ________. A) the quantity of a good or service; the quantity of another good or service B) the price of a good or service; the quantity of the good or service C) the price of a good or service; the price of another good or service D) the quantity of a good or service; time E) people's wants; the quantity of a good or service Answer: A Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 4) The production possibilities frontier illustrates the A) maximum combinations of goods and services that can be produced. B) resources the economy possess, but not its level of technology. C) goods and services that people want. D) limits to people's wants. E) amount of each good that people want to buy. Answer: A Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 5) When drawing a production possibilities frontier, which of the following is held constant? A) the amount of money in the economy B) the available factors of production and the state of technology C) the prices of goods and services D) the quantity of the goods and services that are produced E) None of the above because nothing is held constant when drawing the production possibilities frontier. Answer: B Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

6) A production possibilities frontier shows A) the various combinations of output a nation can produce a certain time, given its available resources and technology. B) the limits to future growth of a nation. C) how money can be allocated among two kinds of goods. D) that if price of one good decreases, the price of the other has to increase. E) that it is impossible to produce inefficiently. Answer: A Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 7) The production possibilities frontier is the A) maximum output that can be produced at an opportunity cost of zero. B) minimum output that can be produced when resources are used inefficiently. C) boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology. D) boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced when technology is changing. E) maximum opportunity cost combinations of goods and services. Answer: C Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 8) The production possibilities frontier is the boundary between the A) goods and services that the economy can produce. B) attainable and unattainable combinations of goods and services. C) wanted and unwanted combinations of goods and services. D) rational and irrational choices facing a society. E) affordable and unaffordable combinations of production. Answer: B Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

9) Consider a production possibility frontier with jeans on the vertical axis and shoes on the horizontal axis. As the country moves along the frontier closer to the horizontal axis A) more jeans are produced. B) the country eventually chooses an unattainable point. C) free lunches occur. D) more tradeoffs occur. E) more shoes are produced. Answer: E Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 10) While moving along a production possibilities frontier, the amount of labor ________, the amount of capital ________, and the level of technology ________. A) is fixed; is fixed; varies B) varies; is fixed; varies C) varies; is fixed; is fixed D) is fixed; is fixed; is fixed E) varies; varies; varies Answer: D Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

11) The table above gives four production possibilities for airplanes and cruise ships. In possibility A, how many resources are devoted to the production of airplanes? A) 0 B) few C) most D) all E) It is impossible to tell without more information about the prices of airplanes and cruise ships. Answer: D Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 12) The table above gives four production possibilities for airplanes and cruise ships. In possibility A, how many resources are devoted to the production of cruise ships? A) 0 B) few C) most D) all E) It is impossible to tell without more information about the prices of airplanes and cruise ships. Answer: A Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 13) Moving from one point to another on a production possibilities frontier implies A) increasing the production of both goods. B) decreasing the production of both goods. C) increasing the production of one good and decreasing the production of another. D) holding the production levels of both goods constant. E) changing the amount of factors of production that are employed. Answer: C Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 5 Copyright © 2023 Pearson Education Ltd.

14) Assume that an association of young workers has lobbied Congress to require that all workers retire once they reach the age of fifty. What impact would this law have on the nation's production possibilities frontier? A) no impact at all B) The level of unemployment would decrease so the production possibilities frontier would shift outward. C) The nation would move to a new position on its production possibilities frontier but the frontier itself would not shift. D) The production possibilities frontier would shift inward. E) The number of young workers would increase so the production possibilities frontier would shift outward. Answer: D Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 15) A major earthquake occurs in the central part of the United States. What impact would this have on the nation's production possibilities frontier and why? A) It would shift outward because unemployment would be reduced. B) Nothing would happen because the nation would still have the same capabilities. C) A tradeoff would occur to replace the resources and goods destroyed. D) It would shift inward because some of the nation's resources, such as capital and labor, would be destroyed. E) It would not shift because people would get to work to replace any capital that was destroyed. Answer: D Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 16) When all of the available factors of production are being efficiently employed, the A) economy is producing at a point within its PPF. B) economy is producing at a point on its PPF. C) economy is producing at a point beyond its PPF. D) PPF disappears. E) opportunity cost of changing production is infinite. Answer: B Topic: Attainable points Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 6 Copyright © 2023 Pearson Education Ltd.

17) In a production possibilities frontier diagram, the attainable production points are shown as A) only the points on the production possibilities frontier. B) only the points beyond the production possibilities frontier. C) only the points inside the production possibilities frontier. D) the points inside and the points on the production possibilities frontier. E) ANY of the production points. Answer: D Topic: Attainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 18) In the production possibilities frontier model, an unattainable point lies A) only on the production possibilities frontier itself. B) only inside the production possibilities frontier. C) only outside the production possibilities frontier. D) both on and outside the production possibilities frontier. E) There are no unattainable points in the production possibilities model. Answer: C Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 19) Production efficiency is represented by ________ a production possibilities frontier. A) all points on B) all points inside C) all points outside D) a movement along E) only one point on Answer: A Topic: Production efficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

20) If an economy cannot produce more of one good without producing less of another good, this implies that which of the following has been achieved? A) allocative efficiency B) minimum marginal cost C) PPF efficiency D) production efficiency E) maximum marginal benefit Answer: D Topic: Production efficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 21) Production efficiency occurs A) anywhere inside or on the production possibilities frontier. B) when the total cost of production is minimized. C) at all points on the production possibilities frontier. D) at only one point on the production possibilities frontier. E) at all points inside the production possibilities frontier. Answer: C Topic: Production efficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 22) When production efficiency does NOT occur, i. an economy is producing at a point within its PPF. ii. there are unemployed resources. iii. allocative efficiency cannot occur. A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Production efficiency Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

23) If there is unemployment in an economy, then the A) production possibilities frontier will shift inwards. B) economy is operating at an unattainable point. C) production possibilities frontier will shift outwards. D) economy is producing at a point inside the production possibilities frontier. E) production possibilities frontier must be bowed inward. Answer: D Topic: Attainable points, unemployment Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 24) If a society moves from a period of time with significant unemployment to a time with full employment, its production possibilities frontier will A) shift leftward. B) shift rightward. C) not shift because the society moves from one point on the frontier to a point inside the frontier. D) not shift because the society moves from a point inside the frontier to a point on the frontier. E) not shift because the society moves from one point on the frontier to a point outside the frontier. Answer: D Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 25) Suppose that an economy is currently producing at a point that lies inside of its production possibilities set. Which of the following would best explain this circumstance? A) The economy does not have enough resources to produce at a point closer to the frontier of the production possibilities set. B) The prevailing level of technology prevents the economy from producing at a point closer to the frontier of the production possibilities set. C) The economy is experiencing a high level of unemployment. D) Any of the above statements could explain this situation. E) None of the above statements could explain this situation. Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

26) Which of the following statements is correct? A) An increase in productivity moves the economy from inside the production possibilities frontier to the frontier itself. B) An increase in productivity shifts the economy from producing at a point on the production possibilities frontier to a point outside the production possibilities frontier. C) An increase in unemployment shifts the economy further inside its production possibilities frontier. D) An increase in unemployment shifts the economy from a point outside the production possibilities frontier back to the production possibilities frontier. E) A reduction in unemployment shifts the entire production possibilities frontier outward. Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 27) A point on the production possibilities frontier reflects an A) attainable point with full employment of all resources. B) attainable point without full employment of all resources. C) unattainable point with full employment of all resources. D) unattainable point without full employment of all resources. E) None of the above answers is correct. Answer: A Topic: Attainable points, full employment Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 28) Suppose a country operates on its production possibility frontier when it produces 1,000 books and 1,000 tables. The combination of ________ reflects ________. A) 500 books and 1,000 tables; an inefficient but attainable point B) 1,000 books and 500 tables; an efficient point C) 1,000 books and 1,000 tables; a free lunch D) 500 books and 500 tables; an attainable and efficient point E) 1,000 books and 1,500 tables; a free lunch Answer: A Topic: Attainable points, inefficiency Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

29) Consider a production possibility frontier with books and tables. A combination of 1,000 books and 500 tables is on the frontier. Which of the following are necessarily TRUE? i. Production of 700 books and 400 tables is attainable but inefficient. ii. Production of 1,000 books and 600 tables is unattainable. iii. Production of 500 books and 1,000 tables is inside the frontier. A) i and ii B) i, ii and iii C) i and iii D) ii and iii E) i only Answer: A Topic: Attainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

30) The table above shows a production possibilities frontier for an economy. Which of the following combinations is unattainable? A) 0 loaves of bread and 800 books B) 100 loaves of bread and 800 books C) 200 loaves of bread and 800 books D) 300 loaves of bread and 200 books E) 0 loaves of bread and 0 books Answer: C Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

31) The table above shows a production possibilities frontier for an economy. If the economy tried to produce a combination of 250 loaves of bread and 800 books A) there is some unemployment. B) there is full employment. C) the tradeoff between bread and books is inefficient. D) it cannot produce this combination because it lacks enough resources or technology. E) it is enjoying a free lunch. Answer: D Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

32) The figure above shows the production possibilities frontier for a country. A combination of 4 million gallons of milk and 4 million gallons of ice cream is A) unattainable. B) attainable and production efficient. C) attainable and production inefficient. D) unattainable and production efficient. E) More information is needed to determine if the point is attainable or not. Answer: A Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

33) The figure above shows the production possibilities frontier for a country. A combination of 3 million gallons of milk and 3 million gallons of ice cream is A) unattainable. B) attainable and production efficient. C) attainable and production inefficient. D) unattainable and production efficient. E) More information is needed to determine if the point is attainable or not. Answer: B Topic: Attainable points, full employment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 34) The figure above shows the production possibilities frontier for a country. A combination of 2 million gallons of milk and 2 million gallons of ice cream is A) unattainable. B) attainable and production efficient. C) attainable and production inefficient. D) attainable but more than production efficient. E) More information is needed to determine if the point is attainable or not. Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

35) Point D in the above PPF figure is A) an attainable production combination with unemployed resources. B) a tradeoff. C) an unattainable production combination. D) a production combination that can be attained once resources are fully employed. E) More information is needed to determine which of the above answers is correct. Answer: C Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 36) Which point in the figure above is an attainable combination that would have unemployed resources? A) point A B) point B C) point C D) point D E) point A and point B Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

37) The figure above shows a nation's production possibilities frontier. In the figure, point A shows A) the maximum quantity of pizza that can be produced. B) the minimum quantity of pizza that the society must produce. C) an unattainable point. D) an attainable point with unemployed resources. E) More information is needed to determine which of the above answers is correct. Answer: A Topic: Attainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 38) The figure above shows a nation's production possibilities frontier. In the figure, point B shows A) an unattainable point. B) an attainable point. C) a point with a free lunch. D) a point with no tradeoff. E) a point at which there are unemployed resources. Answer: A Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

39) The figure above shows the production possibilities frontier for a country. In order for it to produce at point E, the A) country would need to acquire more resources and/or more advanced technology. B) production of compact cars would need to decrease. C) production of SUVs would need to decrease. D) country would need to use its resources more efficiently. E) country would need to determine that compact cars and SUVs are equally important to it. Answer: A Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 40) The figure above shows the production possibilities frontier for a country. If the country is producing at point D, then the A) resources are being used efficiently. B) technology associated with producing SUVs and compact cars is advancing. C) resources are not being used efficiently and/or are unemployed. D) production of SUVs and compact cars is maximized. E) None of the above answers is correct because it is not possible to produce at point D. Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

41) The above figure shows the production possibility frontier for an economy. The point or points that are attainable and production efficient are A) points B and C. B) points A, B, and C. C) point E. D) points A, B, C, and D. E) points A and D. Answer: B Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 42) The above figure shows the production possibility frontier for an economy. The point or points that are attainable are A) points B and C. B) points A, B, and C. C) point E. D) points A, B, C, and D. E) points A and D. Answer: D Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

43) The above figure shows the production possibility frontier for an economy. The point or points that are NOT attainable are A) points B and C. B) points A, B, and C. C) point E. D) points A, B, C, and D. E) points A and D. Answer: C Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 44) In order for Ireland to grow more potatoes, wool production must decrease. This situation is an example of A) producing at a point that lies beyond the PPF. B) zero opportunity cost. C) opportunity benefit. D) a free lunch. E) a tradeoff. Answer: E Topic: Tradeoffs Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 45) As we move along the production possibilities frontier A) the production of one good increases as the production of the other good decreases. B) the possibilities of tradeoffs diminish. C) a tradeoff is not possible because nations need all goods. D) more of both goods can be produced. E) less of both goods can be produced. Answer: A Topic: Tradeoffs Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

46) Which of the following statements is correct? A) If capital is idle, the economy is producing at its full potential. B) The production possibilities frontier shows that there are no limits to production. C) A tradeoff is a limit that forces an exchange or a substitution of one thing for something else. D) Any point on or within the PPF is production efficient. E) None of the above answers is correct. Answer: C Topic: Tradeoffs Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 47) When a nation is producing on its production possibilities frontier, if more resources are used to produce one good, then the production of other goods A) MUST increase. B) MUST decrease. C) MUST remain the same. D) MUST change, but they might increase or decrease. E) MIGHT increase if the nation can produce more efficiently. Answer: B Topic: Tradeoffs Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 48) The negative slope of the production possibilities frontier represents the idea A) that free lunches are possible. B) of tradeoffs, that in order to produce more of one good, the nation must produce less of another. C) of unemployment. D) of inefficient production. E) that prices rise as less is produced. Answer: B Topic: Tradeoffs Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

49) A movement from one point on a production possibilities frontier to another represents A) a tradeoff. B) a free lunch. C) full employment of labor but not capital. D) unemployment. E) an advance in technology. Answer: A Topic: Tradeoffs Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 50) The saying "There's no such thing as a free lunch," applies A) when there is some unemployment. B) on the production possibilities frontier. C) to unattainable combinations of goods and services. D) when more of one good can be produced without decreasing production of another. E) at all points inside the PPF. Answer: B Topic: Tradeoffs Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 51) A free lunch (the absence of a tradeoff) when the production of a good is increased is possible for the entire economy only if A) less of some product is produced. B) prices are decreased. C) prices are increased. D) resources are used inefficiently. E) there is a movement along the PPF. Answer: D Topic: Free lunches Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

52) A movement from a point inside the production possibilities frontier to a point on the production possibilities frontier represents A) a tradeoff. B) a free lunch. C) full employment of labor but not capital. D) unemployment of labor but not capital. E) an infinite opportunity cost. Answer: B Topic: Free lunches Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 53) A reason the production possibilities frontier exists is A) unlimited resources and technology. B) scarcity of resources. C) scarcity of resources and unlimited technology. D) unemployment. E) that people's wants are unlimited. Answer: B Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 54) The production possibilities frontier is a graph showing the A) exact point of greatest efficiency for producing goods and services. B) tradeoff between free lunches. C) maximum combinations of goods and services that can be produced. D) minimum combinations of goods and services that can be produced. E) resources available for the economy's production use. Answer: C Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

55) The production possibilities frontier is a boundary that separates A) the combinations of goods that can be produced from the combinations of services. B) attainable combinations of goods and services that can be produced from unattainable ones. C) equitable combinations of goods and services that can be produced from inequitable ones. D) fair combinations of goods and services that can be consumed from unfair ones. E) affordable production points from unaffordable points. Answer: B Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 56) Points inside the PPF are all A) unattainable and have fully employed resources. B) attainable and have fully employed resources. C) unattainable and have some unemployed resources. D) attainable and have some unemployed resources. E) unaffordable. Answer: D Topic: Attainable points, inefficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 57) During a time of high unemployment, a country can increase the production of one good or service A) without decreasing the production of something else. B) but must decrease the production of something else. C) and must increase the production of something else. D) by using resources in the production process twice. E) but the opportunity cost is infinite. Answer: A Topic: Free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

58) Moving along the production possibilities frontier itself illustrates A) the existence of tradeoffs. B) the existence of unemployment of some factors of production. C) the benefits of free lunches. D) how free lunches can be exploited through trade. E) how tradeoffs need not occur if the economy is efficient. Answer: A Topic: Tradeoffs Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 59) The production possibilities frontier illustrates which of the following economic ideas? A) efficiency B) tradeoffs C) opportunity cost D) all of the above E) none of the above Answer: D Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 60) Points on the PPF are all A) unattainable and have fully employed resources. B) free lunches. C) inefficient. D) attainable and have some unemployed resources. E) production efficient. Answer: E Topic: Production efficiency Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

3.2 Opportunity Cost 1) In a production possibilities frontier graph, the cost of producing more units of a good is measured by the A) dollar value of the resources used to produce the good. B) amount of the other good or service that must be forgone. C) dollar value of the additional output. D) area in the arc between the PPF and a straight line drawn between the starting point and the ending point. E) None of the above answers is correct. Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 2) The opportunity cost of producing one more unit of a good is calculated by dividing the A) increase in the quantity of that good by the decrease in the quantity of other good. B) total quantity of that good by the total quantity of other good. C) decrease in the quantity of the other good by the increase in the quantity of the good whose opportunity cost we're calculating. D) total quantity of the other good by the total quantity of the good whose opportunity cost we're calculating. E) price of the good whose opportunity cost we are calculating by the number of units of the other good that are forgone. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 3) To find the opportunity cost of producing one more unit of any product while on the production possibilities frontier requires A) setting the amounts of the two products equal to each other. B) setting the change in one product equal to the change in the other product. C) dividing the amount of the product forgone by the amount of the product gained. D) subtracting the change in the product whose production increased from the change in the product whose production decreased. E) None of these describes how to find opportunity cost. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 24 Copyright © 2023 Pearson Education Ltd.

4) To calculate the opportunity cost per unit, you divide the decrease in the quantity of the forgone item by the A) decrease in the quantity of the other item. B) increase in the quantity of the other item obtained. C) price of the item obtained. D) price of the item forgone. E) price of the item obtained and then multiply by the price of the item forgone. Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 5) On a production possibilities frontier, 500 pounds of apples and 1,200 pounds of bananas can be produced while at another point on the same frontier, 300 pounds of apples and 1,300 pounds of bananas can be produced. Between these points, what is the opportunity cost of producing a pound of bananas? A) 2 pounds of bananas B) 200 pounds of apples C) 2 pounds of apples D) 0.5 a pound of apples E) 12/5 = 2.4 pounds of apples Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 6) On a production possibilities frontier, 500 pounds of apples and 1,200 pounds of bananas can be produced while at another point on the same frontier, 300 pounds of apples and 1,300 pounds of bananas can be produced. Between these points, what is the opportunity cost of producing a pound of apples? A) 2 pounds of bananas B) 100 pounds of bananas C) 2 pounds of apples D) 0.5 of a pound of bananas E) 5/12 of a pound of bananas Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 25 Copyright © 2023 Pearson Education Ltd.

7) A country produces only apples and bananas. Moving from point A to point B along its production possibilities frontier, 5 apples are forgone and 4 bananas are gained. What is the opportunity cost of a banana? A) 4 apples B) 5/4 of an apple C) 4/5 of an apple D) 1 banana E) None of the above answers is correct. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 8) A country produces only apples and bananas. Moving from point A to point B along its production possibilities frontier, 5 apples are gained and 4 bananas are forgone. What is the opportunity cost of an apple? A) 4 bananas B) 5/4 of a bananas C) 4/5 of a banana D) 1 apple E) None of the above answers is correct. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

9) Robinson Crusoe divides his time between catching fish and gathering fruit. Part of his production possibilities frontier is given in the above table. If Mr. Crusoe is on his PPF and he increases the amount of fruit he gathers from 56 to 90 pounds, the opportunity cost is A) 37 pounds of fish. B) 31 pounds of fish. C) 17 pounds of fish. D) 34 pounds of fruit. E) 90 pounds of fruit. Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 10) Robinson Crusoe divides his time between catching fish and gathering fruit. Part of his production possibilities frontier is given in the above table. Mr. Crusoe, while lonesome, is efficient and always stays on his PPF. Mr. Crusoe is consuming 20 pounds of fish. Then he decides to slowly become a vegetarian and decrease his consumption of fish to 9 pounds. This decision means that Mr. Crusoe will A) incur an opportunity cost of 9 pounds of fruit. B) incur an opportunity cost of 20 pounds of fish. C) be able to enjoy a gain of 9 pounds of fruit. D) incur an opportunity cost of 99 pounds of fruit. E) incur an opportunity cost of 9 pounds of fish. Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

11) The table above shows a nation's production possibilities frontier. If the nation wants to produce 4 robots and 34 pizzas A) it will shift the production possibilities frontier. B) the opportunity cost is 9 pizzas. C) the nation will be producing inefficiently. D) it will be unable to do so because the production point is unattainable. E) the nation will then be producing at a production efficient point. Answer: D Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 12) The table above shows a nation's production possibilities frontier. If the nation chooses to increase the production of robots from 2 to 3 and it is on its PPF, it will have to forgo ________ pizzas. A) 37 B) 34 C) 3 D) 35.5 E) None of the above answers is correct. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

13) The table above shows a nation's production possibilities frontier. The opportunity cost of a robot between combination D and E is A) 4 pizzas. B) 34 pizzas. C) 30 pizzas. D) 1/4 of a pizza. E) undefined because neither point is production efficient. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

14) The figure above shows the production possibilities frontier for a country. The opportunity cost of a gallon of milk between combination point A and B is A) 4 gallons of ice cream for a gallon of milk. B) 3 gallons of ice cream for a gallon of milk. C) 1 gallon of ice cream for a gallon of milk. D) 1/3 of a gallon of ice cream for a gallon of milk. E) zero because at point A, zero milk is being produced. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

15) The figure above shows the production possibilities frontier for a country. If the economy is operating at point B, then the opportunity cost of another million gallons of milk is A) 4 gallons of ice cream for a gallon of milk. B) 3 gallons of ice cream for a gallon of milk. C) 1 gallon of ice cream for a gallon of milk. D) 1/3 of a gallon of ice cream for a gallon of milk. E) zero because after producing another million gallons of milk, then zero gallons of ice cream are produced. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

16) The above figure shows the production possibility frontier for a country. Suppose the country is producing at point A. What is the opportunity cost of increasing the production of rice to 12 tons? A) 15 thousand bottles of wine B) 6 thousand bottles of wine C) 9 thousand bottles of wine D) 12 tons of rice E) Nothing, it is a free lunch. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

17) The above figure shows the production possibility frontier for a country. Suppose the country is producing at point D. What is the opportunity cost of increasing the production of rice to 15 tons? A) 9 thousand bottles of wine B) 6 thousand bottles of wine C) 15 thousand bottles of wine D) 12 tons of rice E) Nothing, it is a free lunch. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 18) The above figure shows the production possibility frontier for a country. Suppose the country is producing at point E. What would be the opportunity cost to increase the production of wine to 9 thousand bottles? A) 12 tons of rice B) 15 thousand bottles of wine C) 9 thousand bottles of wine D) 3 tons of rice E) Nothing, it is a free lunch. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 19) The above figure shows the production possibility frontier for a country. Suppose the country is producing at point D. What would be the opportunity cost to move to point C? A) 6 thousand bottles of wine B) 15 thousand bottles of wine C) 12 tons of rice D) Nothing, it is a free lunch. E) This movement is not possible without economic growth. Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

20) The above figure shows the production possibility frontier for a country. Suppose the country is producing at point A. What would be the opportunity cost to increase the production of rice to 12 tons? A) 6 thousand bottles of wine B) 15 thousand bottles of wine C) 9 thousand bottles of wine D) 6 tons of rice E) Nothing, it is a free lunch. Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 21) The above figure shows the production possibility frontier for a country. What is the opportunity cost per ton of rice to move from point B to point D? A) 1,000 bottles of wine B) 500 bottles of wine C) 2 bottles of wine D) 1/2 of a bottle of wine E) None of the above answers is correct. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 22) The above figure shows the production possibility frontier for a country. What is the opportunity cost per ton of rice to move from point D to E? A) 3,000 bottles of wine B) 333 bottles of wine C) 3 bottles of wine D) 1/3 of a bottle of wine E) None of the above answers is correct. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

23) The above figure shows the production possibility frontier for a country. What is the opportunity cost to move from point D to point E? A) 6 thousand bottles of wine B) 15 thousand bottles of wine C) 6 tons of rice D) 9 thousand bottles of wine E) Nothing, it is a free lunch. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 24) The above figure shows the production possibility frontier for a country. What is the opportunity cost to move from point D to point B? A) 12 tons of rice B) 15 thousand bottles of wine C) 6 thousand bottles of wine D) 9 thousand bottles of wine E) Nothing, it is a free lunch. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 25) Moving from a point inside the production possibilities frontier to a point on the production possibilities frontier, the opportunity cost of producing more of the good on the horizontal axis A) increases. B) decreases. C) is constant. D) is 0. E) is infinite. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

26) Consider a production possibility frontier with jeans on the vertical axis and shoes on the horizontal axis. As a country moves along the frontier closer to the vertical axis A) the opportunity cost of producing jeans increases. B) the opportunity cost of producing shoes increases. C) there are fewer tradeoffs. D) inefficient production occurs. E) the opportunity cost of producing jeans decreases. Answer: A Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 27) Suppose that in a PPF graph, wheat is on the vertical axis and jets are on the horizontal axis. Moving down along the PPF, the A) number of jets increases and the opportunity cost of jets increases. B) amount of wheat increases and the opportunity cost of wheat increases. C) number of jets increases and the opportunity cost of jets decreases. D) amount of wheat increases and opportunity cost of wheat decreases. E) opportunity cost of jets AND wheat both increase. Answer: A Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 28) Why is a production possibilities frontier bowed out (concave)? A) The bowed shape reflects constant opportunity cost. B) The bowed shape reflects decreasing opportunity cost. C) The bowed shape indicates that opportunity cost at first decreases at a decreasing rate, and then begins to decrease at an increasing rate. D) The bowed shape indicates that opportunity cost at first increases at a decreasing rate, and then begins to increase at an increasing rate. E) The bowed shape reflects increasing opportunity cost. Answer: E Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

29) The bowed out (concave) shape of the production possibilities curve implies that as production of one good A) increases, society must forgo increasing amounts of another good. B) increases, society must forgo decreasing amounts of another good. C) decreases, production of other goods decreases as well. D) increases, production of other goods increases as well. E) increases, society can obtain a free lunch. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 30) The idea of increasing opportunity cost is reflected in the A) bowed out shape of the production possibilities frontier. B) bowed in shape of the production possibilities frontier. C) linear shape of the production possibilities frontier. D) positive slope of the production possibilities frontier. E) fact that the PPF shows there are unattainable production points. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 31) A bowed out production possibilities frontier shows A) that resources are equally productive in all uses. B) increasing opportunity cost. C) that resources are not equally productive in all uses. D) Both answers B and C are correct. E) Both answers A and B are correct. Answer: D Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

32) The opportunity cost of a good increases as more of it is produced because A) there is no such thing as a free lunch. B) resources are not equally productive in all activities. C) producing more of a good requires additional resources. D) the number of forgone alternatives also increases. E) people want the good less as more is produced. Answer: B Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 33) As an economy increasingly specializes in producing one good, the opportunity cost of that good increases. The opportunity cost increases because A) resources are not equally productive in all activities. B) what must be paid to resources increases. C) human wants are virtually unlimited. D) not all goods are equally valuable. E) as more of a good is produced, the profit from its production must rise. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 34) As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good? A) It remains constant. B) It decreases. C) It increases. D) It might increase, decrease, or remain constant depending on how much people value the additional units of the good. E) None of these depicts what happens to opportunity cost. Answer: C Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

35) When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost A) increases. B) decreases. C) remains constant. D) might increase, decrease, or remain constant depending on how much people value the additional units of the good. E) cannot be predicted. Answer: A Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 36) A bowed out PPF reflects which of the following ideas? i. Increasing opportunity cost ii. Resources are not equally productive in all activities. iii. Prices of goods increase over time. A) i only B) i and ii C) i and iii D) ii and iii E) i, ii, and iii Answer: B Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 37) If there is increasing opportunity cost, then when moving downward on a production possibilities frontier, the opportunity cost of the good on the horizontal axis ________ as more of the good is produced. A) increases and the PPF gets steeper B) increases and the PPF gets flatter C) decreases and the PPF gets steeper D) decreases and the PPF gets flatter E) does not change and the PPF gets steeper Answer: A Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

38) A bowed out production possibility frontier shows that the A) opportunity cost of a good is constant as more of the good is produced. B) opportunity cost of a good decreases as more of the good is produced. C) opportunity cost of a good increases as more of the good is produced. D) opportunity cost relationship is linear. E) opportunity cost of producing another good is negative. Answer: C Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 39) Why does a nation experience increasing opportunity cost? A) As the nation moves from a production point within the PPF to one on the PPF, opportunity costs increase. B) As the nation moves from a production point within the PPF to another point also within the PPF, opportunity costs increase. C) When the amount of resources increases, the opportunity cost of all goods and services increases. D) Resources are not equally productive in producing different kinds of goods and services. E) Because the nation cannot produce at the unattainable production points that lie beyond the PPF. Answer: D Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 40) The fact of increasing opportunity cost when moving on the PPF means that A) to increase the production of one product requires larger and larger sacrifices of the other good. B) to decrease the production of one product requires smaller and smaller sacrifices of the other good. C) to increase the production of one product requires smaller and smaller sacrifices of the other good. D) when the government forces a movement from one point on the PPF to another point, no production is lost. E) the PPF will be a negatively sloped straight line. Answer: A Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 38 Copyright © 2023 Pearson Education Ltd.

41) Production possibilities frontiers usually curve out and away from the origin. The implication of this curvature is that A) as resources are used to produce one good, fewer resources are available to produce another good. B) the opportunity cost of producing a good goes down as more of that good is produced. C) technological change is present. D) the opportunity cost of producing a good stays the same regardless of how much of that good is produced. E) some resources are better at producing one good while other resources are better at producing alternative goods. Answer: E Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 42) If the production possibilities frontier between two goods were a straight line, then the opportunity cost of one good in terms of another would be A) constant. B) increasing. C) decreasing. D) zero. E) either constant, increasing, or decreasing but more information is needed to determine which. Answer: A Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 43) If the production possibilities frontier between two goods is a straight line, then the A) opportunity cost is not a ratio. B) resources are equally productive in both goods. C) line does not qualify as a production possibilities frontier because the unattainable production points are too close to the inefficient production points. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

44) As an economy moves down along a straight line production possibilities frontier, what happens to the opportunity cost of producing the good on the horizontal axis? A) It remains constant. B) It decreases. C) It increases. D) Above the midpoint it decreases until it equals 1 at the midpoint, and then it increases. E) None of these depict what happens to opportunity cost. Answer: A Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 45) If the production possibilities frontier between bottled water and water in a jug is a straight line, which of the following statements would be correct? A) A large amount of unemployment must exist. B) Resources are equally productive at producing either product. C) There is no tradeoff between the two goods. D) There is no decrease in the production of one good when the production of the other is increased. E) Producing more of one good gives the economy a free lunch. Answer: B Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

46) The table above shows the production possibilities for an economy. Drawing a PPF with books on the vertical axis and bread on the horizontal axis, a movement from possibility B to possibility C to possibility D shows the opportunity cost of ________ moving down along the PPF. A) books is decreasing B) bread is decreasing C) bread is increasing D) books is constant E) books and bread are both increasing Answer: C Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 47) The table above shows the production possibilities for an economy. The opportunity cost of a loaf of bread is ________ when moving from possibility B to possibility C. A) 1/2 of a book B) 2 books C) 200 books D) 100 loaves of bread E) 1 loaf of bread Answer: B Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

48) The table above presents the production possibilities frontier for a nation. Using the information in the table, moving from possibility C to B means that A) 4 units of capital goods are given up to get 55 units of consumption goods. B) 2 units of capital goods are given up to get 55 additional units of consumption goods. C) 4 units of capital goods are given up to get 10 additional units of consumption goods. D) 4 units of capital goods are given up to get 45 units of consumption goods. E) 2 units of capital goods are given up to get 10 additional units of consumption goods. Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 49) The table above presents the production possibilities frontier for a nation. Using the information in the table, when moving from possibility C to D, the cost of 1 unit of a capital good in terms of the consumption goods forgone is ________ consumption goods per capital good. A) 25 B) 15 C) 20 D) 10 E) an undefined amount of Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

50) The table above presents the production possibilities frontier for a nation. Using the information in the table, when moving from possibility A to B to C to ultimately E, the cost of a unit of capital goods in terms of consumption goods A) increases. B) decreases. C) remains the same. D) decreases from possibility A to C, and then increases from possibility C to D. E) cannot be calculated. Answer: A Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

51) The figure above illustrates a small country's production possibilities frontier. Based on the figure, we can tell that the nation's resources are A) equally productive in all tasks because the slope is negative. B) equally productive in all tasks because the production possibilities frontier is bowed out. C) not equally productive in all tasks because the slope is negative. D) not equally productive in all tasks because the production possibilities frontier is bowed out. E) unlimited because the slope is negative and the PPF is bowed out. Answer: D Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

52) The figure above illustrates a small country's production possibilities frontier. Moving from point A to point B, the per unit opportunity cost of a tablet is ________ per tablet. A) 2 computers B) 4/3 of a computer C) 100 computers D) 1/2 of a computer E) 1 tablet Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 53) The figure above illustrates a small country's production possibilities frontier. Moving from point C to point B, the per unit opportunity cost of computers is ________ per computer. A) 4 tablets B) 5/4 of a tablet C) 4/5 of a tablet D) 1/4 of a tablet E) 1 computer Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

54) The figure above shows the production possibilities frontier for a country. In order for it to move from producing at point A to producing at point B, the country would need to A) decrease SUV production by 1 million. B) decrease SUV production by 3 million. C) decrease SUV production by 4 million. D) decrease compact car production by 3 million. E) acquire more resources and/or more advanced technology. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 55) The figure above shows the production possibilities frontier for a country. In order for it to move from producing at point A to producing at point B, the country would need to incur an opportunity cost of A) 1 million SUVs. B) 3 million SUVs. C) 4 million SUVs. D) 3 million compact cars. E) 0 because the gain in compact cars exceeds the loss in SUVs. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 45 Copyright © 2023 Pearson Education Ltd.

56) The figure above shows the production possibilities frontier for a country. How does the opportunity cost of compact cars forgone per SUV gained moving from point C to point B compare with the movement from point B to point A? A) The opportunity cost of moving from point C to point B is greater than the movement from point B to point A. B) The opportunity cost of moving from point C to point B is the same as the movement from point B to point A. C) The opportunity cost of moving from point C to point B is less than the movement from point B to point A. D) The opportunity costs cannot be compared because the units of moving from point C to point B differ from the units of moving from point B to point A. E) More information is needed to determine how the two opportunity costs compare. Answer: C Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 57) Once you find the opportunity cost of producing one unit of a good, to find the opportunity cost of producing the other good, you must A) take the inverse. B) multiply by the total amount produced of the second good. C) divide by the total amount produced of the second good. D) do nothing because the opportunity cost for the first good is the same as the opportunity cost for the second good. E) None of the answers is correct. Answer: A Topic: Opportunity cost is a ratio Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 58) While moving on the production possibilities frontier, if the opportunity cost of producing one good is 1/2, the opportunity cost of producing the other good (in the same range) is A) 1/2. B) 1/4. C) 2. D) 4. E) an amount that cannot be calculated without more information. Answer: C Topic: Opportunity cost is a ratio Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 46 Copyright © 2023 Pearson Education Ltd.

59) The opportunity cost of producing more of one good on a production possibilities frontier is A) a dollar amount. B) a ratio of quantities. C) a ratio of prices. D) equal to the area inside the production possibilities frontier. E) a theoretical concept which cannot be measured. Answer: B Topic: Opportunity cost is a ratio Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 60) The opportunity cost of one more slice of pizza in terms of sodas is the A) number of pizza slices we have to give up in order to get one extra soda. B) number of sodas we have to give up in order to get one extra pizza slice. C) total number of sodas that we have divided by the total number of pizza slices that we have. D) total number of pizza slices that we have divided by the total number of sodas that we have. E) price of a pizza slice minus the price of a soda. Answer: B Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 61) Moving between two points on a PPF, a country gains 6 automobiles and forgoes 3 trucks. The opportunity cost of 1 automobile is A) 3 trucks. B) 6 automobiles - 3 trucks. C) 2 trucks. D) 1/2 of a truck. E) 1 automobile. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

62) Moving between two points on a PPF, a country gains 8 desktop computers and forgoes 4 laptop computers. The opportunity cost of 1 desktop computer is A) 4 laptops. B) 8 desktops. C) 1 desktop. D) 2 laptops. E) 1/2 of a laptop. Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 63) A country produces only cans of soup and ink pens. If the country produces on its bowed outward PPF and increases the production of cans of soup, the opportunity cost of additional A) cans of soup is increasing. B) cans of soup is decreasing. C) cans of soup remains unchanged. D) ink pens is increasing. E) More information is needed to determine what happens to the opportunity cost. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 64) Moving along a country's PPF, a reason opportunity costs increase is that A) unemployment decreases as a country produces more and more of one good. B) unemployment increases as a country produces more and more of one good. C) technology declines as a country produces more and more of one good. D) some resources are better suited for producing one good rather than the other. E) technology must advance in order to produce more and more of one good. Answer: D Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

65) Increasing opportunity cost exists A) in the real world. B) as long as there is high unemployment. C) only in theory but not in real life. D) for a country but not for an individual. E) inside the PPF but not on the PPF. Answer: A Topic: Increasing opportunity costs Skill: Level 1: Definition Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 3.3 Economic Growth 1) Which of the following is the best definition of economic growth? A) the investment in capital and consumption goods by an economy B) the opportunity cost of capital C) the opportunity cost of consumption D) increased development of land and entrepreneurship E) the sustained expansion of production possibilities Answer: E Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 2) The sustained expansion of production possibilities is called A) economic investment. B) production expansion. C) opportunity cost of growth. D) economic growth. E) production possibilities. Answer: D Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

3) Which of the following would most likely cause a country's production possibilities set to shift outward at every point along the frontier? A) a decrease in idle capital B) a decrease in unemployment C) a technological advance in only one sector of the economy D) a general technological advance that affects all sectors of the economy E) none of the above Answer: D Topic: Economic growth and the PPF Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 4) Consider a PPF with consumption goods on the horizontal axis and capital goods on the vertical axis. If the country operates on its PPF near its ________ axis, this country ________. A) vertical; will experience greater economic growth B) vertical; will not face opportunity costs C) horizontal; will have a larger chance at economic growth D) horizontal; faces larger tradeoffs E) vertical; is operating at an inefficient point Answer: A Topic: Economic growth and the PPF Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 5) Economic growth depends upon which of the following? i. Increasing the quantity of labor ii. Lowering the prices of goods and services iii. Advancing technology A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

6) Economic growth depends upon which of the following? i. Improving the quality of labor ii. Technological advancement iii. Increasing the amount of capital A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 7) As an economy grows A) its PPF shifts outward. B) it can eliminate scarcity. C) the opportunity cost of production will approach 0. D) the opportunity cost of production will increase. E) its PPF does not shift; instead, the production point moves from inside the PPF to be closer to the PPF. Answer: A Topic: Economic growth and the PPF Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 8) The opportunity cost of economic growth is A) 0, because it means an expansion of production possibilities. B) the decrease in the current production of productive factors. C) a slower accumulation of human capital. D) the decrease in the current production of consumption goods. E) the increase in the nation's capital stock and/or its technology. Answer: D Topic: Economic growth, opportunity cost Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

9) What is the opportunity cost of economic growth? A) current period consumption goods B) current period capital goods C) land D) both current period consumption and capital goods E) both current period capital goods and land Answer: A Topic: Economic growth, opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

10) The above figure shows the PPF for a country that produces computers and computer factories. Which of the following would most likely shift the PPF from PPF0 in one year to PPF1 in the next? A) Nothing, because the PPF does not shift. B) Increase the production of computers from 9 million (at point C) to 11 million (at point B). C) Decrease the production of computers from 11 million (at point B) to 9 million (at point C) and build 9 new computer factories. D) Increase consumption of both computers and computer factories. E) Decrease production of both computers and computer factories by moving into the interior of the PPF. Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

11) The above figure shows the PPF for a country that produces computers and computer factories. The nation's production possibilities frontier is PPF0. At which of the following production points would the economy grow most rapidly? A) Point A B) Point B C) Point C D) It makes no difference among the three points because they are all production efficient. E) More information is needed to answer the question. Answer: A Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

12) Suppose Puerto Rico and Hawaii currently have the same production possibilities so that the above figure is the PPF for hotels and consumption goods in the two areas. Hotels are a capital good that,once built, will help produce still more consumption goods. If Puerto Rico produces more hotels than Hawaii A) Hawaii's PPF will shift outward further than Puerto Rico's PPF. B) Hawaii's PPF will shift inward. C) Puerto Rico's PPF will not shift. D) Puerto Rico's and Hawaii's PPF will shift outward by the same amount. E) Puerto Rico's PPF will shift outward further than Hawaii's PPF. Answer: E Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

13) Suppose Puerto Rico and Hawaii currently have the same production possibilities so that the above figure is the PPF for hotels and consumption goods in the two areas. Hotels are a capital good that,once built, will help produce still more consumption goods. According to the figure, which island will have more rapid economic growth? A) Hawaii B) Both Hawaii and Puerto Rico will grow at the same speed. C) Puerto Rico D) Neither Hawaii nor Puerto Rico will grow. E) More than one of the above answers is correct. Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

14) Suppose India and France have the same PPF, shown in the figure above. Based on their current production points, which is India's most likely future PPF? A) PPF2 B) PPF1 C) PPF0 D) either PPF0 or PPF1 E) None of the above because economic growth will not happen in India. Answer: A Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

15) Suppose India and France have the same PPF, shown in the figure above. Based on their current production points, which is France's most likely future PPF? A) PPF2 B) PPF1 C) PPF0 D) either PPF0 or PPF1 E) None of the above because economic growth will not happen in India. Answer: B Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 16) Suppose India and France have the same PPF, shown in the figure above. Based on their current production points, India's most likely future PPF is ________, and France's most likely future PPF is ________. A) PPF1; PPF1 B) PPF2; PPF2 C) PPF0; PPF0 D) PPF2; PPF1 E) PPF1; PPF2 Answer: D Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

17) Suppose that Germany, France, Estonia, and India all have the same production possibilities, illustrated in the figure above. Based on the production points in the figure, which country is most likely to expand its PPF to PPF3? A) India B) Germany C) Estonia D) France and Germany equally E) France Answer: B Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 18) Suppose that Germany, France, Estonia, and India all have the same production possibilities, illustrated in the figure above. Based on the production points in the figure, which country is most likely to expand its PPF to PPF1? A) France and Germany equally B) India C) Estonia D) France E) Germany Answer: B Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

19) Suppose that Germany, France, Estonia, and India all have the same production possibilities, illustrated in the figure above. Based on the production points in the figure, India is most likely to expand its PPF to A) PPF3 or PPF2. B) PPF3. C) PPF1. D) PPF1. or PPF2. E) PPF2. Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 20) Suppose that Germany, France, Estonia, and India all have the same production possibilities, illustrated in the figure above. Based on the production points in the figure, Germany is most likely to expand its PPF to A) PPF3 or PPF2. B) PPF3. C) PPF1. D) PPF1 or PPF2. E) PPF2. Answer: B Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 21) To increase its economic growth, a nation should A) limit the number of people in college because they produce nothing. B) encourage spending on goods and services. C) encourage education because that increases the quality of labor. D) increase current consumption. E) eliminate expenditure on capital goods. Answer: C Topic: Economic growth Skill: Level 2: Using definitions Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

22) Other things equal, if Mexico devotes more resources to train its population than Spain A) Mexico will be able to eliminate opportunity cost faster than Spain. B) Mexico will be able to eliminate scarcity faster than Spain. C) Spain will grow faster than Mexico. D) Mexico will have more current consumption than Spain. E) Mexico will grow faster than Spain. Answer: E Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 23) If a nation devotes a larger share of its current production to consumption goods, then A) its economic growth will slow down. B) its PPF will shift outward. C) its PPF will shift inward. D) some productive factors will become unemployed. E) it must produce at a point within its PPF. Answer: A Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 24) Which of the following statements is correct? i. As the economy grows, the opportunity costs of economic growth decrease. ii. Economic growth has no opportunity cost. iii. The opportunity cost of economic growth is current consumption forgone. A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

25) When a country's production possibilities frontier shifts outward over time, the country is experiencing A) no opportunity cost. B) economic growth. C) higher unemployment of resources. D) a decrease in unemployment of resources. E) an end to opportunity cost. Answer: B Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 26) The opportunity cost of economic growth is ________ and the benefit of economic growth is ________. A) increased current consumption; increased future consumption B) increased current consumption; decreased future consumption C) decreased current consumption; increased future consumption D) decreased current consumption; decreased future consumption E) nothing; increased future consumption Answer: C Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 3.4 Specialization and Trade 1) If Wendy can produce more of all goods than Tommy in an hour, then A) Wendy has an absolute advantage in all goods. B) Wendy does not need to trade with Tommy in order to achieve the gains from trade. C) Wendy has a comparative advantage in all goods. D) Tommy has an absolute advantage in all goods. E) Only Tommy, but not Wendy, can benefit from trade between the two of them. Answer: A Topic: Absolute advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

2) Mac can bake more cookies than Monica per hour. It must be TRUE that A) Monica has an absolute advantage in cookie baking. B) Mac has an absolute advantage in baking cookies. C) Mac has a comparative advantage in baking cookies. D) Monica has a comparative advantage in baking cookies. E) Mac cannot benefit by trade between the two of them. Answer: B Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 3) When Mik has an absolute advantage in the production of two goods over Tommy, Mik A) is less productive than Tommy. B) is better off if he does not engage in specialization and trade with Tommy. C) is more productive in producing both goods than Tommy. D) always has a comparative advantage over Tommy in the production of both goods. E) cannot gain from trade with Tommy. Answer: C Topic: Absolute advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 4) If John can produce 10 chairs or 20 lamps during a week while Mary can produce 12 chairs or 22 lamps in the same time, who has the absolute advantage in producing each good? A) Mary in producing both goods B) John in producing both goods C) Mary in producing chairs, John in producing lamps D) John in producing chairs, Mary in producing lamps E) Both Mary and John in both goods Answer: A Topic: Absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

5) If Toni has an absolute advantage in both sewing and ironing when compared to Tom, then A) they might benefit from trading, but we need more information to determine in which task they should specialize. B) neither Toni nor Tom can benefit from trading with each other. C) Toni should specialize in sewing, and Tom should specialize in ironing. D) Toni cannot benefit from trading with Tom, but Tom can benefit from trading with Toni. E) Tom cannot benefit from trading with Toni, but Toni can benefit from trading with Tom. Answer: A Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 6) If a country has A) an absolute advantage in producing a good, it definitely also has a comparative advantage in producing that good. B) an absolute advantage in producing a good, it might or might not have a comparative advantage in producing that good. C) a comparative advantage in production of a good, it must also have an absolute advantage in producing that good. D) an absolute advantage in producing a good, it definitely will not have a comparative advantage in producing that good. E) None of the above answers is correct. Answer: B Topic: Absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 7) Hank requires 1 hour to cut the grass and 3 hours to clean the house. His sister Holly requires 1 hour to cut the grass and 4 hours to clean the house. Which of the following statements is TRUE? A) Hank has a comparative advantage in both cutting the grass and cleaning the house. B) Hank and Holly both have a comparative advantage in cutting the grass. C) Hank has a lower opportunity cost of cutting the grass. D) Hank has an absolute advantage in both cutting the grass and cleaning the house. E) Holly has a comparative advantage in cutting the grass. Answer: E Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

8) The United States can use all its resources to produce 250 DVDs or 500 shoes. China can use all of its resources to produce 30 DVDs or 300 shoes. The opportunity cost of producing a DVD in the United States is A) 2 shoes. B) 1/2 of a shoe. C) 20 shoes. D) 500 shoes. E) 1 DVD. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

9) In the table above, how many jackets must Mary forgo for every dress she makes? A) 12 jackets B) 3/4 of a jacket C) 2/3 of a jacket D) 1 1/2 jackets E) 8 jackets Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 10) In the table above, how many jackets must Mark forgo for every dress he makes? A) 1 jacket B) 16 jackets C) 2/3 of a jacket D) 1 1/2 jackets E) 24 dresses Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

11) In the above table, for Mary the opportunity cost of producing a dress is ________ and the opportunity cost for Mark of producing a dress is ________. A) 1 1/2 jackets; 2/3 of a jacket B) 1 1/2 jackets; 2 1/2 jackets C) 1 1/4 jackets; 1/2 of a jacket D) 1 jacket; 1 jacket E) 1 dress; 1 dress Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 12) A country has a comparative advantage in the production of a good if it can A) produce more of the good than another country. B) produce more of the good most efficiently. C) produce the good on and remain on its production possibilities frontier. D) trade off producing the good for another good. E) produce the good at the lowest opportunity cost. Answer: E Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 13) Having a comparative advantage means a nation can A) benefit from trade. B) produce at a higher opportunity cost. C) produce more of the good. D) produce without incurring an opportunity cost. E) produce the good at a point beyond its PPF. Answer: A Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

14) When a person has a comparative advantage in producing a good or service, the person has A) a higher opportunity cost in producing that product than someone else. B) a constant opportunity cost in producing that product. C) a decreasing opportunity cost in producing that product. D) a lower opportunity cost in producing that product than someone else. E) an increasing marginal benefit in producing the good. Answer: D Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 15) Which of the following best describes comparative advantage? A) being able to produce more output than any other country B) using the fewest number of resources to produce a given amount of output C) having the largest number of resources compared to other countries D) forgoing the fewest units of one product to produce a unit of another product E) It is the same as absolute advantage. Answer: D Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 16) Which of the following is correct about comparative advantage? A) Some countries will have a comparative advantage in everything. B) Having a comparative advantage without an absolute advantage is impossible. C) A comparative advantage in a good means that the country can produce more of the good than any other country. D) A country has a comparative advantage in the production of a good if it can produce the good at lower opportunity cost than any other country. E) None of the above answers is correct. Answer: D Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

17) John can make pizza at a lower opportunity cost than Allen, but Allen can make more pizzas per day than John. Therefore A) John cannot benefit from trade with Allen. B) Allen cannot benefit from trade with John. C) John has a comparative advantage in pizza. D) John has an absolute advantage in pizza. E) Allen has a comparative advantage in pizza. Answer: C Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 18) Alice and Gene work in the mailroom, sorting and delivering mail. In order for them to benefit from specialization and trade, Alice must A) be able to both sort and deliver faster than Gene. B) be equally productive in both sorting and delivering. C) have a comparative advantage in both sorting and delivering. D) have a comparative advantage in one task and Gene must have a comparative advantage in the other task. E) be equally productive as Gene in both sorting and delivering. Answer: D Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 19) When one person's opportunity cost of producing a good is lower than another person's opportunity cost of producing the same good, it is called A) an absolute advantage. B) a comparative advantage. C) specialization. D) production possibilities. E) a tradeoff. Answer: B Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

20) For country Gamma the opportunity cost for producing 1 computer is 10 tons of steel. For country Beta the opportunity cost for producing 1 computer is 6 tons of steel. Which country has the comparative advantage in the production of steel? A) Gamma B) Beta C) Both have the comparative advantage in the production of steel. D) Neither country has the comparative advantage in the production of steel. E) More information is needed to determine which of the two nations has the comparative advantage. Answer: A Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 21) For country North, the opportunity cost incurred when 3 tractors are produced is 21 watches. For country South, the opportunity cost incurred when 5 tractors are produced is 100 watches. Which country has the comparative advantage in the production of tractors? A) North B) South C) Both have the comparative advantage in the production of tractors. D) Neither country has the comparative advantage in the production of tractors. E) More information is needed about which country has the comparative advantage in the production of watches. Answer: A Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 22) If Country A can produce an extra plane by giving up two boats, and Country B can produce an extra plane by giving up three boats, then A) Country A has a comparative advantage over Country B in the production of planes. B) Country B has a comparative advantage over Country A in the production of planes. C) The two countries have no incentive to trade with one another. D) Country A would like to trade with B, but B cannot gain by trading with A. E) Country A has an absolute advantage in producing planes and a comparative advantage in producing boats. Answer: A Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 66 Copyright © 2023 Pearson Education Ltd.

23) David takes 10 minutes to process a customer, and 20 minutes to stock the shelves. Danny takes 15 minutes to process a customer, and 15 minutes to stock the shelves. Which of the following statements is TRUE? A) David has an absolute advantage in performing both tasks. B) Danny has an absolute advantage in performing both tasks. C) David has a comparative advantage in processing customers but not in stocking shelves. D) Danny has a comparative advantage in processing customers but not in stocking shelves. E) Danny has a comparative advantage in processing customers and in stocking shelves. Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 24) Rika's opportunity cost of producing 100 t-shirts is 50 jackets. Jeff's opportunity cost of producing 75 t-shirts is 25 jackets. Who should specialize in jackets? A) Rika B) Jeff C) neither D) both E) More information is needed about their production possibilities frontiers to determine who should specialize in jackets. Answer: A Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 25) On a typical acre of land, Iowa can produce either 300 pounds of beef or 100 pounds of soybeans in a year. On a typical acre of land, Nebraska can produce 150 pounds of beef or 200 pounds of soybeans. Which of the following is correct? A) Nebraska should produce soybeans because its opportunity cost of soybeans is lower. B) Nebraska should produce soybeans because its opportunity cost of soybeans is higher. C) Iowa should produce soybeans because its opportunity cost of soybeans is lower. D) Iowa should produce soybeans because its opportunity cost of soybeans is higher. E) Nebraska and Iowa should divide each acre evenly between soybean and beef production. Answer: A Topic: Achieving the gains from trade Skill: Level 5: Critical thinking Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

26) Huey and Steve can grow potatoes or tomatoes. The table above shows the pounds of potatoes and tomatoes Huey and Steve can grow in a week. Based on the table, Huey's opportunity cost of producing one pound of tomatoes is A) 1.5 pounds of potatoes. B) 0.66 pound of potatoes. C) 0, because he has an absolute advantage in it. D) 0, because he has a comparative advantage in it. E) 1.0 pound of potatoes. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 27) Huey and Steve can grow potatoes or tomatoes. The table above shows the pounds of potatoes and tomatoes Huey and Steve can grow in a week. Based on the table, Steve has a comparative advantage in A) both potatoes and tomatoes. B) neither potatoes nor tomatoes. C) potatoes. D) tomatoes. E) More information is needed about Huey's comparative advantage in order to determine Steve's comparative advantage. Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

28) Huey and Steve can grow potatoes or tomatoes. The table above shows the pounds of potatoes and tomatoes Huey and Steve can grow in a week. Based on the table, which of the following statements is correct? A) Steve has an absolute advantage in both potatoes and tomatoes. B) Steve has a comparative advantage in both potatoes and tomatoes. C) Steve has an absolute advantage in potatoes only. D) Huey has an absolute advantage in potatoes only. E) Huey has an absolute advantage in both potatoes and tomatoes. Answer: E Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 29) If Tom can wax a car in fewer hours than Jerry, then Tom definitely has A) a comparative advantage in car waxing. B) an absolute advantage in car waxing. C) both a comparative and an absolute advantage in car waxing. D) neither a comparative nor an absolute advantage in car waxing. E) an undetermined advantage because we do not know how long it takes Tom and Jerry to wash a car. Answer: B Topic: Comparative advantage versus absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

30) In the table above, Jack's opportunity cost for 1 pound of food is ________ and his opportunity cost for 1 pound of clothing is ________. A) 1 pound of clothing; 4 pounds of food B) 1/2 of a pound of clothing; 2 pounds of food C) 1/3 of a pound of clothing; 3 pounds of food D) 2 pounds of clothing; 2 pounds of food E) 1 pound of food; 1 pound of clothing Answer: B Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 31) In the table above, Jill's opportunity cost for 1 pound of food is ________ and her opportunity cost for 1 pound of clothing is ________. A) 1 pound of clothing; 4 pounds of food B) 1/2 of a pound of clothing; 2 pounds of food C) 1/3 of a pound of clothing; 3 pounds of food D) 2 pounds of clothing; 2 pounds of food E) 1 pound of food; 1 pound of clothing Answer: C Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

32) In the table above, Jack's comparative advantage is producing ________ and Jill's comparative advantage is producing ________. A) clothing; food B) clothing and food; nothing C) nothing; clothing and food D) food; clothing E) clothing; clothing Answer: A Topic: Comparative advantage Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

33) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. If Deb spends all her time assembling packets, how many can she assemble? A) 32 B) 40 C) 64 D) 160 E) 22 Answer: B Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

34) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. What is Deb's opportunity cost of assembling 1 packet? A) 160 envelopes B) 40 envelopes C) 4 envelopes D) 1/4 of an envelope E) 4 packets Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 35) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. Which of the following statements is correct? A) Deb has a comparative advantage in assembling packets. B) Pete has an absolute advantage in both assembling packets and stuffing envelopes. C) Deb has a comparative advantage in stuffing envelopes. D) Deb has an absolute advantage in both assembling packets and stuffing envelopes. E) Deb has a comparative advantage in both assembling packets and stuffing envelopes. Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 36) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. If Deb and Pete specialize and trade, how many packets will be assembled? A) 40 B) more than 40 and less than 80 C) 80 D) 160 E) more than 80 and less than 160 Answer: D Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

37) Gabriel operates a ranch in Idaho where he raises cattle and grows potatoes. The figure above illustrates his production possibilities frontier. What is Gabriel's opportunity cost of growing another ton of potatoes? A) 400 cows B) 80 cows C) 100 cows D) 0 cows E) 1 ton of potatoes Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 38) Gabriel operates a ranch in Idaho where he raises cattle and grows potatoes. The figure above illustrates his production possibilities frontier. What is Gabriel's opportunity cost of raising another 100 cows? A) 1.25 tons of potatoes B) 5.0 tons of potatoes C) 3.0 tons of potatoes D) 1.0 ton of potatoes E) 100 cows Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 73 Copyright © 2023 Pearson Education Ltd.

39) In the above figure, Jack's opportunity cost of producing 1 gallon of soda is ________ of bottled water. A) 1 gallon B) 1/2 of a gallon C) 6 gallons D) 1/4 of a gallon E) 2 gallons Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 40) In the above figure, Jack's opportunity cost of producing 1 gallon of bottled water is ________ of soda. A) 2 gallons B) 1/2 of a gallon C) 6 gallons D) 1/4 of a gallon E) 1 gallon Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 74 Copyright © 2023 Pearson Education Ltd.

41) In the above figure, Jill's opportunity cost of producing 1 gallon of soda is ________ of bottled water. A) 2 gallons B) 1/2 of a gallon C) 4 gallons D) 1 gallon E) 1/4 of a gallon Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 42) In the above figure, Jill's opportunity cost of producing 1 gallon of bottled water is ________ of soda. A) 2 gallons B) 1/2 of a gallon C) 4 gallons D) 1 gallon E) 1/4 of a gallon Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 43) Using the figure above, if Jack and Jill specialize and gain from trade, then A) Jack produces equal amounts of gallons of water and bottled water. B) Jack specializes in the production of bottled water. C) Jack and Jill produce beyond their PPF. D) Jack specializes in the production of soda. E) Jack specializes on the production of soda and water. Answer: B Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

44) The figure above shows the production possibilities frontiers for the United Kingdom and France. What is the opportunity cost of one bushel of wheat in France? A) 1/4 of a pound of fish B) 4 pounds of fish C) 1 pound of fish D) 100 pounds of fish E) 2 pounds of fish Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 45) The figure above shows the production possibilities frontiers for the United Kingdom and France. What is the opportunity cost of one bushel of wheat for the United Kingdom? A) 1/4 of a pound of fish B) 1/2 of a pound of fish C) 1 pound of fish D) 200 pounds of fish E) 2 pounds of fish Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

46) The figure above shows the production possibilities frontiers for the United Kingdom and France. If the United Kingdom and France specialize and engage in trade, the United Kingdom will produce ________ and France will produce ________. A) wheat; wheat B) wheat; fish C) fish; wheat D) fish; fish E) both wheat and fish; both wheat and fish Answer: C Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 47) The figure above shows the production possibilities frontiers for the United Kingdom and France. If the United Kingdom and France specialize and engage in trade, the United Kingdom will export ________ and France will export ________. A) wheat; wheat B) wheat; fish C) fish; wheat D) fish; fish E) nothing; nothing Answer: C Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 48) What is gained when people engage in specialization and trade? A) Specialization and trade allow people to consume outside their individual production possibilities frontiers. B) Specialization and trade allow people to consume inside their production possibilities frontiers. C) Specialization and trade allow people to consume at a point on their production possibilities frontiers. D) Specialization and trade allow people to produce outside their individual production possibilities frontiers. E) There are no gains from specialization and trade. Answer: A Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 77 Copyright © 2023 Pearson Education Ltd.

49) Gains from trade A) occur when one party to the trade has an absolute advantage in both goods. B) result in being able to consume beyond the trading individuals' production possibilities frontiers. C) occur when people do not specialize. D) occur when opportunity costs are equal. E) always benefit one party but not the other party of any trade. Answer: B Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 50) Consider the United States' production of soy beans and running shoes. If the United States has an absolute advantage in the production of both goods compared to China A) both countries can gain from trade. B) only the United States can gain from trade. C) only China can gain from trade. D) each country will be able to produce at a point beyond its PPF. E) only the United States will be able to operate beyond its PPF. Answer: A Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 51) To achieve gains from trade, a country A) needs to have an absolute advantage in the production of all goods. B) specializes in the producing a good in which it has a lower opportunity cost. C) must produce at a point beyond its PPF. D) should produce at the midpoint of its PPF. E) needs to have an absolute advantage in the production of at least one good. Answer: B Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

52) Specialization and trade A) does not benefit anyone. B) allows nations to produce inside their individual production possibilities frontier. C) allows nations to consume combinations of products that are outside their individual production possibilities frontier. D) shifts the production possibilities frontier inward. E) shifts the production possibilities frontier outward. Answer: C Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 53) The United States is one of the richest nations in the world A) so it does not need to trade with poor nations in order to achieve any gains from trade. B) so it might not have a comparative advantage in producing any goods. C) but it can still benefit from specialization and trade. D) so it must have a comparative advantage in the production of all goods. E) so it must have an absolute advantage in the production of all goods. Answer: C Topic: Achieving the gains from trade Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 54) Specialization and trade make a country better off because with trade, the country can consume at a point A) outside its production possibilities frontier. B) inside its production possibilities frontier. C) on its production possibilities frontier. D) on its trading partner's production possibilities frontier. E) inside its trading partner's production possibilities frontier. Answer: A Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

55) By specializing and trading, a country is able to A) obtain the absolute advantage in the goods it produces. B) consume but not to produce combinations of goods that lie beyond its production possibilities frontier. C) produce but not to consume combinations of goods that lie beyond its production possibilities frontier. D) BOTH produce and consume combinations of goods that lie beyond its production possibilities frontier. E) NEITHER produce nor consume combinations of goods that lie beyond its production possibilities frontier. Answer: B Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 56) With no international trade, a country ________ consume at a point outside of its PPF; with international trade, a country ________ consume at a point outside of its PPF. A) cannot; can B) can; cannot C) can; can D) cannot; cannot E) None of the above answers is correct because the presence or absence of international trade has nothing to do with where a country consumes in comparison to its PPF. Answer: A Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

57) In terms of a nation's production possibilities frontier, what impact does international trade have? A) International trade shifts the nation's production possibilities frontier outward. B) International trade shifts the nation's production possibilities frontier inward. C) International trade allows the nation to consume at a point outside its production possibilities frontier. D) International trade shifts the production possibilities frontier outward for the goods that are exported and inward for the goods that are imported. E) International trade shifts the production possibilities frontier outward for the goods that are imported and inward for the goods that are exported. Answer: C Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 58) The gains from trade include i. lower prices from competition ii. greater output from specialization iii. greater variety of goods and services available A) i and iii only B) ii and iii only C) i and ii only D) i, ii, and iii E) ii only Answer: D Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 59) If a nation has an absolute advantage in producing a good, then it A) will have a comparative advantage in producing that good. B) will have no need to trade with other nations. C) will always specialize in that good. D) might or might not have a comparative advantage in producing that good. E) will not have a comparative advantage in producing that good. Answer: D Topic: Comparative advantage versus absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

60) In one hour John can produce 20 loaves of bread or 8 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is TRUE? A) Phyllis has a comparative advantage in producing bread. B) John has a comparative advantage in producing cakes. C) Phyllis has an absolute advantage in both goods. D) John has an absolute advantage in both goods. E) Phyllis has a comparative advantage in producing both cakes and bread. Answer: C Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 61) "Comparative advantage" is defined as a situation in which one person can produce A) more of all goods than another person. B) more of a good than another person. C) a good for a lower dollar cost than another person. D) a good for a lower opportunity cost than another person. E) all goods for lower opportunity costs than another person. Answer: D Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 62) Scott and Cindy both produce only pizza and tacos. In one hour, Scott can produce 20 pizzas or 40 tacos. In one hour, Cindy can produce 30 pizzas or 40 tacos. Scott's opportunity cost of producing 1 taco is A) 1/2 of a pizza. B) 1 pizza. C) 2 pizzas. D) 20 pizzas. E) 2 tacos. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

63) Scott and Cindy both produce only pizza and tacos. In one hour, Scott can produce 20 pizzas or 40 tacos. In one hour, Cindy can produce 30 pizzas or 40 tacos. Cindy's opportunity cost of producing 1 taco is A) 3/4 of a pizza. B) 1 pizza. C) 30 pizzas. D) 40 pizzas. E) 1 1/3 tacos. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 64) Scott and Cindy both produce only pizza and tacos. In one hour, Scott can produce 20 pizzas or 40 tacos. In one hour, Cindy can produce 30 pizzas or 40 tacos. Based on these data A) Cindy has a comparative advantage at producing tacos. B) Scott has a comparative advantage at producing tacos. C) Cindy and Scott have the same comparative advantage in producing tacos. D) neither Cindy nor Scott has a comparative advantage in producing tacos. E) Cindy and Scott have the same comparative advantage in producing pizzas. Answer: B Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 65) In one hour John can produce 20 loaves of bread or 16 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is TRUE? A) Phyllis has a comparative advantage in producing bread. B) John has a comparative advantage in producing cakes. C) Phyllis has an absolute advantage in both goods. D) John has an absolute advantage in both goods. E) Phyllis has a comparative advantage in producing both cakes and bread. Answer: B Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

66) Comparative advantage is most closely related to which of the following concepts? A) productivity B) efficiency C) opportunity cost D) competition E) fairness Answer: C Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 67) If workers in Mexico produce fewer goods and services per hour than workers in the United States in all areas of production, then A) the United States will benefit from trade with Mexico, but Mexico will not. B) Mexico will benefit from trade with the United States, but the United States will not. C) neither Mexico nor the United States will benefit from trade with the other. D) both the United States and Mexico will benefit from trade with the other. E) it is unknown whether either country can benefit from trade with the other. Answer: D Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

3.5 Chapter Figures

1) The figure above shows a production possibilities frontier. In the figure, which of the following combinations of the two goods cannot be produced with the current resources and technology? A) 2 million cell phones and 13 million DVDs B) 4 million cell phones and 4 million DVDs C) 1 million cell phones and 14 million DVDs D) 3 million cell phones and 5 million DVDs E) 5 million cell phones and no DVDs Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

2) The figure above shows a production possibilities frontier. In the figure, which of the following combinations of the two goods are efficient? A) 2 million cell phones and 13 million DVDs B) 5 million cell phones and 15 million DVDs C) no cell phones and 15 million DVDs D) 4 million cell phones and 4 million DVDs E) None of these combinations is efficient. Answer: C Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 3) The figure above shows a production possibilities frontier. In the figure, the economy faces a tradeoff when ________ cell phones and ________ DVDs. are produced. A) 3 million; 9 million B) 2 million; 9 million C) 3 million; 8 million D) 4.5 million; no E) 5 million; 15 million Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 4) The figure above shows a production possibilities frontier. In the figure, when the economy moves from point E to point D, what is the opportunity cost of a DVD? A) 0.25 cell phones B) 0.5 cell phones C) 1 cell phone D) 4 cell phones E) zero Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

5) The figure above shows a production possibilities frontier. In the figure, when the economy moves from point D to point C, the opportunity cost of producing one more DVD ________, and when it moves from point C to D, the opportunity cost of producing one more cell phone ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases E) increases; remains the same Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 6) The figure above shows a production possibilities frontier. In the figure, when the economy moves from point C to point B, what is the opportunity cost of a DVD? A) 0.5 cell phones B) 2 cell phones C) 0.5 million cell phones D) 2 million cell phones E) zero Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

7) The figure above shows how the PPF for cell phones and new cell-phone factories can expand. In the figure, if the economy produced 4 million cell phones using the resources efficiently, the PPF would A) expand, but not as far as shown in the figure. B) not expand. C) expand farther than shown in the figure. D) expand along the vertical axis and not along the horizontal axis. E) expand evenly along both axes. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

8) The figure above shows how the PPF for cell phones and new cell-phone factories can expand. In the figure, if the economy chose the point on this year's PPF that is above point K, the next year's PPF would A) shift outward along the horizontal axis farther than the new PPF shown in the figure. B) shift outward along the horizontal axis, but not as far as the new PPF shown in the figure. C) shift outward along the vertical axis, not along the horizontal axis. D) shift inward along the horizontal axis. E) shift inward along the vertical axis. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 9) The figure above shows how the PPF for cell phones and new cell-phone factories can expand. In the figure, if the economy chose the point on this year's PPF that is below point K, the next year's PPF would A) shift outward along the horizontal axis farther than the new PPF shown in the figure. B) shift outward along the horizontal axis, but not as far as the new PPF shown in the figure. C) shift outward along the vertical axis, not along the horizontal axis. D) shift inward along the horizontal axis. E) shift inward along the vertical axis. Answer: B Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

The figure above shows Liz's and Joe's production possibilities for Salads and Smoothies. 10) Liz has a comparative advantage in ________ and an absolute advantage in ________. A) smoothies only; both goods B) smoothies only; smoothies only C) both goods; both goods D) salads only; both goods E) salads only; salads only Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 11) Liz has a comparative advantage in ________ because ________. A) smoothies; her opportunity cost of producing smoothies is lower than Joe's B) salads; her opportunity cost of producing salads is lower than Joe's C) smoothies; she can produce more smoothies per hour than Joe can D) salads; she can produce more salads per hour than Joe can E) both goods; she can produce more of both goods per hour than Joe can Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 90 Copyright © 2023 Pearson Education Ltd.

12) Given the information in the figure above, Liz ________ benefit from trade with Joe because ________. A) can; each of them has a comparative advantage in one of the goods B) can; each of them has an absolute advantage in one of the goods C) cannot; she has an absolute advantage in both goods D) cannot; she has a comparative advantage in both goods E) can; Joe is more productive in producing one of the goods Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 13) Given the information in the figure above, Joe can benefit from trade as far as the price at which he buys Liz's smoothies is A) below 5 salads per smoothie. B) not higher than 2 salads per smoothie. C) not lower than 2 salads per smoothie. D) not lower than 1 salad per smoothie. E) not higher than 4 salads per smoothie. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 14) Using the figure above, suppose with no trade Liz and Joe each produce at point A on their respective PPFs. Then, Liz suggests that they specialize and trade. She would produce only smoothies and Joe would produce only salads. Then she would sell 10 smoothies to Joe at a price of 2.5 salads per smoothie. In this scenario A) Liz gains 10 smoothies and 5 salads, and Joe gains 5 smoothies. B) Liz gains 5 smoothies, and Joe gains 10 smoothies. C) Liz gains 10 smoothies, and Joe loses 5 smoothies. D) Liz gains 5 smoothies and 5 salads, and Joe loses 5 salads. E) Neither of the individuals gains from trade. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

15) Using the figure above, suppose with no trade Liz and Joe each produce at point A on their respective PPFs. Then, Joe suggests that they specialize and trade. He would produce only salads and Liz would produce only smoothies. Then, Joe says, he would buy 16 smoothies from Liz at a price of 1.5 salads per smoothie. Liz should A) accept Joe's offer since she will gain 4 smoothies and 4 salads. B) accept Joe's offer, as she will be as well off as with no trade. C) not accept Joe's offer, as the price he offers is too low for her to gain from trade. D) not accept Joe's offer since she would lose 2 smoothies and 2 salads. E) accept Joe's offer since she will gain 4 salads. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 3.6 Integrative Questions 1) As technology advances A) all opportunity costs decrease. B) the PPF shifts outward. C) a country moves toward the midpoint along its PPF and can produce more of both goods. D) all opportunity costs increase. E) the PPF shifts inward because unemployment occurs. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 2) If a country is operating at a point of production efficiency A) it enjoys a free lunch when increasing production. B) it produces on its production possibilities frontier. C) it must specialize in the production of a good. D) it operates on its trade line. E) it cannot be producing at its point of comparative advantage. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

3) Relative to Al, Joe has ________ if Joe can produce a good at a lower opportunity cost than Al. A) a comparative advantage B) more production efficiency C) a comparative benefit D) a marginal benefit E) a free lunch Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 4) Suppose that after specializing according to comparative advantage, a country is trading with another nation that also specializes according to its comparative advantage. Which of the following statements are TRUE for the first country? i. It enjoys gains from trade. ii. It must have an absolute advantage in the production of the good it produces. iii. It is producing at a point beyond its PPF. A) i only B) i and ii C) i and iii D) ii and iii E) i, ii, and iii Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) The table above gives the production possibilities frontier for two countries, Anaconda and Bear. This table shows that A) when Anaconda and Bear specialize and trade, Anaconda should specialize in the production of shoes. B) when Anaconda and Bear specialize and trade, Anaconda should produce at its production point E. C) Anaconda has an absolute advantage in the production of corn and shoes. D) Bear can consume no more than 2 bushels of corn and 700 pairs of shoes. E) Bear is unable to gain from trade with Anaconda. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 6) The table above gives the production possibilities frontier for two countries, Anaconda and Bear. The table shows that A) Bear achieves production efficiency ONLY at its production point A. B) Anaconda achieves production efficiency ONLY at its production point A. C) Anaconda has a comparative advantage in the production of corn. D) Bear has an absolute advantage in the production of both goods. E) Both answers A and B are correct. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills

7) The table above gives the production possibilities frontier for two countries, Anaconda and Bear. The opportunity cost of moving from production point B to production point C for Anaconda equals ________ and for Bear equals ________. A) 1 ton of corn; 1 ton of corn B) 650 pairs of shoes; 900 pairs of shoes C) 550 pairs of shoes; 700 pairs of shoes D) 100 pairs of shoes; 200 pairs of shoes E) 50 pairs of shoes; 100 pairs of shoes Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 8) The table above gives the production possibilities frontier for two countries, Anaconda and Bear. The opportunity cost of moving from ________ is greater for ________. A) point A to point B; Anaconda B) point B to point A; Bear C) point D to point E; Bear D) point E to point D; Bear E) any point to any other point; Bear Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 3.7 Essay: Production Possibilities 1) What does the vertical intercept of a production possibilities frontier represent? Answer: The vertical intercept is the maximum amount that can be produced if all available resources are dedicated to the production of the good or service measured on the vertical axis. Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

2) What economic concepts are represented in the production possibilities model? Answer: There are a large number of economic concepts illustrated by the production possibilities frontier: ∙ Scarcity of resources: The production possibilities frontier is a frontier between attainable and unattainable combinations. ∙ Opportunity cost: The negative slope of the production possibilities frontier indicates that in order to get more of one good, you must produce less of the other (tradeoff). ∙ Increasing opportunity cost: The bowed out production possibilities frontier represents the changing opportunity costs when resources are specialized. ∙ Production efficiency: Points on the production possibilities frontier efficiently use all resources while points below the production possibilities frontier represent unemployed or misallocated resources and the possibility of a free lunch. Topic: Production possibilities frontier Skill: Level 5: Critical thinking Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication 3) How can a combination of goods be unattainable? Answer: A combination of goods can be unattainable if producing that combination requires more resources and technology than are available. Topic: Unattainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 4) What does a production point beyond the production possibilities frontier represent? Answer: A production point beyond the production possibilities frontier is an unattainable combination of products. Topic: Unattainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

5) "If Mexico is currently operating at a point beyond its production possibilities frontier, then there are unemployed or misallocated resources in Mexico." Is this statement true or false? Briefly explain your answer. Answer: The statement is false. It is false on two counts. First, production points beyond the production possibilities frontier are unattainable, so it is not possible for Mexico to be producing at such a point. Second, it is points within the production possibilities frontier that have unemployed or misallocated resources. Topic: Unattainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication 6) "If Mexico is currently operating at a point inside its production possibilities frontier, then there are unemployed or misallocated resources in Mexico." Is this statement true or false? Briefly explain your answer. Answer: The statement is true. Points within the production possibilities frontier are attainable, so it is possible for Mexico to be producing at a point within its frontier. At points within the production possibilities frontier, there are unemployed or misallocated resources. Topic: Attainable points, unemployment Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 7) Are all points inside the production possibilities frontier unattainable? Answer: No, all points within the production possibilities frontier are attainable, though there are unemployed resources at these points. Topic: Attainable points, unemployment Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

8) In the movie Cast Away, Tom Hanks plays a FedEx efficiency expert stranded on a deserted island. While on the island, he divides his time between catching fish, gathering coconuts, painting, and building a raft. Suppose that these were Mr. Hanks' only activities. Did he face an opportunity cost from pursuing any of these activities? Why or why not? Answer: Yes, Mr. Hanks faces an opportunity cost from all of these endeavors. If he decides to use his time catching fish, he couldn't gather coconuts, paint, or build a raft. Whatever he would have been doing, not opting to catch fish is his opportunity cost of catching fish. Similarly, time spent on building his raft means less time painting, or fewer coconuts for breakfast, or fewer fish for dinner. Tradeoffs such as these are a feature of any economy that is operating on its production possibilities frontier and cannot be avoided. Topic: Tradeoffs Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication 9) What does it mean when a "free lunch" is available? Relate your answer to the production possibilities frontier. Answer: A free lunch means that there is no tradeoff, that is, the production of one good or service can be increased without decreasing the production of another good or service and thereby giving up some of the other good. A free lunch occurs when the economy is producing at a point within the production possibilities frontier because at these points some resource is unemployed. By utilizing the unemployed resource, more goods or services can be produced without giving up any other goods or services. Topic: Free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication 10) Describe the differences between tradeoffs and free lunches in terms of a PPF. Answer: A tradeoff is a constraint or limit that forces giving up one thing in exchange for something else. When resources are fully employed, a country operates on its PPF. Any movement from one point to another point along the PPF requires the country to make a tradeoff between the two goods because one good is given up to get some other good. A free lunch occurs when some resources are not being used or not being used in their most productive way. When a country operates inside its PPF and moves toward its PPF choosing a different combination of goods, the country enjoys a free lunch. It does not face a tradeoff. Topic: Tradeoffs and free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication

11) On a production possibilities frontier diagram, where are production points that have tradeoffs? Where are production points with a free lunch? Answer: A tradeoff is a situation in which a limit forces one thing to be given up in exchange for something else. Any point on the production possibilities frontier itself is a production point with a tradeoff. Why? Moving along the production possibilities frontier means that more of one good can be obtained only at the (opportunity) cost of giving up some other good, which means that there is a tradeoff. A free lunch is the absence of a tradeoff, that is, when the production of a good or service can be increased without decreasing the production of another good or service. A free lunch occurs at any point within the production possibilities frontier. At these points, resources are being used inefficiently. By utilizing the resource efficiently, more goods or services can be produced without giving up any other goods or services. Topic: Tradeoffs and free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication 12) Explain why a movement from a point inside a production possibilities frontier to the production possibilities frontier is described as a free lunch and a movement along a production possibilities frontier is described as a tradeoff. Answer: The key point to answer this question is the fact that producing more of a good requires more resources. Hence, if all resources are employed efficiently, as is the case when producing on the production possibilities frontier, producing more of one good means reallocating resources away from the production of another good; there is a tradeoff between the two goods. In other words, to produce more of one good, the production of another must be given up. If, however, resources are used inefficiently, as is the case when producing inside the production possibilities frontier, then the production of a good can be increased by using the resources efficiently; hence no tradeoff is required and the additional goods are a free lunch. Topic: Tradeoffs and free lunches Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication

13) Draw a production possibilities frontier between beans and peas. Label the unattainable points, the attainable points with fully employed resources, and the attainable points with unemployed resources. Answer:

The production possibilities frontier, with the points labeled, is above. Any point beyond the production possibilities frontier is unattainable. Any point on the production possibilities frontier is attainable and resources are fully employed. Finally, any point within the production possibilities frontier is attainable and has unemployed resources. Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

14) The figure above shows a nation's production possibilities frontier for apples and oranges. a. What combination of goods is represented by point A? b. What combination of goods is represented by point B? c. Which point represents an unattainable combination of goods? d. The movement from point C to point D results in a free lunch. What is the free lunch? Answer: a. 3 million bushels of apples and 3 million bushels of oranges b. 3 million bushels of apples and 4 million bushels of oranges c. Point B is an unattainable point. d. The movement from point C to point D results in an increase of 1 million bushels of oranges with no decrease in apples. Therefore the 1 million bushels of oranges are a free lunch. Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

15) Before the first Gulf War, Kuwait had the capacity to produce a certain amount of oil from its oil wells. After the war, it found that capacity greatly diminished because the oil wells were on fire. Draw Kuwait's PPF before and after the war, assuming that the only two goods produced are oil and food. Further assume that setting the oil wells on fire did not affect Kuwait's ability to produce food. Explain why the PPF before the war is different from the PPF after the war. Answer:

When a PPF is drawn, we draw it for a fixed amount of natural resources, along with fixed amounts of the other factors of production such as labor, capital, etc. Fire reduced Kuwait's natural resources temporarily, so the PPF after the war shifted inwards. However, because setting the oil wells on fire did not affect Kuwait's ability to produce food, the maximum amount of food production, the point where the PPF intersects the vertical axis, did not change. Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 3.8 Essay: Opportunity Cost 1) Moving on a bowed out PPF, what happens to the opportunity cost of its production as a nation specializes more in one product? Answer: The bowed out PPF indicates that as the amount of the good produced increases, the good's opportunity cost increases. Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

2) Why is the production possibilities frontier bowed out? Answer: The production possibilities frontier is bowed out because resources are not equally productive in all uses. The resources used to produce robots are different from the resources used to produce pizzas. Thus, as more of one good is produced, say robots, less productive resources must be used to increase the number of robots produced. Hence the opportunity cost of the additional robots increases, which gives the production possibilities frontier a bowed out shape. Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Written and oral communication 3) Why does the production possibilities frontier have a bowed out shape rather than being a straight line? Answer: The fact that as the production of one good or service increases, its opportunity cost increases means that the production possibilities frontier will be bowed out. Only if the opportunity cost remained constant as the production of a good increases would the production possibilities frontier be a straight line. Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Written and oral communication 4) When economists state that the opportunity cost of a product increases as more of it is produced, what do they mean? For instance, what is the opportunity cost? And, where in a PPF diagram does this statement apply and where does it not apply? Answer: In general, the opportunity cost of increasing the production of one good or service is the forgone production of another good or service. The statement that the opportunity cost of a product increases as more of it is produced applies to production points on the production possibilities frontier. On the production possibilities frontier, resources are fully employed. Hence to increase the production of one good or service, resources must be switched away from the production of another good or service and hence the production of that good or service decreases. And, as more of the first good or service is produced, the opportunity cost of an additional unit becomes larger, so that the opportunity cost increases. However, the assertion that the opportunity cost of a product increases as more of it is produced does not apply to production points within the production possibilities frontier. Production points within the production possibilities frontier are points at which there are resources being used inefficiently. From a production point with inefficiently used resources, to increase the production of a good, some of the resources can be used efficiently and so there is no opportunity cost in terms of forgone other products. Therefore from a point within the production possibilities frontier, the opportunity cost of increasing the production of a good is zero. Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Written and oral communication 103 Copyright © 2023 Pearson Education Ltd.

5) What is the relationship between the bowed out shape of the production possibilities frontier and the increasing opportunity cost of a good as more of it is produced? Answer: The production possibilities frontier is bowed out because the opportunity cost of a good increases as more of it is produced. As the first unit of the good measured along the horizontal axis is produced, resources that are extremely well suited for its production can be used. Because of the suitability, not many resources need to be devoted to its production, so the opportunity cost-the decrease in the production of the good measured along the vertical axis-is not large. Hence at this location along the production possibilities frontier, the slope of the production possibilities frontier is shallow. But, as more of the product is produced, resources that are not as well suited must be devoted to its production. Consider one of the last units of this good, just before the production possibilities frontier intersects the horizontal axis. By the time the nation produces this much of the product, to produce one more unit means that resources that are extremely poorly suited in its manufacture must be used. Because these resources are not well suited, a lot of them must be used and, because a lot of them must be used, the opportunity cost in terms of the forgone other good is large. With the large decrease in the production of the good along the vertical axis, the slope of the production possibilities frontier at this location is steep. So, the production possibilities frontier goes from having a shallow slope to a steep one, that is, the production possibilities frontier is bowed outward. Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Written and oral communication

6) A (very, very small) country produces milk and shirts and its production possibilities frontier is in the table above. a. The nation is currently producing at point B. What is the opportunity cost of two additional gallons of milk? At point C? At point D? What do your results show? b. Suppose the nation is initially producing 4 gallons of milk and 40 shirts. What is the opportunity cost of 2 additional gallons of milk? Explain your answer. Answer: a. At point B, the opportunity cost of 2 additional gallons of milk is 20 shirts. At point C, the opportunity cost of 2 additional gallons of milk at 30 shirts. At point D, the opportunity cost of 2 additional gallons of milk is 40 shirts. The opportunity cost of 2 additional gallons of milk increases as more milk is produced. b. Producing 4 gallons of milk and 40 shirts means that the nation is producing at a point within the interior of its production possibilities frontier. Hence the opportunity cost of producing an additional 2 gallons of milk is 0. The opportunity cost is 0 because at a production point in the interior of the production possibilities frontier there are unemployed resources. These unemployed resources can be put to work producing the additional 2 gallons of milk. Because they were not producing anything previously, there is no decrease in the production of shirts and hence no opportunity cost. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

7) Jean can either type her term paper or create Web pages during the limited time she has available. The table above shows her PPF. a. Can Jean type 90 pages and create 2 Web pages? b. Use the above numbers to calculate the opportunity cost of a typed page as she increases her time typing and decreases time creating a Web page. Answer: a. Jean cannot type 90 pages and create 2 Web pages because, as row D shows, that combination is beyond her PPF. b. The opportunity cost is the ratio of the decrease in the number of Web pages divided by the increase in the number of typed pages. The following table gives the opportunity cost for typed pages.

Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

8) The table above gives the production possibilities frontier for a nation that produces wheat and soybeans. Use the information in that table to complete the table below, which has in it the opportunity costs of moving from one production point to another. Do not forget to note the units of the opportunity costs.

Answer:

The table above gives the opportunity costs. The units of the opportunity costs are in the column headings. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

9) The figure above represents the production possibilities frontier for a country. a. The nation is currently producing at point B and wants to move to point C. What is the opportunity cost of the move? b. The nation is currently producing at point B and wants to move to point A. What is the opportunity cost of the move? c. The nation is currently producing at point D and wants to move to point B. What is the opportunity cost of the move? Answer: a. By moving from point B to point C, the production of automobiles decreases by 1 million, from 3 million to 2 million. The 1 million decrease in automobiles is the opportunity cost of the movement. b. By moving from point B to point A, the production of cameras decreases by 3 million, from 3 million to 0 million. The 3 million decrease in cameras is the opportunity cost of the movement. c. By moving from point D to point B the nation gains 1 million additional cameras and also gains 2 million additional automobiles. The opportunity cost of this movement is zero, because there are no goods forgone. No goods are forgone because the nation is moving from a point with inefficiently used resources, point D, to one at which resources are efficiently utilized, point B. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

10) The table above presents the production possibilities of Farmer Brown. Use these data to calculate Farmer Brown's opportunity cost of additional beef as Farmer Brown moves from point A to B to C to D. Also use the data to calculate Farmer Brown's opportunity cost of additional wheat as Farmer Brown moves from point D to C to B to A. Based on these costs, does Farmer Brown use resources that are more productive in one activity than the other or are they equally productive in both uses? Explain your answer. Answer: The opportunity cost of a pound of beef is 1 bushel of wheat between points A and B, 1 1/2 bushels of wheat between points B and C, and 2 bushels of wheat between points C and D. The opportunity cost of a bushel of wheat is 1/2 pound of beef between points D and C, 2/3 pound of beef between points C and B, and 1 pound of beef between points B and A. Farmer Brown does use resources that are more productive in one activity than the other because the opportunity costs of producing beef and wheat increase as more beef and wheat are produced. If the resources were equally productive in both activities, the opportunity costs would be constant. Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 3.9 Essay: Economic Growth 1) How is economic growth shown in a production possibilities frontier graph? Answer: Economic growth is illustrated as an outward shift of the PPF. Topic: Economic growth Skill: Level 2: Using definitions Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

3.10 Essay: Specialization and Trade 1) What is comparative advantage? Give an example. Answer: Comparative advantage is the ability of a person to produce a good at a lower opportunity cost compared to another person. A lower opportunity cost means that the person gives up less to produce the good compared to another person. For example, one person may need to give up one hour of typing to get dinner made while another person must give up two hours of typing to produce the same dinner. Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 2) "When a person has an absolute advantage in producing a good, the person necessarily has a lower opportunity cost of producing it." Is this assertion true or false? Answer: The assertion is incorrect. An absolute advantage is when a person can produce more of the good than someone else. A comparative advantage relies on a comparison of opportunity costs, so a person has a comparative advantage in producing a good if the person can produce the good at a lower opportunity cost. Topic: Comparative advantage versus absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 3) "When a person is more productive in producing a good or service than another person, the first person has the comparative advantage in producing the good." Is this assertion correct or incorrect? Explain your answer. Answer: The assertion is incorrect. The statement describes an absolute advantage, that is, a person has an absolute advantage in the production of a good if the person can produce more of it in a given time period than someone else. Comparative advantage, however, relies on a comparison of opportunity costs. A person has a comparative advantage in producing a good if the person can produce the good at a lower opportunity cost than another person. Topic: Comparative advantage versus absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

4) Why is it likely that the United States has an absolute advantage in goods and yet it still ends up importing them from other countries? Answer: The United States might have an absolute advantage in producing a good but not a comparative advantage. In this case, the opportunity cost of producing the good in the United States is higher than in another country. Thus the United States will import the product from the other country. Topic: Comparative advantage versus absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 5) The United States has an absolute advantage in producing sugar over all of the other sugar producing countries. Does this fact mean that we should not import any sugar from the other countries? Answer: Having an absolute advantage doesn't mean that the United States should engage in the production of sugar. If the opportunity cost of sugar in the United States is higher than in the other countries, then the other countries will have the comparative advantage. The countries with the comparative advantage are the ones that should do the producing. Quite likely these other nations have the comparative advantage and so it would be good policy for the United States to import sugar from these nations. Topic: Comparative advantage versus absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 6) Japan can use all of its resources to produce 100 videos or 400 shoes. China can use all of its resources to produce 25 videos or 200 shoes. Which nation has the comparative advantage in shoes and which nation has the comparative advantage in videos? Answer: In Japan, the opportunity cost of producing a video is 4 shoes and in China it is 8 shoes. Therefore Japan has the comparative advantage in producing videos because its opportunity cost is lower. In Japan, the opportunity cost of producing a shoe is 1/4 of a video and in China the opportunity cost of producing a shoe is 1/8 of a video. China has the comparative advantage in producing shoes because its opportunity cost is lower. Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

7) The United States can use all of its resources to produce 50 computers or 4,000 shoes. Suppose that at world market prices, one computer exchanges for 100 shoes. Explain how the United States can gain from trade. Answer: In the United States, the opportunity cost to produce 1 computer is 80 pairs of shoes. The United States can then sell the computers on the world market for 100 shoes each and thereby be ahead by 20 shoes per computer. Topic: Comparative advantage Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

8) The table above shows the amounts of cloth and cheese that China and Pakistan can produce in an hour. Which country has the comparative advantage in cloth and which country has the comparative advantage in cheese? Answer: In China, to produce 8 cloths has an opportunity cost of 16 cheeses, so the opportunity cost of 1 cloth is (16 cheese)/(8 cloths) = 2 cheeses per cloth. In Pakistan, to produce 4 cloths has an opportunity cost of 12 cheeses. Hence the opportunity cost of 1 cloth is (12 cheeses)/(4 cloths) or 3 cheeses per cloth. Because China's opportunity cost of a cloth is lower, China has the comparative advantage in producing cloth. In China, to produce 16 cheeses has an opportunity cost of 8 cloths, so the opportunity cost of 1 cheese is (8 cloths)/(16 cheeses) = 1/2 cloth per cheese. In Pakistan, to produce 12 cheeses has an opportunity cost of 4 cloths. Hence the opportunity cost of 1 cheese is (4 cloths)/(12 cheeses) or 1/3 cloth per cheese. Because Pakistan's opportunity cost of a cheese is lower, Pakistan has the comparative advantage in producing cheese. Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

9) Omar and John can fix computers or write computer programs. The table above shows the number of computers they can fix and the lines of code they can write in a day. a. Who, if anyone, has the absolute advantage? b. Who has the comparative advantage in fixing computers? Why? c. Who has the comparative advantage in writing programs? Why? Answer: a. Omar has an absolute advantage in fixing computers and writing code because he can fix 12 per day compared to John who can fix only 4 per day, and can write 800 lines of code per day compared to John who can write only 200 lines a day. b. John has the comparative advantage in fixing computers. He has the comparative advantage because his opportunity cost of fixing one computer is 50 lines of computer code. Omar does not have a comparative advantage in fixing computers because his opportunity cost of fixing a computer is higher at 66.7 lines of code. c. Omar has the comparative advantage in writing programs. His opportunity cost of writing one line of code is .015 of a computer fixed. John does not have the comparative advantage in writing programs because his opportunity cost of writing one line of code is 0.02 computers fixed. (Alternatively, to write 1 line of code costs Omar the opportunity to repair 1.5 percent of a computer and costs John the opportunity to repair 2.0 percent of a computer.) Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

10) Two nations can produce computers and software in the amounts given in the table above. Does either nation have an absolute advantage in producing the products? Which nation has a comparative advantage in computers? Which nation has a comparative advantage in software? Explain your answers. Answer: Nation B has an absolute advantage in producing both goods because it can produce more of both in one day than can Nation A. Nation B has the comparative advantage in computer production and Nation A has the comparative advantage in software. The nation with the lowest opportunity cost of producing a good has the comparative advantage in that good. In Nation A, to produce 100 computers has the opportunity cost of 140 units of software forgone, so the opportunity cost of 1 computer equals (140 units of software)/(100 computers) = 1.4 units of software per computer. In Nation B, similar calculations show that the opportunity cost for a computer is 1.25 units of software per computer. Nation B's opportunity cost is lower, so Nation B has the comparative advantage in computers. For software, in Nation A the opportunity cost of a unit of software is (100 computers)/(140 units of software) = 0.71 computers per unit of software while in Nation B the opportunity cost is (120 computers)/(150 units of software) = 0.80 computers per unit of software. Nation A's opportunity cost is lower, so Nation A has the comparative advantage in software. Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

11) The figure above shows Prakash's and Gail's production possibilities frontiers for writing books and magazine articles. a. What is Prakash's opportunity cost of a book? What is Gail's opportunity cost? Who has the comparative advantage in writing books? b. Who has the comparative advantage in writing magazine articles? c. According to their comparative advantages, who should write books and who should write magazine articles? Answer: a. In a year, Prakash can write 2 books or 40 magazine articles. Hence the opportunity cost of 1 book is (40 magazine articles) ÷ (2 books) = 20 magazine articles per book. In a year, Gail can write 3 books or 30 magazine articles. Hence the opportunity cost of 1 book is (30 magazine articles) ÷ (3 books) = 10 magazine articles per book. Gail's opportunity cost of writing books is lower than Prakash's, so Gail has the comparative advantage in writing books. b. Prakash has the comparative advantage in writing magazine articles. c. Gail has the comparative advantage in writing books, so she should write books. Prakash has the comparative advantage in writing magazine articles, so he should write magazine articles. Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

12) "When countries specialize in producing the good in which they have a comparative advantage and then trade with each other, only the country with the absolute advantage gains." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. Absolute advantage, which is essentially the ability to produce more of a good than another country, has nothing to do with the gains from trade. All nations gain from free international trade regardless of whether they possess an absolute advantage or not. Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 13) "Because the United States is the largest economy in the world and can produce anything it needs domestically, there are no gains from trade for the United States." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The United States, like any other nation, gains from trade when it specializes according to comparative advantage. Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 14) How can a nation that is at an absolute DISADVANTAGE gain from trade? Answer: Being at an absolute disadvantage means that the nation can produce less than its trading partner, but it says nothing about the relative costs of producing the goods. International trade is based on comparative advantage, which means that the low-cost producer specializes in the production of a good and exports it to the other nation that has the higher cost of production. A nation that has an absolute disadvantage still has a lower opportunity cost of production for one of the goods and hence has the comparative advantage in the production of that good. Therefore this country will gain from trade, as will all its trading partners. Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

15) Why do nations engage in international trade? Answer: Nations engage in international trade because they gain from trade. International trade results in a more efficient use of resources and thereby increases world output. As a result, it increases the amount of goods and services available for consumption in all nations and thereby makes all countries better off. Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 16) Explain why specialization and trade increases a country's overall level of consumption. Answer: A country specializes in the activities in which it has the lowest opportunity cost. By trading, it can obtain goods and services at a lower opportunity cost than it would cost to produce the goods and services domestically. Hence the nation acquires goods and services at a lower cost than before and so the nation's consumption increases. In fact, trade allows the nation to consume at a point beyond its production possibilities frontier. Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

Foundations of Economics, 9e (Bade), GE Chapter 4 Demand and Supply 4.1 Demand 1) A market is defined as A) a physical place where people buy only goods. B) a physical place where people buy both goods and services. C) a store where people buy physical goods. D) any arrangement that brings buyers and sellers together. E) a place where one good is bartered for another. Answer: D Topic: Markets Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 2) eBay A) is considered a market because eBay is profitable. B) is a market because buyers and sellers are brought together to buy and sell. C) would be a market if there was only one physical location. D) cannot function as a market. E) is not a market because buyers can buy from only one seller at any point in time. Answer: B Topic: Markets Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 3) Which of the following are examples of a market? i. the New York Stock Exchange ii. a used car lot iii. a website selling vacations to Disney World A) i, ii and iii B) i only C) iii only D) i and iii only E) ii and iii only Answer: A Topic: Markets Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge 1 Copyright © 2023 Pearson Education Ltd.

4) Which of the following statements is TRUE about a competitive market? A competitive market A) must have a physical location. B) includes markets for goods and services but not for inputs. C) has so many buyers and sellers that no one can influence the price. D) has one seller competing to sell his or her product. E) has a handful of sellers but always has many buyers. Answer: C Topic: Markets Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 5) What is the "quantity demanded"? A) the amount of a good people desire B) the amount of a good people are able and willing to buy during a specific time period and at a given price C) the amount of a good people are able and willing to buy at all possible prices D) the maximum amount of a good that can be consumed during a specific time period E) the minimum amount of a good that people are willing to buy during a specific time period and at a given price Answer: B Topic: Quantity demanded Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 6) The "quantity demanded" of any good or service is ________ during a specified time period and at a specified price. A) the amount people are willing to buy B) the amount people are able to buy C) the amount people are willing and able to offer D) the amount people are willing and able to buy E) the amount people are willing to buy because it is the amount sellers are willing to sell Answer: D Topic: Quantity demanded Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

7) The "law of demand" refers to the fact that, other things remaining the same, when the price of a good rises A) the demand curve shifts rightward. B) the demand curve shifts leftward. C) there is a movement down along the demand curve to a larger quantity demanded. D) there is a movement up along the demand curve to a smaller quantity demanded. E) the demand curve shifts rightward and there is a movement up along the demand curve to a smaller quantity demanded. Answer: D Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 8) The law of demand refers to how A) demand changes when people's incomes change. B) demand changes when the prices of substitutes and complements change. C) the quantity demanded changes when the price of the good changes. D) the price of the good changes when people's demand for the good changes. E) the quantity demanded changes when the demand for the good changes. Answer: C Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 9) Which of the following describes the law of demand? When other things remain the same, as A) the price of gas falls, the quantity demanded of gas increases. B) the quantity demanded of bread increases, the price of bread falls. C) the price of peanut butter increases, the quantity demanded of jelly decreases. D) your income increases, you'll buy more hamburgers. E) more people decide to eat pizza, the demand for pizza increases. Answer: A Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

10) Gasoline prices increase by 50 percent and other things remain the same. As a result, there is A) an increase in the demand for gasoline. B) a decrease in the demand for gasoline. C) no change in the quantity of gasoline demanded. D) a decrease in the quantity of gasoline demanded. E) More information is needed to determine if the demand for gasoline increases or decreases. Answer: D Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 11) In stores, it is common to find seasonal products marked down when the season ends. What explains this behavior? A) The law of demand is being used to increase the quantity demanded. B) The store is trying to increase its customers' demand for the product. C) The store manager must be trying to drive away customers by selling low quality products. D) The store is trying to increase its customers' incomes by increasing their purchasing power. E) The store is trying to sell the goods and realizes that they are substitutes for other goods whose prices have risen. Answer: A Topic: Law of demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 12) The law of demand implies that, other things remaining the same A) as the price of a cheeseburger rises, the quantity of cheeseburgers demanded increases. B) as the price of a cheeseburger rises, the quantity of cheeseburgers demanded decreases. C) as income increases, the quantity of cheeseburgers demanded increases. D) as the demand for cheeseburgers increases, the price of a cheeseburger falls. E) as more people demand cheeseburgers, the quantity demanded increases. Answer: B Topic: Law of demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

13) An increase in the quantity demanded is shown as A) a movement along the demand curve. B) a movement toward the demand curve. C) a rightward shift of the demand curve. D) a leftward shift of the demand curve. E) BOTH a movement along the demand curve and a shift of the demand curve. Answer: A Topic: Quantity demanded Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 14) Which of the following results in a movement upward along the demand curve for movies? A) an increase in the price of movie tickets B) a decrease in the price of movie tickets C) an increase in income, assuming that movies are a normal good D) a decrease in income, assuming that movies are a normal good E) a decrease in the price of Netflix, a substitute for movies Answer: A Topic: Quantity demanded Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 15) Which of the following is TRUE regarding demand? i. Demand is the relationship between quantity demanded and the price of a good when all other influences on buying plans remain the same. ii. Demand refers to one quantity at one time. iii. "Demand" and "quantity demanded" are the same thing. A) i only B) ii only C) i and ii D) iii only E) ii and iii Answer: A Topic: Quantity demanded versus demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

16) The price of cotton clothing falls. As a result A) the quantity demanded of cotton clothing increases. B) the demand for cotton clothing increases. C) the quantity demanded of cotton clothing decreases. D) the demand for cotton clothing decreases. E) both the demand for cotton clothing increases AND the quantity demand of cotton clothing increases. Answer: A Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 17) The American Dairy Association starts a highly successful advertising campaign that makes most people want to drink more milk. As a result A) the demand for milk increases. B) the quantity demanded of milk increases. C) the price of milk falls to encourage people to drink more milk. D) the demand for milk is not affected. E) the demand for milk decreases because the price of milk rises. Answer: A Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 18) A demand schedule shows A) the quantities that people plan to buy in all possible circumstances. B) the quantities that people plan to buy at each different price when all other influences on buying plans remain the same. C) the quantities that people would plan to buy if they could afford them at each different price when all other influences on buying plans remain the same. D) the quantities that people plan to buy at each different income when all other influences on buying plans remain the same. E) the quantities that people plan to buy at each different price as long as producers are willing to supply that quantity. Answer: B Topic: Demand schedule Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

19) A demand schedule A) shows the quantity demanded at one price. B) is a graph showing a relationship between the quantity demanded and the price of a good. C) is a list of the quantities demanded at each different price when all other influences on buying plans remain the same. D) shows that demand is on schedule. E) shows how the demand changes when the supply changes. Answer: C Topic: Demand schedule Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 20) The downward slope of a demand curve A) represents the law of demand. B) shows that as the price of a good rises, consumers increase the quantity they demand. C) indicates how the quantity demanded changes when incomes rise and the good is a normal good. D) indicates how demand changes when incomes rise and the good is a normal good. E) indicates how demand changes when the price changes and the good is a normal good. Answer: A Topic: Demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 21) A demand curve A) has an upward slope. B) has a downward slope. C) is a graph of the relationship between quantity demanded of a good and its price. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: D Topic: Demand curve Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

22) Demand curves slope ________ because as the price increases and other things remain the same, the quantity demanded ________. A) downward; decreases B) downward; increases C) upward; decreases D) upward; increases E) downward; does not change Answer: A Topic: Demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 23) The market demand curve A) cannot show how quantity demanded changes in response to a change in price. B) cannot show a change in demand for a good. C) is the horizontal sum of individual demand curves. D) is the vertical sum of individual demand curves. E) is upward sloping. Answer: C Topic: Individual and market demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

24) The figure above shows the market for sports drinks. Consider this statement: regarding the figure: "If the price falls from $3 to $1 per bottle, quantity demanded changes from 10 to 25 bottles." Which of the following states the same idea? A) A change in quantity demanded can be shown as a movement from point A to B. B) As demand changes from January to June, demand will increase from 10 to 25 bottles. C) If the price changes from $1 to $3, 15 more bottles are demanded. D) A change in demand from June to January decreases the demand for sports drinks. E) As the price of sports drinks falls, demand decreases. Answer: A Topic: Changes in quantity demanded versus change in demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge

25) The figure above shows the market for sports drinks. Which of the statements are TRUE? i. A change in demand is shown as a movement from C to A. ii. A change from point C to point B represents a change in the quantity demanded. iii. If the price increases from $1 to $3, quantity demanded will decrease from 25 to 10 bottles. A) i, ii and iii B) ii only C) i and iii D) iii only E) i and ii Answer: C Topic: Changes in quantity demanded versus change in demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 26) Consider a demand curve for apples. "A change in the price of apples leads to a ________ the demand curve for apples because ________. A) movement along; all other factors influencing buying plans are held constant B) shift in; all other factors influencing demand are held constant C) movement along; all other factors influencing demand are allowed to change D) shift in; changes in the prices of other fruit affect demand E) movement along; changes in the prices of other fruit affect demand Answer: A Topic: Changes in quantity demanded Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 27) Consider the market for burritos. The law of demand can be illustrated by A) a shift in the demand curve for burritos due to a change in the price of a burrito. B) a shift in the demand curve for burritos due to a change in the price of a taco. C) a movement along the demand curve for burritos when the price of a taco changes. D) a movement along the demand curve for burritos due to a change in the price of a burrito. E) a shift in the demand curve for burritos due to a shift in the supply curve of burritos. Answer: D Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge

28) The market demand curve for mangos is A) the same as the demand curve of one buyer in a market with many buyers. B) upward sloping because rich people can afford more mangos than poor people can buy. C) the horizontal sum of the individual demand curves of all the buyers. D) the vertical sum of the individual demand curves of all the buyers. E) the horizontal average of the individual demand curves of all the buyers. Answer: C Topic: Individual and market demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 29) There are five hundred buyers in the market for cheese. If we know each individual's demand curves, to find the market demand, we must A) add the prices that each buyer will pay at every quantity. B) add the quantities that each buyer will purchase at every price. C) multiply the price times quantity for each buyer and then add the resulting products together. D) average the price each buyer is willing to pay for each given quantity. E) give up because there is no way to find the market demand. Answer: B Topic: Individual and market demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 30) Market demand curves are obtained by A) determining the price each consumer is willing to pay for the good and summing those prices across all consumers. B) observing the prices and quantities sold in a market over time and plotting those pricequantity combinations in a graph. C) summing the quantities every consumer is willing to buy at each different price. D) observing the behavior of an individual consumer in a market. E) averaging the quantities every consumer is willing to buy at each different price. Answer: C Topic: Individual and market demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

31) The market demand curve for mousetraps is A) found by summing the quantities of mousetraps demanded at each income level by each buyer. B) found by summing the prices of mousetraps at each quantity of mousetraps demanded by each buyer. C) the horizontal sum of the individual demand curves for mousetraps of all the buyers. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: C Topic: Individual and market demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 32) To find the market demand curve for in-line skates, we must A) add the quantities demanded at every price and every income by every buyer of in-line skates. B) add the quantities demanded at prices that all buyers can afford to pay. C) sum horizontally the individual demand curves of all the buyers. D) take account of the skate buying plans of all actual and potential buyers in all possible situations. E) None of the above answers is correct because we need also to take account of the supply of in-line skates. Answer: C Topic: Individual and market demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

33) The table below shows the market for frozen yogurt and the three people who make up the market. Price ($ per serving) 7.00 6.00 5.00

Quantity demanded (servings per week) Jo Eli Sam 1 0 0 2 1 0 4 3 1

If the price is $6 per serving, ________ each week. A) the market demand is 3 servings B) the market supply is 3 servings C) the market demand is 7 servings D) there will be a shortage of frozen yogurt. E) there will be a surplus of frozen yogurt. Answer: A Topic: Market demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge 34) The phrase "a change in demand" refers to a A) movement along a demand curve. B) movement along the price curve. C) change in the quantity demanded of a good. D) shift of the demand curve. E) movement along the quantity curve. Answer: D Topic: Changes in demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

35) When demand increases A) consumers are willing to buy more at any price. B) consumers buy more of the good only if its price falls. C) the price is lower at any level of quantity demanded. D) consumers buy more of the good only if its price rises. E) the demand curve shifts leftward. Answer: A Topic: Changes in demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 36) A change in the demand for apples could result from any of the following EXCEPT A) a change in the number of buyers. B) increased preferences for fresh fruit consumption for health reasons. C) a change in the price of an apple. D) a change in the price of a banana. E) a change in income. Answer: C Topic: Changes in demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 37) Changes in which of the following factors do NOT shift the demand curve? A) the price of the good B) buyers' incomes C) the price of a substitute good D) the number of buyers E) the price expected in the future Answer: A Topic: Shifts of the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

38) If the demand for used cars decreases after the price of a new car falls, used cars and new cars are A) inferior goods. B) substitute goods. C) complementary goods. D) normal goods. E) The questions errs because it is the quantity of used cars, NOT the demand for used cars, that will change when the price of a new car falls. Answer: B Topic: Changes in demand, price of a substitute Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 39) Consumers regard Dell computers and Apple computers as substitutes. If the price of a Dell computer decreases, the A) demand for Dell computers increases. B) demand for Apple computers increases. C) demand for Apple computers decreases. D) supply of Dell computers increases. E) demand for Dell computers decreases. Answer: C Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 40) Which of the following increases the demand for a good or service? A) a fall in the price of the good or service B) a smaller number of consumers wanting to buy the good or service C) a rise in the price of the good or service D) a rise in the price of a substitute good or service E) a rise in the price of a complement Answer: D Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

41) Consider the market for smart phones. Which of the following shifts the demand curve rightward? A) an increase in the price of smart phones B) a decrease in the price of smart phones C) an increase in the price of land-line phone service, a substitute for smart phones D) a decrease in the number of smart phone buyers E) an increase in the supply of smart phones Answer: C Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 42) Which of the following shifts the demand curve for movies rightward? A) an increase in the price of Netflix, a substitute for movies B) an increase in the price of movie tickets C) a decrease in the price of move tickets D) an increase in movie star salaries E) an increase in the price of HDTV sets Answer: A Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 43) Which of the following shifts the demand curve for movies leftward? A) a decrease in the price of Netflix, a substitute for movies B) a decrease in the price of movie tickets C) an increase in the price of movie tickets D) an increase in movie star salaries E) an increase in incomes, assuming movies are a normal good Answer: A Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

44) Two brands of water, Natural Water and Mountain Water, are close substitutes. If the price of Mountain Water decreases, the fall in price A) shifts the demand curve for Natural Water rightward. B) shifts the demand curve for Natural Water leftward. C) increases the price of Natural Water. D) increases the demand for Mountain Water. E) More information is needed to determine if the demand curve for Natural Water shifts rightward or leftward. Answer: B Topic: Changes in demand, price of a substitute Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 45) Car insurance and cars are complements. If the price of car insurance increases, the A) demand for cars decreases. B) demand for cars increases. C) quantity of cars demanded decreases. D) quantity of cars demanded increases. E) More information is needed to determine if the demand increases or decreases. Answer: A Topic: Changes in demand, price of a complement Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 46) Consumers eat salsa with taco chips. The price of salsa rises. How does the increase in the price of salsa affect the demand for taco chips? A) It decreases the demand for taco chips. B) It increases the demand for taco chips. C) It has no effect on the demand for taco chips. D) It will decrease the demand for taco chips ONLY IF taco chips are a normal good. E) It could increase, decrease, or have no effect on the demand for taco chips, but more information is needed to determine the impact. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

47) What happens to the demand for a good if a complement's price increases? A) The demand decreases and the demand curve shifts rightward. B) The demand increases and the demand curve shifts rightward. C) The demand decreases and the demand curve shifts leftward. D) The demand increases and the demand curve shifts leftward. E) There is no impact on demand for the good and the demand curve does not shift. Answer: C Topic: Changes in demand, price of a complement Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 48) Hot dogs and hot dog buns are complements. If the price of a hot dog falls, then A) the demand for hot dogs will increase. B) the demand for hot dog buns will decrease. C) the quantity demanded of hotdogs will decrease. D) the demand for hot dog buns will increase. E) the quantity demanded of hot dog buns will increase. Answer: D Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 49) A popular dinner among college students today is sushi, green tea, and wasabi dip so these foods are complements. If the price of green tea increases and the price of wasabi dip increases, what would be the effect on demand for sushi at lunch? A) The demand for sushi would decrease. B) The demand for sushi would be unaffected, but the price would increase. C) The demand for sushi could increase or decrease. D) The demand for sushi would increase. E) The demand for sushi would be unaffected, but the price would decrease. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

50) Soda and hot dogs are complements for one another. If a shortage of carbonated water leads to an increase in the price of soda, then the A) demand for hot dogs increases. B) demand for hot dogs decreases. C) quantity of hot dogs demanded increases. D) quantity of hot dogs demanded decreases. E) More information is needed to determine if the demand increases or decreases. Answer: B Topic: Changes in demand, price of a complement Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 51) A student at New York University used to take the Redhound bus when she visited her grandmother in Boston. After graduating, although the bus fare and the plane fare were the same as they were when she was a student, with a well-paid job on Wall Street she now takes the plane to Boston to visit her grandmother. For this student, travel by Redhound bus is A) a normal good. B) an inferior good. C) a substitute good. D) a complement good. E) a good with negative preferences. Answer: B Topic: Inferior goods Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 52) If the demand for digital cameras increases when consumers' incomes rise, then digital cameras are A) a normal good. B) an inferior good. C) a substitute for camcorders. D) a complement to camcorders. E) made using advanced technology. Answer: A Topic: Normal goods Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

53) If the demand for a good increases when people's incomes increase A) the good is an inferior good. B) the law of demand is violated. C) the good's demand curve must be slope upward. D) the good is a normal good. E) the good is a substitute good for an inferior good. Answer: D Topic: Changes in demand, normal good Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 54) In a recession, consumers have less income to spend. As a result, if dining out is a normal good, then which of the following would happen to the demand curve for dining out? A) The demand curve would shift leftward. B) The demand curve would not shift but the price of dining out would rise. C) The effect on the demand curve is unknown. D) The demand curve would shift rightward. E) The demand curve would not shift but the price of dining out would fall. Answer: A Topic: Changes in demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 55) If macaroni and cheese is an inferior good, then a decrease in income results in A) an increase in the demand for macaroni and cheese. B) a decrease in the demand for macaroni and cheese. C) an increase in the supply of macaroni and cheese. D) a decrease in the supply of macaroni and cheese. E) Both answers A and D are correct. Answer: A Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

56) If income increases and the demand for bus rides decreases A) bus rides are a normal good. B) consumers are behaving irrationally. C) bus rides are an inferior good. D) bus rides are a substitute good. E) bus rides must be a complement good with some other good. Answer: C Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 57) Which of the following is TRUE? A) For an inferior good, when income increases, the demand curve shifts leftward. B) If the price of a substitute rises, the demand curve shifts leftward. C) If people expect the price of a good will rise in the future, the demand curve shifts leftward. D) An increase in population shifts the demand curve leftward. E) An increase in the cost of producing a good shifts the demand curve leftward. Answer: A Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 58) Ramen noodles are a staple food item for many college students. Ramen noodles are very inexpensive, easy to prepare, and can be combined easily with other foods. After students graduate, find employment, and earn a higher income, they decrease their Ramen noodle purchases significantly. In this case, Ramen noodles are A) a normal good. B) an inferior good. C) a complement for higher income people. D) a substitute good. E) None of the above answers is correct. Answer: B Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

59) Water bottlers announce that next month the price of bottled water will rise by 25 percent. Which of the following occurs immediately? A) The quantity of bottled water demanded increases. B) The quantity of bottled water demanded decreases. C) The demand for bottled water decreases. D) The demand for bottled water increases. E) None of the above answers is correct because it is the supply that immediately changes, not the demand. Answer: D Topic: Changes in demand, expectations Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 60) A huge 50 percent off sale on golf clubs is advertised for next week. What happens this week in the market for golf clubs? A) The supply of golf clubs increases. B) The supply of golf clubs decreases. C) The demand for golf clubs increases. D) The demand for golf clubs decreases. E) The demand for and the supply of golf clubs decreases. Answer: D Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 61) You are just about to finish college and are about to start a high paying job. Because of this new job, what is the most likely outcome in the market for cars? A) Your demand for cars will decrease. B) The market supply of cars will increase. C) Your demand for cars will increase. D) The market supply of cars will decrease. E) The demand and the supply for cars will decrease. Answer: C Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

62) Which of the following increases the demand for a good? A) a rise in the price of a complement B) the expectation that future income will be higher C) an increase in income, assuming the good is an inferior good D) a decrease in the number of buyers E) a fall in the price of a substitute Answer: B Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 63) Suppose that tattoos gained immense popularity with retired people as well as college students. This gain in popularity best reflects which of the following influences on buying plans? A) the price of a substitute good B) income C) expectations D) preferences E) the price of a complement good Answer: D Topic: Changes in demand, preferences Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 64) Consider the market for cellular phones. Which of the following shifts the demand curve leftward? A) studies showing using cellular phones can cause brain cancer B) a decrease in the price of cellular phones C) a decrease in the quantity demanded of cellular phones D) an increase in the services provided by cellular phones, such as text messaging E) an increase in the price of cellular phones Answer: A Topic: Changes in demand, preferences Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

65) Scooters and bicycles are substitutes. Suppose that the price of a bicycle falls. Which of the figures above best illustrates how this fall in price affects the demand curve for scooters? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the above answers is correct because the change in the price of a bicycle will affect the supply curve NOT the demand curve. Answer: B Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

66) Scooters are a normal good and buyers' incomes decrease. Which of the figures above best illustrates how this change affects the demand curve for scooters? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the above answers is correct because the decrease in income will affect the supply curve NOT the demand curve. Answer: B Topic: Changes in demand, normal good Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 67) Over the next few years more and more people prefer to ride on scooters. Which of the figures above best illustrates how this change affects the demand curve for scooters? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the above answers is correct because the change in tastes will affect the supply curve NOT the demand curve. Answer: A Topic: Changes in demand, number of buyers Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 68) A scooter uses much less gasoline than does a car. Suppose the price of gasoline rises substantially. Which of the figures above best illustrates how this change affects the demand curve for scooters? A) Figure A only B) Figure B only C) Figure C only D) Figure D only E) Both Figure A and Figure D Answer: A Topic: Changes in demand, preferences Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

69) In the above figure, the movement from point a to point b reflects A) a decrease in the price of pizza. B) an increase in the demand for pizza. C) an increase in the number of people who eat pizza. D) an increase in the price of the tomato sauce used to produce pizza. E) a decrease in the number of firms producing pizza. Answer: A Topic: Changes in quantity demanded Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 70) In the above figure, the shift in the demand curve from D to D1 can be the result of A) an increase in the price of pizza. B) an increase in the price of a sub sandwich, a substitute for pizza. C) an increase in the price of soda, a complement to pizza. D) a change in quantity demanded. E) a decrease in income if pizza is a normal good. Answer: B Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

71) In the above figure, the shift in the demand curve from D to D2 can be the result of A) an increase in income if pizza is a normal good. B) an increase in the price of a sub sandwich, a substitute for pizza. C) an increase in the price of soda, a complement to pizza. D) a change in quantity demanded. E) a decrease in the supply of pizza that raises the price of pizza. Answer: C Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

72) The figure above shows the market for iPods. Which of the following creates a movement from point A to point B? A) a requirement that all students at universities have an iPod B) a decrease in the price of iPods C) a decrease in the price of Zunes, a substitute for iPods D) an increase in the price of iPods E) an increase in people's incomes Answer: B Topic: Changes in quantity demanded Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

73) The figure above shows the market for iPods. Which of the following shifts the demand curve from D0 to D1? A) a decrease in the price of Zunes, a substitute for iPods B) an increase in the price of iPods C) a requirement that all students at universities have an iPod D) a decrease in the price of iPods E) an increase in people's incomes Answer: A Topic: Changes in demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 74) The figure above shows the market for iPods. Which of the following shifts the demand curve from D0 to D2? A) a decrease in the price of Zunes, a substitute for iPods B) an increase in the price of iPods C) a requirement that all students at universities have an iPod D) a decrease in the price of iPods E) a decrease in people's incomes if iPods are a normal good Answer: A Topic: Changes in demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

75) Pizza is a normal good. In the above figure, the shift in the demand curve from D to D2 can be the result of A) a decrease in the price of soda, a complement to pizza. B) an increase in the price of hamburgers, a substitute for pizza. C) a decrease in income. D) a study that shows that pizza is a very healthy food. E) an increase in the cost of producing pizza. Answer: C Topic: Changes in demand, normal good Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 76) In the above figure, the shift in the demand curve from D to D1 can be the result of A) a decrease in income if pizza is a normal good. B) a decrease in the price of a sub sandwich, a substitute for pizza. C) an increase in the price of soda, a complement to pizza. D) an increase in the number of teenagers, all of whom demand more pizza than do other age groups. E) new technology that increases the profit from producing pizza. Answer: D Topic: Changes in demand, number of buyers Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

77) In the above figure, ________ will shift in the demand curve from D to D1. A) an increase in income if pizza is an inferior good B) a decrease in the price of a sub sandwich, a substitute for pizza C) buyers' expectation that pizza will be less expensive next week D) a scientific article published that demonstrates eating pizza is good for one's health E) a fall in the cost of producing pizza Answer: D Topic: Changes in demand, preferences Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 78) Which of the following brings only an increase in the quantity demanded of a good? A) a decrease in income, assuming the good is an inferior good B) a rise in the price of a substitute good C) a fall in the price of the good itself D) an expectation that the good's price will rise in the future E) a decrease in income, assuming the good is a normal good Answer: C Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 79) People consume more soup as temperatures falls. So, as cold weather approaches A) the quantity of soup demanded increases. B) the demand for soup increases. C) people move closer to their demand curve for soup. D) people move farther beyond their demand curves. E) both the demand AND the quantity demanded of soup increase. Answer: B Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

80) The impact of an increase in the price of a particular good is illustrated as a A) leftward shift in its demand curve. B) rightward shift in its demand curve. C) movement upward and to the left along its demand curve. D) movement downward and to the right along its demand curve. E) rightward shift in its demand curve AND a movement upward and to the left along its demand curve. Answer: C Topic: Movement along the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

81) According to the figure above, which of the following events will increase the quantity demanded of bottled water? A) a fall in the price of soda B) a rise in the price of a fitness club membership C) an increase in the number of buyers of bottled water D) a fall in the price of bottled water E) a rise in the price of bottled water Answer: D Topic: Changes in quantity demanded Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

82) The table above gives the demand schedule for lattes at the Bottomless Cup. If the price of a latte is $3, then the quantity of lattes demanded is ________ an hour. A) 90 B) 30 C) 80 D) 60 E) 230 Answer: D Topic: Quantity demanded Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 83) Other things remaining the same, the quantity of a good or service demanded will increase if the price of the good or service A) rises. B) falls. C) does not change. D) rises or does not change. E) rises or falls. Answer: B Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

84) The "law of demand" indicates that if the University of Maine increases tuition, all other things remaining the same A) the demand for classes will decrease at the University of Maine. B) the demand for classes will increase at the University of Maine. C) the quantity of classes demanded will increase at the University of Maine. D) the quantity of classes demanded will decrease at the University of Maine. E) both the demand for and the quantity of classes demanded will decrease at the University of Maine. Answer: D Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

85) The graph illustrates the demand for peanuts. Peanuts are a normal good because the A) demand curve for peanuts slopes downward. B) demand for peanuts increases when income increases. C) demand for peanuts increases when the price of one of its substitutes rises. D) peanuts have both substitutes and complements. E) demand curve shows that if the price of peanuts rises, there is a movement along the demand curve to a lower quantity demanded. Answer: B Topic: Normal goods Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

86) A normal good is DEFINED as a good A) with a downward sloping demand curve. B) for which demand increases when the price of a substitute rises. C) for which demand increases when income increases. D) for which demand increases when the number of demanders increases. E) for which demand increases when the price of a complement falls. Answer: C Topic: Normal goods Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

87) Soda and peanuts are complements. Other influences on buying plans remaining the same, a rise in the price of soda A) increases the demand for peanuts. B) decreases the demand for peanuts. C) decreases the demand for soda. D) increases the demand for soda. E) has no effect on the demand for peanuts, though it does change the quantity demanded of peanuts. Answer: B Topic: Changes in demand, price of a complement Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

88) People come to expect that the price of a gallon of gasoline will rise next week. As a result A) today's supply of gasoline increases. B) today's demand for gasoline increases. C) the price of a gallon of gasoline falls today. D) next week's supply of gasoline decreases. E) today's demand for gasoline and today's supply of gasoline do not change. Answer: B Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 89) One reason the demand for laptop computers might increase is a A) fall in the price of a laptop computers. B) fall in price of desktop computers. C) change in preferences as laptops have become more portable, with faster processors and larger hard drives. D) poor quality performance record for laptop computers. E) decrease in income if laptops are a normal good. Answer: C Topic: Changes in demand, preferences Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 90) Teenagers drink more soda than other age groups. If the number of teenagers increases, everything else remaining the same A) market demand for soda increases. B) market demand for soda decreases. C) market demand for soda does not change. D) there is a movement along the market demand curve for soda. E) None of the above answers is correct because the effect on the demand depends whether the supply curve shifts rightward, leftward, or not at all. Answer: A Topic: Changes in demand, number of buyers Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

91) The number of buyers of sport utility vehicles, SUV, decreases sharply. So the A) demand curve for SUVs shifts leftward. B) demand curve for SUVs shifts rightward. C) demand curve for SUVs does not shift, nor is there a movement along then demand curve. D) demand curve for SUVs does not shift, but there is a movement downward along it. E) supply curve for SUVs shifts rightward. Answer: A Topic: Changes in demand, number of buyers Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 92) When moving along a demand curve, which of the following changes? A) the consumers' incomes B) the prices of other goods C) the number of buyers D) the price of the good E) the consumers' preferences Answer: D Topic: Movement along the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

93) The graph illustrates the demand curve for soda. After a rise in the price of a soda from $1.00 a can to $2.00 a can, the quantity of soda demanded A) decreases from 2 cans to 0 cans a day. B) increases from 0 cans to 2 cans a day. C) remains unchanged. D) decreases from 1 can to 0 cans a day. E) cannot be determined from the figure because the demand curve will shift to a new curve. Answer: A Topic: Movement along the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 94) Pizza and tacos are substitutes, and the price of a pizza increases. Which of the following correctly indicates what happens? A) The demand for pizzas decreases and the demand for tacos increases. B) The demand for both goods decreases. C) The quantity of tacos demanded increases and the quantity of pizza demanded decreases. D) The quantity of pizza demanded decreases and the demand for tacos increases. E) The demand for each decreases because both are normal goods. Answer: D Topic: Changes in quantity demanded versus change in demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

95) If the price of a DVD falls i. the demand curve for DVDs will shift rightward. ii. the demand curve for DVDs will not shift. iii. there will be a movement along the demand curve for DVDs. A) i only B) ii only C) iii only D) ii and iii E) i and iii Answer: D Topic: Shifts in the demand curve versus movements along the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

96) The figure shows the market for sports drinks. If the price of bottled water (a substitute for sports drinks) A) increases, then the demand curve for sports drinks shifts from D0 to D1. B) increases, then there will be a movement from point A to point B. C) decreases, then the demand curve for sports drinks shifts from D0 to D1. D) increases, then there will be a movement from point B to point A. E) increases, then the demand curve for sports drinks shifts from D0 to D2. Answer: A Topic: Changes in demand, price of a substitute Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge

97) The figure shows the market for sports drinks. If the price of sports drinks decreases (with all other factors influencing buying plans unchanged), which of the following is TRUE? i. There will be a movement from point A to point B. ii. The law of demand must be applied. iii. There will be a shift from D0 to D1. iv. There will be a shift from D0 to D2. A) ii and iii B) i and ii C) ii and iv D) iii only E) iv only Answer: B Topic: Changes in quantity demanded versus change in demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge 4.2 Supply 1) To be part of the supply for a good, a producer must be A) only able to supply the good. B) only willing to supply the good. C) both able and willing to supply the good. D) both able and willing to supply the good, and have already identified a buyer. E) both able and willing to supply the good, and have already sold the good. Answer: C Topic: Producers Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 2) The quantity supplied of a good or service is the A) list of all quantities at different prices, as illustrated by a supply schedule and a supply curve. B) list of all quantities at different prices, as illustrated by a demand schedule and a demand curve. C) one quantity produced at a variety of prices. D) quantity produced at one price. Answer: D Topic: Quantity supplied Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

3) The law of supply states that, other things remaining the same A) demand increases when supply increases. B) if the price of a good increases, firms buy less of it. C) if the price of a good increases, the quantity supplied increases. D) as people's income increase, the supply of goods increases. E) if the price of a good increases, the supply increases. Answer: C Topic: Law of supply Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 4) The law of supply states that other things remaining the same, a decrease in the price of a kayak leads to A) a decrease in the supply of kayaks. B) a decrease in the quantity of kayaks supplied. C) an increase in the supply of kayaks. D) an increase in the quantity of kayaks supplied. E) an increase in the supply of kayaks AND a decrease in the quantity of kayaks supplied. Answer: B Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 5) Which of the following helps explain why the law of supply exists? A) Larger outputs result in lower costs of production. B) the law of increasing opportunity cost C) The costs of production remain constant throughout all levels of output. D) Sellers realize that if the price increases, they make larger profits and do not need to change their production. E) the law of demand Answer: B Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

6) The law of supply reflects the fact that A) people buy more of a good when its price falls. B) suppliers have an incentive to use their resources in the way that brings the biggest return. C) higher prices are more attractive to consumers because they signal a higher quality product. D) businesses can sell more goods at lower prices. E) the demand curve is downward sloping. Answer: B Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 7) The supply schedule A) shows the relationship between the quantity supplied and the price of a good when all other influences on selling plans remain the same. B) is a curve showing the relationship between the amount the sellers are willing and able to sell and the price of that good when all relevant factors change. C) shows one quantity at one price. D) is the schedule that suppliers have to keep or else they will be late. E) shows the relationship between the quantity supplied and the price of a good when all other influences on selling plans change. Answer: A Topic: Supply schedule Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 8) A supply curve A) slopes downward. B) slopes upward. C) is a graph of the relationship between quantity supplied of a good and its price. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: D Topic: Supply curve Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

9) Which of the following results in a movement upward along the supply curve for movies in theaters? A) an increase in the price of movie tickets B) a decrease in the price of movie tickets C) a decrease in the price of downloaded movies D) a decrease in movie star salaries E) an increase in the number of theaters Answer: A Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 10) If the price of iPads decreases A) there will be a movement down along the supply curve for iPads. B) there will be a rightward shift in the iPad supply curve. C) there will be a movement up along the supply curve for iPads. D) the supply curve for iPads shifts leftward. E) there has been a decrease in the price of iTunes songs. Answer: A Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Revised AACSB: Analytical thinking 11) Which of the following increases the quantity supplied of yoga pants but does NOT increase the supply of yoga pants? A) a decrease in the price of a yoga pants B) an increase in the price of a yoga pants C) a decrease in the number of suppliers of yoga pants D) an increase in the price of the resources used to produce yoga pants E) new technology that lowers the cost of producing yoga pants Answer: B Topic: Changes in quantity supplied versus change in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

12) When the price of oranges increases A) the supply of oranges increases. B) the quantity of oranges demanded increases. C) the quantity of oranges supplied increases. D) the supply of oranges decreases. E) none of the above Answer: C Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 13) Which of the following increases the supply of a product? A) lower prices for the resources used to produce the product B) some producers going bankrupt and leaving the industry C) a higher price for the product D) an increase in the expected future price of the product E) a decrease in productivity Answer: A Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 14) Which of the following does NOT increase the supply of personal computers, that is, does NOT shift the supply curve of personal computers? A) an advance in the technology used to produce personal computers B) an increase in the number of firms producing personal computer C) a fall in the cost of the components used to assemble personal computers D) a rise the price of a personal computer E) a change in the expected future price of a personal computer Answer: D Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

15) Which of the following shifts the supply curve of rutabagas rightward? (A rutabaga is a potato-like vegetable.) A) an increase in the price of a rutabaga B) an exceptionally cold summer that killed much of the rutabaga crop C) a fall in the price of fertilizer used to grow rutabagas D) Both answers A and C shift the supply curve of rutabagas rightward. E) Both answers A and B shift the supply curve of rutabagas rightward. Answer: C Topic: Shifts of the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 16) Mulch is shredded wood and is a by-product in the production of lumber. Because these two goods are produced together, they are A) complements in production. B) substitutes in production. C) inputs into the same production process. D) not related. E) normal goods in production. Answer: A Topic: Complements in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 17) A decrease in the price of a complement in production leads to A) a decrease in the supply of the good in question. B) an increase in the supply of the good in question. C) no change in the supply of the good in question. D) a decrease in the quantity supplied of the good in question. E) an increase in the supply of the good in question AND a decrease in the quantity supplied of the good in question. Answer: A Topic: Changes in supply, price of a complement in production Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

18) Milk can be used to produce cheese or butter. If the price of a pound of butter rises, what happens to the supply of cheese? A) The supply of cheese increases. B) The supply of cheese decreases. C) The supply of cheese stays the same, and there is no change in the quantity supplied of cheese. D) The supply of cheese stays the same, and there is a decrease in the quantity supplied of cheese. E) The supply of cheese could increase, decrease, or stay the same depending on what happens to the supply of butter. Answer: B Topic: Changes in supply, price of a substitute in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 19) Oil refiners can refine a barrel of petroleum so that it yields either more home heating oil or more diesel fuel. If the price of diesel fuel falls, there is A) an increase in the supply of home heating oil. B) a decrease in the supply of home heating oil. C) an increase in the quantity of home heating oil supplied. D) a decrease in the quantity of home heating oil supplied. E) an increase in the demand for home heating oil. Answer: A Topic: Changes in supply, price of a substitute in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 20) Which of the following increases the supply of gasoline? A) a situation where the quantity of gasoline demanded exceeds the quantity supplied B) an increase in the price of gasoline C) a decrease in the price of a resource used to produce gasoline, such as crude oil D) a decrease in the demand for gas-guzzling, sport utility vehicles E) an increase in income if gas-guzzling, sport utility vehicles are a normal good Answer: C Topic: Changes in supply, price of a resource Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

21) The United Auto Workers bargained for higher wages and more benefits for autoworkers. As a result of the higher wages and increased benefits i. the quantity of new automobiles supplied decreases. ii. the supply of new automobiles decreases. iii. the supply of new automobiles increases. A) only i B) only ii C) only iii D) both i and ii E) Neither i, ii, nor iii is correct. Answer: B Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 22) If the automobile workers' union successfully negotiates a wage increase for its members, how does the wage hike affect the supply of automobiles? A) The supply increases. B) The supply decreases. C) The quantity supplied increases. D) The quantity supplied decreases. E) Both answers B and D are correct. Answer: B Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 23) Plywood is used in the construction of houses. If the price of plywood rises, what happens to the supply of houses? A) The supply increases so that the supply curve shifts rightward. B) The supply decreases so that the supply curve shifts leftward. C) The quantity supplied increases, but there is no shift in the supply curve. D) The quantity supplied decreases, but there is no shift in the supply curve. E) The quantity supplied decreases, and the supply curve shifts leftward. Answer: B Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

24) It is expected that the price of a bushel of wheat will increase in one month. This belief will result in A) an increase in the current supply of wheat. B) a decrease in the current supply of wheat. C) a decrease in the future supply of wheat. D) no change in the current or future supply of wheat. E) an increase in the current quantity supplied of wheat. Answer: B Topic: Changes in supply, expectations Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 25) If the number of companies producing memory chips increases, then the A) supply of memory chips does not change. B) supply of memory chips increases. C) supply of memory chips decreases. D) quantity of memory chips supplied increases. E) demand for memory chips increases. Answer: B Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 26) An increase in the number of fast-food restaurants A) raises the price of fast-food meals. B) increases the demand for fast-food meals. C) increases the supply of fast-food meals. D) increases the demand for substitutes for fast-food meals. E) increases both the demand and supply of fast-food meals. Answer: C Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

27) An increase in the number of pineapple growers results in A) an increase in the quantity of pineapples supplied and no shift in the supply curve of pineapples. B) an increase in the supply of pineapples and a rightward shift in the supply curve of pineapples. C) an increase in the supply of pineapples and a leftward shift in the supply curve of pineapples. D) no change in the supply of pineapples and a movement along the supply curve of pineapples. E) None of the above answers is correct. Answer: B Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 28) If the number of sellers decreases, then the supply curve ________ and the supply ________. A) shifts rightward; increases B) shifts rightward; decreases C) shifts leftward; increases D) shifts leftward; decreases E) does not shift; does not change, but there is a decrease in the quantity supplied Answer: D Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 29) Which of the following results in an increase in the supply of a good or service? A) a fall in the price of the good or service B) a smaller number of sellers producing the good or service C) an increase in foreign imports of the good or service D) higher taxes imposed upon producers of the good or service E) a rise in the price of the good or service Answer: C Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

30) Researchers have found a hybrid of corn that is cheaper to grow. This technological breakthrough A) increases the demand for hybrid corn. B) increases the supply of hybrid corn. C) decreases the supply of hybrid corn. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 31) Suppose over the next several years the productivity of firms producing electric cars improves dramatically. The advance in productivity leads to A) a decrease in the supply of electric cars so that the supply curve shifts leftward. B) a decrease in the supply of electric cars so that the supply curve shifts rightward. C) an increase in the supply of electric cars so that the supply curve shifts leftward. D) an increase in the supply electric cars so that the supply curve shifts rightward. E) no change in the supply of electric cars, only a change in the quantity supplied of electric cars. Answer: D Topic: Changes in supply, shifts of the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 32) Which of the following increases the supply of a good and shifts its supply curve rightward? A) a smaller number of producers B) a higher wage paid to workers in the industry C) a technological advance in how the good is produced D) an increase in the cost of the resources used to produce the good E) an increase in the price of the good Answer: C Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

33) Which of the following increases the supply of a good? A) The price of a complement in production decreases. B) Producers expect higher prices for the good in the future. C) Productivity improves. D) Prices of inputs used to produce the good rise. E) The number of producers decreases. Answer: C Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 34) Advances in productivity increase supply because they might A) increase the price expected in the future. B) decrease the number of goods available. C) decrease the cost of production. D) raise the prices of resources used to produce the good. E) increase the number of firms producing the good. Answer: C Topic: Changes in supply, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 35) The number of corn producers increases, so the supply of corn ________ and the supply curve of corn ________. A) increases; shifts rightward B) increases; shifts leftward C) decrease; shifts rightward D) decreases; shifts leftward E) increases; does not shift Answer: A Topic: Changes in supply, shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

36) Which of the following shifts the supply curve for oranges? A) disastrous weather that destroys about half of this year's orange crop B) a newly discovered increase in the nutritional value of oranges C) an increase in the price of bananas, a substitute in consumption for oranges D) an increase in income for all orange consumers if oranges are a normal good E) an increase in the number of orange consumers Answer: A Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 37) Because of the high cost of fuel, railroads such as Union Pacific Corp and CSX Corp have increased the price they charge to haul freight. This change means that A) the demand curve for hauling freight has shifted leftward. B) the supply curve for hauling freight has shifted leftward. C) the demand curve for hauling freight has shifted rightward. D) the supply curve for hauling freight has shifted rightward. E) neither the supply curve nor the demand curve for hauling freight has shifted; the only change is that the price is higher. Answer: B Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 38) Which of the following shifts the supply curve of popcorn leftward? A) a decrease in the price of popcorn B) an increase in the price of popcorn C) a technological development in the production of popcorn D) a decrease in the number of popcorn suppliers E) a decrease in the cost of producing popcorn Answer: D Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

39) In the above figure, the movement from point a to point b reflects A) an increase in the price of pizza. B) an increase in the supply of pizza. C) an increase in the number of producers of pizza. D) a decrease in the cost of the tomato sauce used to produce pizza. E) a decrease in income if pizza is a normal good. Answer: A Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 40) In the above figure, the shift in the supply curve from S to S1 reflects A) an increase in the quantity of pizza supplied. B) a decrease in the quantity of pizza supplied. C) an increase in the supply of pizza. D) a decrease in the supply of pizza. E) None of the above answers is correct. Answer: D Topic: Changes in supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

41) In the above figure, the shift in the supply curve from S to S2 reflects A) an increase in the quantity of pizza supplied. B) a decrease in the quantity of pizza supplied. C) an increase in the supply of pizza. D) a decrease in the supply of pizza. E) a decrease in the supply of pizza AND a simultaneous decrease in the quantity of pizza supplied. Answer: C Topic: Changes in supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 42) In the above figure, the shift in the supply curve from S to S2 might reflect A) a decrease in the cost of the tomato sauce used to produce pizza. B) a decrease in the number of pizza producers. C) an increase in the price of a pizza. D) an increase in income if pizza is a normal good. E) an increase in the price of a good that is a substitute for consumers. Answer: A Topic: Shifts of the supply curve, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 43) In the above figure, an increase in cost of the cheese used to produce pizza A) shifts the supply curve from S to S1. B) shifts the supply curve from S to S2. C) results in a movement from point a to point b. D) results in a movement from point b to point a. E) has no effect. Answer: A Topic: Shifts of the supply curve, cost of resources Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

44) In the above figure, an increase in productivity A) shifts the supply curve from S to S1. B) shifts the supply curve from S to S2. C) results in a movement from point a to point b. D) results in a movement from point b to point a. E) has no effect. Answer: B Topic: Shifts of the supply curve, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

45) The above figure shows the market for laptops. Which of the following causes a movement from A to B? A) a decrease in the number of laptop manufactures and sellers B) an increase in the productivity of the workers manufacturing laptops C) an increase in the cost of hard drives D) an increase in the price of laptops E) a decrease in the price of laptops Answer: D Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

46) The above figure shows the market for laptops. Which of the following causes a movement from B to A? A) an increase in the cost of hard drives B) an increase in the productivity of the workers manufacturing laptops C) a decrease in the price of laptops D) an increase in the price of laptops E) an increase in the number of laptop manufactures and sellers Answer: C Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 47) The above figure shows the market for laptops. Which of the following shifts the supply curve from S0 to S2? A) an increase in the cost of hard drives B) an increase in the productivity of the workers manufacturing laptops C) a decrease in the price of laptops D) an increase in the price of laptops E) a decrease in the number of laptop manufactures and sellers Answer: B Topic: Changes in supply, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 48) The above figure shows the market for laptops. Which of the following shifts the supply curve from S0 to S1? A) an increase in the cost of hard drives B) a decrease in the price of laptops C) an increase in the number of laptop manufactures and sellers D) an increase in the price of laptops E) an increase in the productivity of the workers manufacturing laptops Answer: A Topic: Changes in supply, price of a resource Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

49) The above figure illustrates the market for corn. If point "a" represents the original equilibrium and point "b" the new equilibrium, which of the following could have caused the change? A) an increase in consumers' preferences for corn B) an increase in consumers' income if corn is a normal good C) an increase in labor costs of producing corn D) an improvement in the technology of producing corn E) an increase in consumers' income if corn is an inferior good Answer: D Topic: Shifts of the supply curve, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 50) The above figure illustrates the market for corn. If point "a" represents the original equilibrium and point "b" the new equilibrium, which of the following could have caused the change? A) an increase in the number of corn growers B) an increase the price of wheat, a substitute in production for corn C) an increase in the cost of the fertilizer used to grow the corn D) a belief among corn farmers that the price of a bushel of corn will be higher next month E) an increase in income if corn is a normal good Answer: A Topic: Shifts of the supply curve, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 57 Copyright © 2023 Pearson Education Ltd.

51) The above figure illustrates the market for corn. If point "a" represents the original equilibrium and point "b" the new equilibrium, which of the following could have caused the change? A) a decrease in the number of corn growers B) a decrease the price of wheat, a substitute in production for corn C) an increase in the cost of the seed used to grow the corn D) an decrease in buyers' incomes if corn is an inferior good E) an increased belief among buyers that corn is healthy Answer: B Topic: Shifts of the supply curve, price of a substitute in production Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 52) In the figure above, if point "a" represents the original equilibrium and point "b" the new equilibrium, then A) there has been an increase in supply. B) there has been an increase in demand. C) there has been a change in the quantity supplied and no change in supply. D) Both answers B and C are correct. E) Both answers A and B are correct. Answer: A Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 53) Autoworkers negotiate a wage increase. How does this change affect the supply curve of cars? A) It shifts the supply curve leftward. B) It shifts the supply curve rightward. C) It does not shift the supply curve or create a movement along it. D) The supply curve will shift but there is not enough information to tell if the change shifts the supply curve rightward, leftward, or not at all. E) It creates a movement downward along the supply curve. Answer: A Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

54) The figure shows the market for tires. If the price of tires falls from $90 to $60 per tire, this can be shown as a ________ because all other factors affecting selling plans are ________. A) movement down along S0; held constant B) movement down along S0; allowed to vary C) shift from S0 to S1; allowed to vary D) shift from S1 to S0; held constant E) movement down along S0; unpredictable Answer: A Topic: Law of supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 55) The figure shows the market for tires. A change in the price of tires from $60 to $120 A) is shown as a movement from point B to point A. B) causes a shift from S1 to S0. C) is shown as a movement from point A to point C. D) causes shift from S0 to S1. E) could be caused a a decrease in the price of rubber. Answer: A Topic: Changes in quantity supplied Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

56) The figure shows the market for tires. The effect of an increase in the price of rubber can be shown as a A) shift from S1 to S0 due to a change in supply. B) change from point A to point B. C) shift from S0 to S1 due to a change in supply. D) change from point B to point A. E) change from point B to point C due to a change in the quantity supplied. Answer: C Topic: Changes in supply, price of a resource Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 57) If the supply of iPads increases, then i. the supply curve for iPads has shifted rightward. ii. the price of iPads has decreased. iii. there will be a movement upward along the iPad supply curve. A) i only B) i, ii and iii C) i and ii D) ii and iii E) i and iii Answer: A Topic: Quantity supplied versus supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 58) Which of the following leads to an increase in the quantity supplied but not an increase in supply? A) a decrease in the costs of production B) an increase in the product's price C) an advance in the technology used to produce the good D) an increase in the price of another product that the suppliers can produce E) an increase in the number of firms producing the good or service Answer: B Topic: Quantity supplied versus supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

59) The price of salsa rises. How does the increase in the price of salsa affect the supply of salsa? A) The supply of salsa increases. B) The supply of salsa decreases. C) There is no change to either the supply of salsa or the quantity of salsa supplied. D) There is no change to the supply of salsa, but the quantity of salsa supplied increases. E) There is no change to the supply of salsa, but the quantity of salsa supplied decreases. Answer: D Topic: Quantity supplied versus supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 60) If a higher price for wheat decreases the quantity of corn being produced, which of the following describes what has occurred? A) The supply of wheat increased and the supply of corn decreased. B) The quantity of wheat supplied increased and quantity of corn supplied decreased. C) The supply of wheat increased and the quantity of corn supplied decreased D) The quantity of wheat supplied increased and the supply of corn decreased. E) The supply of wheat decreased and the supply of corn decreased. Answer: D Topic: Quantity supplied versus supply Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 61) "Other things remaining the same, if the price of a good rises, the quantity supplied of that good increases." This sentence describes a A) shift of a supply curve. B) shift of the price curve. C) movement along a supply curve. D) movement along the price curve. E) movement along the quantity curve. Answer: C Topic: Movement along the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

62) The quantity supplied of a good, service, or resource is ________ during a specified period and at a specified price. A) the amount that people are able to sell B) the amount that people are willing to sell C) the amount that people are able and willing to sell D) the amount that people are willing and able to buy E) the amount sold Answer: C Topic: Quantity supplied Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 63) The quantity supplied of a good is A) the same thing as the quantity demanded at each price. B) the amount that the people are willing and able to sell during a given time period at a specified price. C) equal to the difference between the quantity available and the quantity desired by all consumers and producers. D) the amount the firm will sell when it can sell all it wants. E) always larger than the quantity demanded at each price. Answer: B Topic: Quantity supplied Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

64) The graph illustrates the supply of sweaters. Which of the following events will increase the quantity supplied of sweaters? A) a rise in the price of a sweater B) a rise in the wage rate paid to the workers who make sweaters C) a rise in the expected future price of a sweater D) an increase in the number of sellers of sweaters E) a decrease in the number of sweater buyers Answer: A Topic: Quantity supplied Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 65) Which of the following indicates that the law of supply applies to makers of soda? A) An increase in the price of a soda leads to an increase in the demand for soda. B) An increase in the price of a soda leads to an increase in the supply of soda. C) An increase in the price of a soda leads to an increase in the quantity of soda supplied. D) A decrease in the price of a soda leads to an increase in the quantity of soda demanded. E) A decrease in the price of a soda leads to an increase in the supply of soda. Answer: C Topic: Law of supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

66) One reason supply curves have an upward slope is because A) increased supply will require increased technology. B) people will pay a higher price when less is supplied. C) a higher price brings a greater profit, so firms want to sell more of that good. D) to have more of the good supplied requires more firms to open. E) None of the above answers is correct because supply curves have a downward slope. Answer: C Topic: Supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 67) The market supply curve is the ________ of the ________. A) horizontal sum; individual supply curves B) vertical sum; individual supply curves C) horizontal sum; individual supply curves minus the market demand D) vertical sum; individual supply curves minus the market demand E) vertical average; of the individual supply curves Answer: A Topic: Market supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 68) If the costs of producing pizza increase, which will occur? A) The supply of pizza will decrease. B) The quantity of pizzas supplied will increase as sellers try to cover their costs. C) Pizza will cease to be produced and sold. D) The demand curve for pizza will shift leftward when the price of a pizza increases. E) The demand curve for pizza will shift rightward when the price of a pizza increases. Answer: A Topic: Changes in supply, costs Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

69) Wheat is used to produce cereal. When the price of wheat falls, the A) demand for wheat increases. B) supply of wheat decreases. C) supply of cereal increases. D) demand for cereal increases. E) demand for cereal decreases. Answer: C Topic: Changes in supply, costs Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 70) A rise in the price of a substitute in production for a good leads to A) an increase in the supply of that good. B) a decrease in the supply of that good. C) no change in the supply of that good; instead there is a change in the quantity supplied. D) a decrease in the quantity of that good supplied. E) no change in either the supply or the quantity supplied of the good. Answer: B Topic: Changes in supply, price of a substitute in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 71) Suppose the price of leather used to produce shoes increases. The higher price of leather ________ the supply of shoes and the supply curve of shoes ________. A) increases; shifts rightward B) increases; shifts leftward C) decreases; shifts rightward D) decreases; shifts leftward E) does not change; does not shift Answer: D Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

72) An increase in the number of producers of bird seed ________ the supply of bird seed and shifts the supply curve of bird seed ________. A) increases; rightward B) increases; leftward C) decreases; rightward D) decreases; leftward E) does not change; rightward Answer: A Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 73) Which of the following will increase the supply of a product? A) an increase in the price of the product B) an increase in the demand for the product C) an increase in the number of sellers D) a decrease in the demand for the product E) an increase in the price of inputs Answer: C Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

74) The graph illustrates the supply of sweaters. Which of the following events will increase the supply of sweaters? A) a rise in the price of a sweater B) a rise in the wage rate paid to the workers who make sweaters C) a rise in the expected future price of a sweater D) an increase in the number of sellers of sweaters E) an increase in income if sweaters are a normal good Answer: D Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 75) The graph illustrates the supply of sweaters. As the technology used to produce sweaters improves, the A) supply of sweaters decreases and the demand for sweaters does not change. B) supply of sweaters increases and the demand for sweaters does not change. C) quantity of sweaters supplied increases. D) quantity of sweaters supplied decreases. E) supply of sweaters increases AND the demand for sweaters increases. Answer: B Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

76) An increase in the productivity of producing jeans results in A) the quantity of jeans supplied increasing. B) the supply of jeans increasing. C) buyers demanding more jeans because they are now more efficiently produced. D) buyers demanding fewer jeans because their price will fall, which signals lower quality. E) some change, but the impact on the supply of jeans is impossible to predict. Answer: B Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 77) A change in the price of a good ________ its supply curve and ________ a movement along its supply curve. A) shifts; causes B) shifts; does not cause C) does not shift; causes D) does not shift; does not cause E) None of the above because the change in the price might cause either a shift in the supply curve or a movement along the supply curve depending on the size of the change. Answer: C Topic: Shifts of the supply curve versus movement along the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

78) The graph illustrates the supply of sweaters. A fall in the price of sweaters brings A) a movement along the supply curve. B) a decrease in the quantity supplied of sweaters. C) a shift of the supply curve. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Movement along the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

79) The graph illustrates the supply of soda. If the price of soda rises from $0.50 a can to $1.50 a can, the quantity of soda supplied A) increases from 0 cans to 4,000 cans a day. B) decreases from 4,000 cans to 0 cans a day. C) remains unchanged because the supply increases NOT the quantity supplied. D) increases from 0 to 6,000 cans a day. E) remains unchanged because the supply decreases NOT the quantity supplied. Answer: A Topic: Movement along the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 80) When the price of rice rises A) the market quantity supplied of rice increases. B) the market supply of rice increases. C) the market quantity of rice demanded decreases. D) Both A and C are true. E) Both A and B are true. Answer: D Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

81) Wheat is used to produce cereal. When the price of wheat falls, the A) demand for wheat increases. B) supply of wheat decreases. C) supply of cereal increases. D) demand for cereal increases. E) demand for cereal decreases. Answer: C Topic: Changes in supply, expectations Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 82) The table below shows the three firms that are suppliers in the frozen yogurt market. Price ($ per serving) 8.00 7.00 6.00

Quantity Supplied (1,000s of servings supplied) YoYo FunFro Yummy 300 300 400 150 200 300 0 100 200

If the price in the market is $6.00 A) only 2 firms supply a total of 300 servings. B) 450 servings are supplied in the market. C) 600 servings are supplied in the market. D) all 3 firms supply a total of 900 servings. E) there will be a shortage of frozen yogurt. Answer: A Topic: Market supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

4.3 Market Equilibrium 1) Market equilibrium occurs when A) all markets become equal. B) the quantity demanded equals the quantity supplied. C) opposing forces pull demand and supply apart. D) demand and supply move in opposite direction. E) demand and supply change so that they are equal at ALL possible prices. Answer: B Topic: Market equilibrium Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 2) Market equilibrium occurs when A) the quantity demanded equals the quantity supplied. B) the market is changing rapidly. C) other things remain the same. D) buyers get the lowest possible price. E) everyone who wants the good gets the quantity he or she wants. Answer: A Topic: Market equilibrium Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 3) Market equilibrium i. can never occur because there are always people who want a good but cannot afford it. ii. occurs at the intersection of the supply and demand curves. iii. is the point where the price equals the quantity. A) ii only B) iii only C) ii and iii D) i only E) i and ii Answer: A Topic: Market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

4) A surplus of cardboard boxes means that A) at the current price of a cardboard box, the quantity demanded exceeds the quantity supplied. B) at the current price of a cardboard box, the quantity demanded is less than the quantity supplied. C) the current price of a cardboard box is less than the equilibrium price. D) at the current price of a cardboard box, the quantity demanded equals the quantity supplied and the price will fall to restore the equilibrium. E) More information is needed to determine if the price of cardboard boxes is higher than, lower than, or equal to the equilibrium price. Answer: B Topic: Surplus Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 5) When there is a surplus of snowboards, the A) demand for snowboards is greater than the supply of snowboards. B) supply of snowboards is greater than the demand for snowboards. C) quantity of snowboards demanded is greater than the quantity of snowboards supplied. D) quantity of snowboards supplied is greater than the quantity of snowboards demanded. E) price rises to restore the equilibrium. Answer: D Topic: Surplus Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 6) If there is a surplus of tacos, then the A) quantity of tacos demanded equals the quantity of tacos supplied. B) quantity of tacos demanded is greater than the quantity of tacos supplied. C) quantity of tacos demanded is less than the quantity of tacos supplied. D) market is at equilibrium. E) supply curve of tacos will shift leftward to eliminate the surplus. Answer: C Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

7) When a surplus of rice occurs A) the price of rice rises. B) the price of rice falls. C) there is a balance between the forces of supply and demand. D) the quantity demanded is greater than quantity supplied at the current price. E) the demand curve shifts rightward and the supply curve shifts leftward to eliminate the surplus. Answer: B Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 8) Suppose the equilibrium price of oranges is $2.00 per pound. If the actual price is above the equilibrium price, a A) shortage exists and the price falls to restore equilibrium. B) shortage exists and the price rises to restore equilibrium. C) surplus exists and the price falls to restore equilibrium. D) surplus exists and the price rises to restore equilibrium. E) surplus exists but nothing happens until either the demand or the supply changes. Answer: C Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 9) Suppose the current price of a pound of steak is $12 per pound and the equilibrium price is $9 per pound. In this case, there is a A) shortage, so the price falls and quantity demanded increases. B) surplus, so the price falls and quantity demanded increases. C) shortage, so the price rises and quantity demanded decreases. D) surplus, so the price rises and quantity demanded increases. E) surplus, so the price falls and quantity supplied increases. Answer: B Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

10) As a falling price eliminates a surplus in the jersey market A) the demand curve for jerseys shifts leftward, and the supply curve of jerseys shifts rightward. B) consumers increase the quantity of jerseys they demand. C) producers increase the quantity of jerseys they supply. D) producers decrease the quantity of jerseys they supply, and buyers decrease the quantity of jerseys they demand. E) the demand curve for jerseys shifts rightward, and the supply curve of jerseys shifts leftward. Answer: B Topic: Surplus Skill: Level 5: Critical thinking Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 11) If the price is below the equilibrium price A) there is a surplus. B) there is a shortage. C) the supply curve will shift rightward. D) the supply curve will shift leftward. E) the demand curve will shift leftward. Answer: B Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 12) When there is a shortage of parking spaces at your college, the A) demand for parking spaces is greater than the supply. B) supply of parking spaces is greater than the demand. C) quantity of parking spaces supplied is greater than the quantity of parking spaces demanded. D) quantity of parking spaces demanded is greater than the quantity of parking spaces supplied. E) Both answers A and D are correct. Answer: D Topic: Shortage Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

13) If the price of carrots is below the equilibrium price, the A) quantity demanded of carrots exceeds the quantity supplied and a surplus exists. B) quantity supplied of carrots exceeds the quantity demanded and a surplus exists. C) quantity demanded of carrots exceeds the quantity supplied and a shortage exists. D) quantity supplied of carrots exceeds the quantity demanded and a shortage exists. E) quantity supplied of carrots equals the quantity demanded. Answer: C Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 14) Suppose the current price of a pound of steak is $6 per pound and the equilibrium price is $9 per pound. What takes place? A) There is a shortage, so the price falls and quantity demanded increases. B) There is a surplus, so the price falls and quantity demanded increases. C) There is a shortage, so the price rises and quantity demanded decreases. D) There is a shortage, so the price rises and quantity demanded increases. E) There is a shortage, so the price falls and quantity demanded decreases. Answer: C Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

15) The table above shows the situation in the gasoline market in Tulsa, Oklahoma. If the price of a gallon of gasoline is $2.30 then A) there is a surplus of gasoline in Tulsa. B) there is a shortage of gasoline in Tulsa. C) the gasoline market in Tulsa is in equilibrium. D) Without more information we cannot determine if there is a surplus, a shortage, or an equilibrium in the gasoline market in Tulsa. E) There is neither a surplus nor a shortage, but the market is NOT in equilibrium. Answer: A Topic: Market equilibrium Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 16) The table above shows the situation in the gasoline market in Tulsa, Oklahoma. If the price of a gallon of gasoline is $2.25, then A) there is a surplus of gasoline in Tulsa. B) there is a shortage of gasoline in Tulsa. C) the gasoline market in Tulsa is in equilibrium. D) Without more information we cannot determine if there is a surplus, a shortage, or an equilibrium in the gasoline market in Tulsa. E) There is neither a surplus nor a shortage, but the market is NOT in equilibrium. Answer: C Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

17) The table above shows the situation in the gasoline market in Tulsa, Oklahoma. If the price of a gallon of gasoline is $2.20, then A) there is a surplus of gasoline in Tulsa. B) there is a shortage of gasoline in Tulsa. C) the gasoline market in Tulsa is in equilibrium. D) Without more information we cannot determine if there is a surplus, a shortage, or an equilibrium in the gasoline market in Tulsa. E) There is neither a surplus nor a shortage, but the market is NOT in equilibrium. Answer: B Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

18) Using the data in the table above, the equilibrium quantity and equilibrium price for a cellular telephone is A) 50,000 and $100. B) 80,000 and $80. C) 60,000 and $50. D) 40,000 and $20. E) 100,000 and $20. Answer: C Topic: Market equilibrium Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

19) Using the data in the table above, at the price of $80 a phone A) a shortage of 25,000 cellular telephones occurs. B) a surplus of 80,000 cellular telephones occurs. C) a surplus of 25,000 cellular telephones occurs. D) a shortage of 55,000 cellular telephones occurs. E) the market is in equilibrium. Answer: C Topic: Surplus Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

20) Using the data in the table above, the equilibrium quantity and equilibrium price for a stapler is A) 10,000 and $8. B) 90,000 and $8. C) 100,000 and $5. D) 70,000 and $6. E) 60,000 and $5. Answer: D Topic: Market equilibrium Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 21) Using the data in the table above, if the price of a stapler is $8, then there is ________ of staplers, and the quantity of staplers demanded ________ the quantity of staplers supplied. A) a surplus; is greater than B) a surplus; is less than C) a shortage; is greater than D) a shortage; is less than E) neither a surplus nor a shortage; equals Answer: B Topic: Surplus Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 79 Copyright © 2023 Pearson Education Ltd.

22) Using the data in the table above, if the price of a stapler is $5, then there is ________ of staplers and the quantity of staplers demanded ________ the quantity of staplers supplied. A) a surplus; is greater than B) a surplus; is less than C) a shortage; is greater than D) a shortage; is less than E) neither a surplus nor a shortage; equals Answer: C Topic: Shortage Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

23) In the figure above, a price of $35 per dozen roses results in A) a shortage. B) equilibrium. C) a surplus. D) upward pressure on the price of roses. E) an eventual rightward shift of the demand curve and/or leftward shift of the supply curve. Answer: C Topic: Surplus Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

24) In the figure above, a price of $15 per dozen roses results in A) equilibrium. B) a shortage. C) a surplus. D) downward pressure on the price of roses. E) an eventual leftward shift of the demand curve and/or rightward shift of the supply curve. Answer: B Topic: Shortage Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

25) The above figure shows the market for game day t-shirts. If the price of t-shirts is $8, then A) there is a shortage and the price of t-shirts will rise. B) there is a surplus and the price of t-shirts will rise. C) the market is in equilibrium. D) there is a shortage and the price of t-shirts will fall. E) there is a surplus and the price of t-shirts will fall. Answer: A Topic: Surplus, shortage, market equilibrium Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

26) The above figure shows the market for game day t-shirts. If the price of t-shirts is $10, then A) there is a surplus and the price of t-shirts will rise. B) there is a shortage and the price of t-shirts will rise. C) there is a shortage and the price of t-shirts will fall. D) there is a surplus and the price of t-shirts will fall. E) the market is in equilibrium. Answer: E Topic: Surplus, shortage, market equilibrium Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 27) The above figure shows the market for game day t-shirts. If the price of t-shirts is $12, then A) there is a shortage and the price of t-shirts will fall. B) there is a shortage and the price of t-shirts will rise. C) there is a surplus and the price of t-shirts will rise. D) there is a surplus and the price of t-shirts will fall. E) the market is in equilibrium. Answer: D Topic: Surplus, shortage, market equilibrium Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 28) The above figure shows the market for game day t-shirts. If the price of t-shirts is $8, then A) the market is in equilibrium. B) there is a surplus and the price of t-shirts will rise. C) the quantity demanded is greater than quantity supplied. D) there is a shortage and the price of t-shirts will fall. E) there is a surplus and the price of t-shirts will fall. Answer: C Topic: Surplus, shortage, market equilibrium Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

29) Assume a competitive market is in equilibrium. There is an increase in demand, but no change in supply. As a result the equilibrium price ________, and the equilibrium quantity ________. A) rises; increases B) rises; does not change C) falls; does not change D) falls; decreases E) falls; increases Answer: A Topic: Effects of an increase in demand Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 30) If a market begins in equilibrium and then the demand curve shifts leftward, a A) shortage is created, which is eliminated by a fall in price. B) shortage is created, which is eliminated by a rise in price. C) surplus is created, which is eliminated by a fall in price. D) surplus is created, which is eliminated by a rise in price. E) surplus is created, which is eliminated by the supply curve shifting leftward. Answer: C Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 31) When the demand curve shifts rightward and the market moves to a new equilibrium, then the A) supply increases. B) supply decreases. C) quantity supplied increases. D) quantity supplied decreases. E) price falls to restore the equilibrium. Answer: C Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

32) An increase in both the equilibrium price and quantity can be the result of A) a decrease in demand. B) an increase in supply. C) a decrease in supply. D) an increase in demand. E) None of the above answers is correct. Answer: D Topic: Effects of an increase in demand Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 33) Suppose the equilibrium quantity of movie tickets is 1,000. If the demand curve shifts ________, the equilibrium quantity of movie tickets will ________. A) rightward; increase B) rightward; decrease C) leftward; increase D) rightward; not change E) leftward; not change Answer: A Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 34) If consumers buy a large number of plug-in electric cars, the equilibrium price of electricity will ________ and the equilibrium quantity of electricity will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease E) not change; increase Answer: A Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

35) Because of a sharp increase in the price of gasoline, the demand for Sports Utility vehicles (SUVs) has decreased. So, the high price of gasoline leads to a A) leftward shift of the demand curve for SUVs AND the supply curve of SUVs. B) leftward shift of the demand curve for SUVs and no shift in the supply curve of SUVs. C) leftward shift of the demand curve for SUVs and a rightward shift of the supply curve of SUVs. D) leftward shift of the supply curve of SUVs and no shift in the demand curve for SUVs. E) rightward shift of the supply curve of SUVs and no shift in the demand curve for SUVs. Answer: B Topic: Effects of an increase in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 36) If the price of tangerines increases, the price of oranges also rises because A) consumers consider the two goods complements and so sellers decreased the supply of oranges. B) consumers consider the two goods substitutes and demand for oranges increases. C) if the supply of tangerines decreased, then the supply of oranges also must decrease. D) buyers must have expected a higher price for oranges and thus increased their demand for oranges. E) buyers' incomes must have decreased and oranges are an inferior good. Answer: B Topic: Effects of an increase in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 37) Suppose that the equilibrium price and quantity of new houses both increase. Which of the following could be a cause of this change? A) Both the supply and the demand for new houses increased, and the supply increased by more than the demand. B) The demand for new houses increased, and the supply did not change. C) Both the supply and demand for new houses decreased. D) The supply of new houses decreased, and the demand for new houses did not change. E) The supply of new houses increased, and the demand for new houses did not change. Answer: B Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

38) Suppose that the equilibrium price and quantity of new houses both increase. Which of the following could be a cause of this change? A) The wage paid carpenters who build new houses might have risen. B) A technological advance in framing a new house might have occurred. C) The rent for nearby apartments might have fallen. D) More home buyers might have moved into the area. E) The cost of wood framing used to build houses might have fallen. Answer: D Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 39) Suppose that over the next few years the demand for dancing to country and western music decreases. Hence, at country and western dance clubs the equilibrium price of admission ________ and the equilibrium quantity of dancing ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: D Topic: Effects of a decrease in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 40) For consumers, taco chips and salsa are complements. If the price of salsa rises, what is the effect on the equilibrium price and quantity of taco chips? A) The equilibrium price of taco chips falls, and the equilibrium quantity decreases. B) The equilibrium price of taco chips rises, and the equilibrium quantity decreases. C) There is no change in the equilibrium price of taco chips, and the equilibrium quantity increases. D) The equilibrium price of taco chips could rise, fall, or stay the same, and the equilibrium quantity increases. E) The equilibrium price of taco chips rises, and the equilibrium quantity increases. Answer: A Topic: Effects of a decrease in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

41) Computer chips are a normal good. Suppose the economy slips into a recession so that income falls. As a result, the demand for computer chips ________ so that the price of a computer chip ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) decreases; does not change Answer: D Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 42) Bagels and cream cheese are complementary goods. Suppose that the price for flour, which is used to produce bagels, increases. The equilibrium price of CREAM CHEESE ________, and the equilibrium quantity of CREAM CHEESE ________. A) rises; decreases B) rises; increases C) falls; decreases D) does not change; does not change E) falls; increases Answer: C Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 43) Suppose that people decide riding scooters is no longer fun. The equilibrium price of a scooter ________, and the equilibrium quantity of scooters ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: D Topic: Effects of a decrease in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

44) Assume a market is in equilibrium. There is an increase in supply, but no change in demand As a result the equilibrium price ________, and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) rises; does not change D) falls; decreases E) falls; increases Answer: E Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 45) If the supply of solar panels increases A) the price and quantity of solar panels increases. B) the demand for solar panels increases. C) the quantity demanded of solar panels decreases. D) the price of solar panels decreases and the quantity increases. E) None of the above. Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 46) If good weather conditions result in a larger than normal crop of peaches, then the A) equilibrium price of peaches rises, and the equilibrium quantity of peaches increases. B) equilibrium price of peaches falls, and the equilibrium quantity of peaches increases. C) demand curve for peaches shifts leftward. D) increase in the supply of peaches induces a greater demand for peaches, so that the equilibrium price rises and the equilibrium quantity increases. E) equilibrium price of peaches falls, and the equilibrium quantity of peaches decreases. Answer: B Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

47) The initial equilibrium price in the market for Web pages is $200 per page and 1,000 Web pages are created in a month. Many new Web design firms now enter the market. As a result A) the supply of Web pages increases and the price falls. B) the supply curve of Web pages shifts leftward and the price falls. C) the demand for Web pages increases and the price rises. D) the supply of web pages increase and the price falls, which then increases the demand for Web pages and the demand curve shifts rightward. E) the demand for Web pages increases and the price falls. Answer: A Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 48) Suppose the equilibrium price of movie tickets is $10. If the supply curve for movies shifts ________, the equilibrium price will ________. A) rightward; decrease B) leftward; decrease C) rightward; increase D) leftward; not change E) rightward; not change Answer: A Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 49) Which of the following lowers the equilibrium price of a canoe? A) an increase in the supply of canoes B) an increase in the demand for canoes C) an increase in the quantity of canoes supplied D) a decrease in the supply of canoes E) Both answers A and B are correct. Answer: A Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

50) When personal computers were first produced, the price was very high. As time passed, the price of personal computers fell because A) the demand for personal computers decreased. B) the initial price was too high and nobody bought personal computers. C) there were technological advances in the production of personal computers. D) people's incomes increased and personal computers are an inferior good. E) None of the above answers is correct. Answer: C Topic: Effects of an increase in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 51) An increase in the equilibrium price and a decrease in the equilibrium quantity can be the result of A) a decrease in demand. B) an increase in supply. C) a decrease in supply. D) an increase in demand. E) None of the above. Answer: C Topic: Effects of a decrease in supply Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 52) If a freeze destroys oranges before they are harvested, the equilibrium price of an orange ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: B Topic: Effects of a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

53) Suppose that the price of bread rises. This rise could be the result of A) a decrease in the supply of bread. B) an increase in the supply of bread. C) a decrease in the demand for bread. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: A Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 54) If an early frost destroys most of the apple crop, the equilibrium price of an apple ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 55) In Great Britain, raising taxes on gasoline has increased the costs of supplying gasoline. As a result, the equilibrium quantity of gasoline ________, and the equilibrium price of gasoline ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) does not change; rises Answer: C Topic: Effects of a decrease in supply Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

56) Suppose that the price of flour used to produce bagels increases. Hence the equilibrium price of a bagel ________, and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; does not change Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 57) Fresh orange juice and frozen orange juice are substitutes in production. The price of fresh orange juice rises. As a result, the equilibrium price of FROZEN orange juice ________, and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: B Topic: Effects of a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

58) A construction boom occurs and many of the new buildings need plywood for their framing. Which of the figures above best illustrates this change? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A or Figure C Answer: A Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

59) Contractors can use plywood or brick to construct walls. Suppose the price of bricks increases. Which of the figures above best illustrates the effect of this change on the market for plywood? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A or Figure C depending on how contractors react to the higher price of bricks. Answer: A Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 60) The number of logging firms increases. Which of the figures above best illustrates this change? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A and Figure D Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 61) New technology for producing plywood is developed. Which of the figures above best illustrates this change? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A and Figure D Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

62) In an effort to protect endangered species from the effects of logging in America's national forests, the federal government passes a law prohibiting logging in most of the state of Washington. Which of the figures above best illustrates the effect of this new law? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the above because a prohibition cannot be illustrated using demand and supply figures. Answer: C Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

63) Which figure above shows the effect if research is published claiming that eating pizza is healthy? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure A and Figure D Answer: A Topic: Effects of an increase in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

64) Pizza is a normal good. Which figure above shows the effect of a decrease in consumers' incomes? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C Answer: B Topic: Effects of a decrease in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 65) Which figure above shows the effect of a technological advance in the production of pizza? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure A and Figure D Answer: D Topic: Effects of an increase in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 66) Which figure above shows the effect of a decrease in the number of pizza sellers? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C Answer: C Topic: Effects of a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

67) Which figure above shows the effect of an increase in the cost of the tomato sauce used to produce pizza? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C Answer: C Topic: Effects of a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

68) The above figure shows the market for pizza. The market is in equilibrium when people's incomes decrease. If pizza is a normal good, then which point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: E Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

69) The above figure shows the market for pizza. The market is in equilibrium when the cheese used to produce pizza falls in price. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 70) The above figure shows the market for pizza. The market is in equilibrium when the wages paid pizza workers increases. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 71) The above figure shows the market for pizza. The market is in equilibrium when new pizza firms enter the market. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

72) The above figure shows the market for pizza. The market is in equilibrium when some of the pizza firms go out of business. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 73) The above figure shows the market for pizza. The market is in equilibrium when people learn that eating pizza helps prevent heart disease. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: C Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 74) The above figure shows the market for pizza. The market is in equilibrium. Pizza and tacos are substitutes for consumers. The price of tacos falls. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: E Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

75) If both the supply and demand curves shift simultaneously, we can always predict what will happen to A) both the price and the quantity. B) either the price or the quantity, but not both. C) only the price. D) only the quantity. E) neither the price nor the quantity. Answer: B Topic: Effects of changes in both demand and supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 76) A competitive market is in equilibrium. Then there is an increase in demand and an increase in supply. The equilibrium price ________, and the equilibrium quantity ________. A) rises; increases B) perhaps changes but we can't say if it rises, falls, or stays the same; does not change C) falls; increases D) perhaps changes but we can't say if it rises, falls, or stays the same; increases E) falls; perhaps changes but we can't say if it increases, decreases, or stays the same Answer: D Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 77) If the demand and supply both increase equally, then the equilibrium price ________ and the equilibrium quantity ________. A) increases; increases B) increases; does not change C) does not change; increases D) increases; decreases E) decreases; does not change Answer: C Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

78) Kiwis and strawberries are substitutes for consumers. An increase in the price of a kiwi coupled with an increase in the number of strawberry growers ________ the equilibrium price of a pound of strawberries and ________ the equilibrium quantity of strawberries. A) raises; increases B) probably changes, but more information is needed to determine if it rises or falls; increases C) raises; probably changes, but more information is needed to determine if it increases or decreases D) lowers; probably changes, but more information is needed to determine if it increases or decreases E) lowers; increases Answer: B Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 79) A competitive market is in equilibrium. Then there is a decrease in demand and a decrease in supply. The equilibrium price ________, and the equilibrium quantity ________. A) rises; decreases B) perhaps changes but we can't say if it rises, falls, or stays the same; decreases C) falls; increases D) perhaps changes but we can't say if it rises, falls, or stays the same; increases E) rises; increases Answer: B Topic: Effects of a decrease in demand and a decrease in supply. Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 80) If both supply and demand decrease by the same amount, the equilibrium price A) does not change. B) rises. C) falls. D) cannot be predicted. E) None of the answers is correct because the price depends on what happens to the equilibrium quantity. Answer: A Topic: Effects of a decrease in demand and a decrease in supply. Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

81) Both the demand for and supply of cars changes in France. You observe that the quantity of cars does not change but the price rises. Thus, which of the following occurred? A) Demand and supply increased by an equal amount. B) Demand and supply decreased by an equal amount. C) Demand increased and supply decreased by an equal amount. D) Demand decreased and supply increased by an equal amount. E) Demand increased by a larger magnitude than supply decreased. Answer: C Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 82) Suppose that the demand curve for desktop computers shifts rightward and at the same time the supply curve shifts leftward. Which of the following could have caused these shifts? A) Desktop computers are a normal good and incomes increased, while more firms entered the market. B) The price of a laptop computer, a substitute for desktop computers, fell, and the cost of producing desktop computers decreased. C) Consumers purchased more computers because of the Christmas season, and the labor costs of producing desktop computers decreased. D) Desktop computers are a normal good and incomes increased, while the labor costs of producing personal computers increased. E) Desktop computers are a normal good and incomes decreased, while the labor costs of producing personal computers increased. Answer: D Topic: Effects of an increase in demand and a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 83) If the demand curve for desktop computers shifts rightward and at the same time the supply curve shifts leftward, then A) the equilibrium price definitely rises. B) the equilibrium price definitely falls. C) the equilibrium price definitely remains the same. D) More information is needed to determine the effect on the equilibrium price. E) the equilibrium quantity definitely increases. Answer: A Topic: Effects of an increase in demand and a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 103 Copyright © 2023 Pearson Education Ltd.

84) If the demand curve for desktop computers shifts rightward and at the same time the supply curve shifts leftward, then A) the equilibrium quantity definitely increases. B) the equilibrium quantity definitely decreases. C) the equilibrium quantity definitely remains the same. D) More information is needed to determine the effect on the equilibrium quantity. E) the equilibrium price definitely falls. Answer: D Topic: Effects of an increase in demand and a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 85) The demand for oranges increases while the supply decreases. The equilibrium price of oranges ________, and the equilibrium quantity ________. A) rises; decreases B) falls; perhaps changes but we can't say if it increases, decreases, or stays the same C) falls; increases D) does not change; perhaps changes but we can't say if it increases, decreases, or stays the same E) rises; perhaps changes but we can't say if it increases, decreases, or stays the same Answer: E Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 86) The demand for cat food decreases while the supply increases. The equilibrium price of cat food ________, and the equilibrium quantity ________. A) does not change; increases B) rises; decreases C) falls; perhaps changes but we can't say if it increases, decreases, or stays the same D) rises; perhaps changes but we can't say if it increases, decreases, or stays the same E) falls; increases Answer: C Topic: Effects of a decrease in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

87) Suppose the government imposes a small carbon tax on automakers. But the price of gasoline has doubled due to a Middle East crisis which has reduced oil production. In the market for autos, these changes mean that supply and demand have both changed with the effect on the demand larger than the effect on the supply. The result is that the price of autos will ________ and the number of autos sold will ________. A) rise; perhaps change but we can't say if it increases, decreases, or stays the same B) rise; increase C) rise; decrease D) fall; perhaps change but we can't say if it increases, decreases, or stays the same E) fall; decrease Answer: E Topic: Effects of a decrease in demand and a decrease in supply. Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 88) If both producers and consumers believe that a product's price will rise in the future, then at the present, demand ________ and supply ________. A) increases; increases B) decreases; decreases C) increases; decreases D) decreases; increases E) does not change; does not change Answer: C Topic: Changes in both demand and supply, expected future price Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 89) If both producers and consumers believe that a product's price will rise in the future, then at the present, the equilibrium price A) does not change. B) rises. C) falls. D) might rise, fall, or not change, but the change can never be predicted. E) might rise, fall, or not change depending on whether the effect from the producers is greater than or less than the effect from the consumers. Answer: B Topic: Changes in both demand and supply, expected future price Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

90) The equilibrium price of a good occurs if the A) quantity of the good demanded equals the quantity of the good supplied. B) quantity of the good demanded is greater than the quantity of the good supplied. C) quantity of the good demanded is less than the quantity of the good supplied. D) demand for the good is equal to the supply of the good. E) price of the good seems reasonable to most buyers. Answer: A Topic: Market equilibrium Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 91) If there is a surplus of a good, the quantity demanded is ________ the quantity supplied, and the price will ________. A) less than; rise B) less than; fall C) greater than; rise D) greater than; fall E) equal to; fall Answer: B Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

92) The graph illustrates the market for bottled water. When the price exceeds the equilibrium price, the quantity demanded is ________ the quantity supplied and the price of the good will ________. A) less then; fall B) greater than; rise C) greater than; fall D) less than; rise E) equal to; fall Answer: A Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 93) Which of the following is correct? i. A surplus puts downward pressure on the price of a good. ii. A shortage puts upward pressure on the price of a good. iii. There is no surplus or shortage at equilibrium. A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) only iii Answer: D Topic: Surplus, shortage, market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 107 Copyright © 2023 Pearson Education Ltd.

94) Which of the following is the best explanation for why the price of gasoline increases during the summer months? A) Oil producers have higher costs of production in the summer. B) Sellers have to earn profits during the summer to cover losses in the winter. C) There is increased driving by families going on vacation. D) There is less competition among oil refineries in the summer. E) The number of gas stations open 24 hours a day rises in the summer months and so the price must rise to cover the higher costs. Answer: C Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 95) The number of people looking to buy ceiling fan buyers increases, so there is an increase in the A) quantity of ceiling fans demanded and a surplus of ceiling fans. B) demand for ceiling fans and a rise in the price of a ceiling fan. C) demand for ceiling fans and a surplus of ceiling fans. D) supply of ceiling fans and no change in the price of a ceiling fan. E) demand for ceiling fans and in the supply of ceiling fans. Answer: B Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 96) When the demand for a good decreases, its equilibrium price ________ and equilibrium quantity ________. A) falls; decreases B) falls; increases C) rises; decreases D) rises; increases E) falls; does not change Answer: A Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

97) A technological improvement lowers the cost of producing corn. As a result, the price of a pound of corn ________ and the quantity of corn ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) falls; does not change Answer: C Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 98) The technology associated with manufacturing computers has advanced enormously. This change has led to the price of a computer ________ and the quantity ________. A) rising; increasing B) rising; decreasing C) falling; increasing D) falling; decreasing E) falling; not changing Answer: C Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

99) The graph illustrates the market for bottled water. If the producers of bottled water switch to using improved technology, then the A) supply of bottled water decreases. B) quantity demanded of bottled water increases. C) quantity demanded of bottled water does not change. D) price of bottled water rises. E) supply curve shifts leftward. Answer: B Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 100) Suppose that the price of lettuce used to produce tacos increases. This change means that the equilibrium price of a taco ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

101) Suppose a medical study reveals new benefits to consuming beef and at the same time a bumper corn crop reduces the cost of feeding steers. The equilibrium quantity of beef will A) decrease. B) perhaps increase, decrease, or stay the same, but more information is needed to determine which it does. C) stay the same. D) increase. E) definitely either stay the same or decrease. Answer: D Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 102) Candy makers accurately anticipate the increase in demand for candy for Halloween so that the supply of candy and demand for candy increase the same amount. As a result, the price of candy ________ and the quantity of candy ________. A) rises; does not change B) falls; increases C) does not change; increases D) does not change; does not change E) rises; increases Answer: C Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 103) Suppose improvements in technology cause the supply of natural gas to increase and at the same time the demand for natural gas increases. What are we sure of? A) Both equilibrium price and quantity increase. B) Equilibrium price increases. C) Equilibrium price decreases. D) Equilibrium quantity increases. E) Equilibrium quantity decreases. Answer: D Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

104) The graph illustrates the market for British pounds, the currency of the United Kingdom. As the number of buyers of pounds increases and the number of sellers of pounds increases, the equilibrium price of a pound A) will rise. B) will fall. C) will remain the same. D) might rise, fall, or remain the same depending on whether the effect on buyers is larger than, less than, or the same as the effect on sellers. E) None of the above answers is correct. Answer: D Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

105) The graph illustrates the market for computers. If the number of buyers of computers increases and technology advances, you predict that the A) equilibrium quantity of computers will increase. B) equilibrium quantity of computers will decrease. C) equilibrium price of a computer will rise. D) equilibrium price of a computer will fall. E) equilibrium quantity of computers might increase, decrease, or not change. Answer: A Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 106) Which of the following definitely results in a product's equilibrium price rising? A) an increase in both demand and supply B) a decrease in both demand and supply C) an increase in demand combined with a decrease in supply D) a decrease in demand combined with an increase in supply E) an increase in the supply combined with no change in the demand Answer: C Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

107) During 2008 the supply of gasoline decreased while at the same time the demand for gasoline increased. If the magnitude of the increase in demand was greater than the magnitude of the decrease in supply, then the equilibrium price of gasoline ________ and the equilibrium quantity ________. A) increased; increased B) increased; decreased C) increased; did not change D) decreased; did not change E) did not change; increased Answer: A Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 108) When demand increases and supply decreases by the same amount, the equilibrium quantity ________ and the equilibrium price ________. A) decreases; rises B) decreases; falls C) decreases; does not change D) decreases; might rise, fall, or not change E) does not change; might rise, fall, or not change Answer: C Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

109) The graph illustrates the market for British pounds, the currency of the United Kingdom. As the number of buyers of pounds decreases and the number of sellers of pounds increases, the equilibrium price of a pound A) will rise. B) will fall. C) will remain the same. D) might rise, fall, or remain the same but more information is needed. E) will rise if the magnitude of the effect on the buyers is larger than the magnitude of the effect on the sellers. Answer: B Topic: Effects of a decrease in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 110) An increase in the equilibrium price and a decrease in the equilibrium quantity can be the result of A) a decrease in demand. B) an increase in supply. C) a decrease in supply. D) an increase in demand. E) None of the above is correct. Answer: C Topic: Market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 115 Copyright © 2023 Pearson Education Ltd.

111) Consider the market for frozen yogurt. Assume the market starts at point A. An increase in income causes a movement to point A) D if frozen yogurt is a normal good. B) B if frozen yogurt is a normal good. C) C because the price of resources used to make frozen yogurt will increase. D) D because the price of resources used to make frozen yogurt will increase. E) B because the price of resources used to make frozen yogurt will decrease. Answer: A Topic: Market equilibrium Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Application of knowledge 112) Consider the market for frozen yogurt. Assume the market starts at point A. Which of the following is TRUE? A) If frozen yogurt is a normal good, an increase in income leads to a shift from D1 to D2 and a movement along the supply curve. B) A change in the price of frozen yogurt leads to a shift from D1 to D2. C) If frozen yogurt is a normal good, an increase in income leads to a movement up along D1 from point A to point C. D) An increase in the number of firms supplying frozen yogurt leads to a movement from point A to point D. E) A decrease in the number of firms supplying frozen yogurt leads to a movement from point A to point B. Answer: A Topic: Market equilibrium Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Application of knowledge 116 Copyright © 2023 Pearson Education Ltd.

4.4 Integrative Questions 1) Consider the market for bread. If the price of wheat rises, then the A) demand curve for bread shifts leftward. B) supply curve of bread shifts leftward. C) price of bread falls. D) equilibrium quantity of bread increases. E) demand curve for bread shifts rightward. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 2) Consider the market for turkeys. In the United States, because of Thanksgiving in the month of November A) there is a downward movement along the demand curve for turkeys. B) there is an upward movement along the supply curve for turkeys. C) the supply curve of turkeys shifts leftward. D) the demand curve for turkeys shifts leftward. E) neither the demand curve nor the supply curve shift; instead there is a movement along both curves. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 3) Consider the market for feather pillows. If there is an increase in the price of feather dusters, a substitute in production for feather pillows, then A) the price of feather pillows decreases. B) the demand curve for feather pillows shifts leftward. C) the supply curve for feather pillows shifts leftward. D) there is a downward movement along the demand curve for feather pillows. E) the demand curve for feather pillows shifts rightward. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

4) Consider the market for peanut butter. If there is an increase in the price of peanuts A) there is an upward movement along the supply curve for peanut butter. B) the supply curve for peanuts shifts rightward. C) there is a decrease in the supply of peanuts. D) there is a decrease in the supply of peanut butter. E) there is a decrease in the demand for peanut butter. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 5) Peanut butter and jelly are complements for many consumers. Consider the market for peanut butter. If there is an increase in the price of jelly A) there is a movement along the supply curve of peanut butter. B) the price of peanut butter rises. C) the quantity of peanut butter increases. D) there is a shift in the supply curve for jelly. E) the demand curve for peanut butter does not shift; instead there is a movement along it. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 6) Consider the market for wheat. If there is an improvement in harvesting technology A) the supply curve for wheat shifts rightward. B) the demand curve for wheat shifts rightward. C) there is a movement up along the demand curve. D) the equilibrium price rises. E) the demand curve for wheat shifts leftward. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

7) When the price of rice rises A) the market quantity supplied of rice increases. B) the market supply of rice increases. C) the market quantity of rice demanded decreases. D) Both A and C are true. E) Both A and B are true. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 8) Consider the market for camera film. If more people start using digital cameras, which do not require film A) the supply curve of film shifts rightward. B) the demand curve for film shifts leftward. C) there is a movement up along the demand curve for film. D) there is a movement down along the demand curve for film. E) neither the demand curve nor the supply curve for film shifts; instead there is a movement along both. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

9) The above figures show the market for HD televisions. If people's incomes increase and HD televisions are a normal good, which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: A Topic: Changes in demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

10) The above figures show the market for HD televisions. Blu-ray players can be used to play HD movies. If the price of blu-ray players falls, then which figure shows the effect of this change in the market for HD televisions? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 11) The above figures show the market for HD televisions. If research is published showing that watching HD television shows causes eye damage, then which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: B Topic: Changes in demand, preferences Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 12) The above figures show the market for HD televisions. If cable television providers lower the price of providing HD cable service, which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

13) The above figures show the market for HD televisions. If the price of the LCD screens used to produce these televisions falls, which figure shows the effect of this change in price? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: C Topic: Changes in supply, price of a resource Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 14) The above figures show the market for HD televisions. If there are severe earthquakes that destroy a significant number of HD television manufacturing plants, which figure shows the effect of the earthquake? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: D Topic: Changes in supply, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 15) The above figures show the market for HD televisions. If more firms start to produce HD televisions, which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: C Topic: Changes in supply, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

16) The above figures show the market for HD televisions. If the technology used to produce these televisions advances so that productivity increases, which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: C Topic: Changes in supply, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 17) Consider the market for leather shoes. If producers believe the price of leather shoes will increase next month, today A) the supply curve for leather shoes shifts rightward. B) the supply curve for leather shoes shifts leftward. C) there is a movement along the supply curve for leather shoes. D) the equilibrium price of leather shoes falls. E) the equilibrium quantity of leather shoes increases. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 18) Consider the market for peanut butter. If there is an increase in the price of bread (a complement for peanut butter) along with a drought in peanut growing areas, the A) equilibrium quantity of bread increases. B) equilibrium quantity of peanut butter definitely decreases. C) equilibrium quantity of peanut butter might increase or might decrease. D) equilibrium price of peanut butter definitely rises. E) equilibrium price of peanut butter definitely falls. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

19) Consider the market for peanut butter. If there is a decrease in the price of deli turkey slices (a substitute in consumption for peanut butter) along with a decrease in the price of peanut brittle (a substitute in production for peanut butter), the A) equilibrium price of peanut butter definitely falls. B) equilibrium quantity of peanut definitely decreases. C) equilibrium price of peanut butter might rise or fall. D) equilibrium quantity of peanut butter definitely increases. E) equilibrium price of peanut butter definitely rises. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 20) Millions of people from Mexico have migrated to the United States. This has reduced the supply of labor in Mexico and increased the supply of labor in the United States. Assume that the demand for labor in Mexico and the United States is unchanged. Then wages in the United States ________ and wages in Mexico ________. A) fall; rise B) rise; rise C) rise; do not change D) fall; fall E) do not change; fall Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking 4.5 Essay: Demand 1) What is the law of demand? Answer: The law of demand states that other things remaining the same, if the price of a good rises, the quantity demanded of that good decreases, and if the price of a good falls, the quantity demanded of that good increases. Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

2) What leads to a decrease in the quantity demanded of a good or service? Answer: The quantity demanded of a good or service decreases when the price of the product increases. Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 3) Explain the difference between a change in demand and a change in quantity demanded. What leads to each of these changes? Answer: A change in demand occurs when consumers will buy more or less of a product at every price; a change in the quantity demanded occurs when the price changes and consumers buy more or less. A change in demand is reflected by a shift of the entire demand curve, while a change in the quantity demanded is reflected by a movement along one demand curve. Only a change in the price of the good brings about a change in the quantity demanded. A change in demand is brought about by a change in any of the other influences on demand, namely, the prices of related goods, income, expectations, the number of buyers, and preferences. Topic: Changes in quantity demanded versus change in demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication 4) List the factors that change demand and shift the demand curve. Tell what happens to demand and the demand curve when there is an increase in the factor. Answer: One factor that changes demand is a change in income. An increase in income increases demand and shifts the demand curve rightward for a normal good. An increase in income decreases demand and shifts the demand curve leftward for an inferior good. A change in the price of a substitute or complement also changes demand. An increase in the price of a substitute increase demand and shifts the demand curve rightward while an increase in the price of a complement decreases demand and shifts the demand curve leftward. Expectations, the number of buyers, and preferences also change demand. If people expect their income to increase, or if they expect its price to be higher in the future, or if the number of buyers increases, or if people's preferences for the good increase, demand increases and the demand curve shifts rightward. Topic: Changes in demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication

5) Computers are a complement to computer software. Suppose the price of a computer falls. How does this fall in price affect the demand for computer software and the demand curve for computer software? Answer: The fall in the price of a complement increases the demand for a product. Hence the fall in the price of a computer increases the demand for computer software and shifts the demand curve for computer software rightward. Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication 6) What is the difference between a normal good and an inferior good. Give an example of each. Answer: A good is a normal good if an increase in incomes leads to an increase in demand for a good. Most goods are normal goods. An example of a normal good is new clothes. A good is an inferior good if an increase in income leads to a decrease in demand for the good. Second-hand clothing that can be purchased at thrift stores is an inferior good. Topic: Normal and inferior goods Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication

7) Suppose Katie, Mark, and Bobby are the only consumers in the market for ice cream. Using the demand schedules in the table above, what is the market demand curve for ice cream? Answer:

Topic: Market demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

8) Soft drinks and milk are substitutes for consumers. Draw a graph showing the effect of an increase in the price of milk on the demand for soft drinks. Answer:

Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

9) Soft drinks are a normal good. Draw a graph showing the effect of an increase in income on the demand for soft drinks. Answer:

Topic: Changes in demand, income Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 4.6 Essay: Supply 1) What leads to a decrease in the quantity supplied of a good or service? Answer: The quantity supplied of a good or service decreases when the price of the good or service decreases. Topic: Quantity supplied Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

2) What is the difference between quantity supplied and supply? Answer: Quantity supplied is the amount that people are willing to sell during a specific period for a specific price. It deals with one quantity at one price. Supply is the relationship between the quantity supplied and the price of the good. Supply applies to various prices and various quantities. Topic: Changes in quantity supplied versus change in supply Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 3) List the factors that change supply and shift the supply curve. Tell what happens to supply and the supply curve when there is an increase in the factor. Answer: The factors that change supply are productivity, the number of sellers, expectations, prices of resources, and prices of related goods. An increase in productivity, an increase in the price of a complement in production, a decrease in expected future prices, and an increase in the number of sellers all lead to an increase in supply and a rightward shift in the supply curve. An increase in the price of a substitute in production or an increase in the prices of inputs leads to a decrease in supply and a leftward shift in the supply curve. Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Written and oral communication 4) What are substitutes in production? Answer: Goods are substitutes in production when one can be produced in place of the other, that is, when the goods are produced using the same resources. Topic: Substitutes in production Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 5) Suppose that the number of companies selling computer software decreases. How does this change affect the supply of computer software and the supply curve of computer software? Answer: A decrease in the number of sellers decreases the supply. Hence the decrease in the number of companies selling computer software decreases the supply of computer software and shifts the supply curve of computer software leftward. Topic: Changes in supply, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

6) Suppose that the productivity used to produce computers advances. How does this change affect the supply of computers and the supply curve of computers? Answer: An advance in productivity increases the supply of computers. Hence increases in productivity shift the supply curve of computers rightward. Topic: Changes in supply, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

7) The table above indicates how many thousands of containers of ice cream three different companies are willing to produce at different prices. Does this information reflect the law of supply? Why or why not? Answer: Yes, the information in the table is in accord with the law of supply because for all three companies, as the price rises (falls), the quantity supplied increases (decreases). Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

8) The table above shows supply schedules for the two nail salons in town, Nancy's Nails and Fancy Nails. What is the market supply of manicures? Answer:

Topic: Market supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 4.7 Essay: Market Equilibrium 1) When does a shortage occur? Answer: A shortage occurs when the price is below the equilibrium price. When the price is less than the equilibrium price, the quantity demanded is greater than the quantity supplied. Topic: Shortage Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 2) When does a surplus occur? Answer: A surplus occurs when the price is above the equilibrium price. When the price exceeds the equilibrium price, the quantity supplied is greater than the quantity demanded. Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

3) At prices above the equilibrium price, what occurs? Answer: If the price exceeds the equilibrium price, there is a surplus because the quantity supplied exceeds the quantity demanded. With a surplus, the law of market forces points out that the price will fall. As the price falls, the quantity supplied decreases and the quantity demanded increases, thus decreasing the size of the surplus. The price will continue to fall as long as there is a surplus, that is, as long as the price exceeds the equilibrium price. Ultimately the price will fall to equal the equilibrium price, at which time the surplus will be eliminated and the price will no longer change. Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication 4) When the demand for blue jeans increases, what happens next? Answer: If the demand for blue jeans increases, then at all prices buyers are more willing and more able to buy blue jeans. The demand curve for blue jeans shifts rightward. With the curve shifts, at the initial price a shortage of jeans will emerge. The law of market forces drives the price higher. Hence an increase in demand for blue jeans leads to a rise in the price of a pair of blue jeans and an increase in the quantity of blue jeans. Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication 5) Suppose Ramen noodles, an inexpensive but a quite tasty dish, are an inferior good. Why do grocery stores in college towns, that is, towns with a large fraction of college students, stock a lot of Ramen noodles? Answer: Generally, college students' incomes are relatively low because they cannot hold high paying, full-time jobs. Hence the demand for inferior goods is strong in college towns. Hence the demand curve for Ramen noodles in a college town lies to the right of the demand curve for Ramen noodles in a similar size town not dominated by a college. Thus the equilibrium quantity of Ramen noodles is quite large in a college town and so stores stock a lot of Ramen noodles. Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication

6) Why does an increase in supply lead to lower prices? Answer: When the supply of a good, such as computers, increases, the supply curve shifts rightward. This shift means sellers are more willing and more able to sell computers at all prices than they were before. When this change occurs, a surplus of computers breaks out. With the surplus, the law of market forces drives the price lower and thereby eliminates the surplus. Topic: Effects of a change in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication 7) Smart phones are becoming less expensive as new technology reduces the cost of production. In a supply and demand model, explain the effects of the technological innovations and their effect on the quantity of smart phones. Answer: Advances in technology increase the supply of smart phones and the supply curve of smart phones shifts rightward. The demand curve does not shift. Rather, on the demand side there is an increase in quantity demanded, or movement along the curve, in response to the falling price. The equilibrium price of a smart phone falls and the equilibrium quantity of smart phones increases. Topic: Effects of a change in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication 8) What is the effect on the price and quantity of a product if both the demand and supply simultaneously increase? Answer: The equilibrium quantity unambiguously increases. The effect on the equilibrium price is ambiguous. The equilibrium price rises if the increase in demand exceeds the increase in supply. The equilibrium price falls if the increase in supply exceeds the increase in demand. The equilibrium price is unchanged if the increase in demand equals the increase in supply. Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

9) What is the effect on the price and quantity of a product if the demand decreases and the supply simultaneously increases? Answer: The equilibrium price unambiguously falls. The effect on the equilibrium quantity is ambiguous. The equilibrium quantity decreases if the decrease in demand exceeds the increase in supply. The equilibrium quantity increases if the increase in supply exceeds the decrease in demand. The equilibrium quantity is unchanged if the decrease in demand equals the increase in supply. Topic: Effects of a decrease in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 10) For consumers, computers are a complement to computer software. Suppose the price of a computer falls. Simultaneously, suppose that the number of companies selling computer software decreases. How do these changes affect the price and quantity of computer software? Answer: The fall in the price of a computer increases the demand for computer software and the demand curve for computer software shifts rightward. A decrease in the number of sellers decreases the supply of computer software and the shifts the supply curve of computer software leftward. The increase in demand and decrease in supply both raise the price, so the price definitely rises. The increase in demand increases the quantity and the decrease in supply decreases the quantity. Hence the net effect on the quantity is ambiguous. Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 11) In early 2019 the price of computer hard disc drives rose. In a demand and supply model, shifts in what curve or curves could have brought about the higher price? Answer: The higher price could have been brought about by an increase in demand, a decrease in supply, or the combination of an increase in demand combined with a decrease in supply. Hence the higher price could have been the result of a rightward shift in the demand curve, a leftward shift in the supply curve, or a combined rightward shift of the demand curve and leftward shift of the supply curve. Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

12) The above table gives the demand and supply schedules for cat food. If the price is $3.00 per pound of cat food, will there be a shortage, a surplus, or is this price the equilibrium price? If there is a shortage, how much is the shortage? If there is a surplus, how much is the surplus? If $3.00 is the equilibrium price, what is the equilibrium quantity? Answer: At a price of $3.00 per pound of cat food, there is a surplus. The surplus equals 44 tons (the quantity supplied) minus 35 tons (the quantity demanded), or 9 tons of cat food. Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 13) The above table gives the demand and supply schedules for cat food. If the price is $1.00 per pound of cat food, will there be a shortage, a surplus, or is this price the equilibrium price? If there is a shortage, how much is the shortage? If there is a surplus, how much is the surplus? If $3.00 is the equilibrium price, what is the equilibrium quantity? Answer: At a price of $1.00 per pound of cat food, there is a shortage. The shortage equals 52 tons (the quantity demanded) minus 15 tons (the quantity supplied), or 37 tons of cat food. Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 14) The above table gives the demand and supply schedules for cat food. What is the equilibrium price and quantity? Answer: The equilibrium price is $2.50 per pound of cat food because that is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity of cat food is 40 tons per year. Topic: Equilibrium price and quantity Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

15) The above table gives the demand and supply schedules for cat food. If the supply increases by 20 tons at every price, what is the new equilibrium price and quantity? Answer: The equilibrium price is $1.50 per pound of cat food because that is the price at which the quantity demanded equals the (new) quantity supplied. The equilibrium quantity of cat food is 46 tons per year. Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

16) The diagram above illustrates the market for apartments in Victoria, British Columbia. a. If the current rent is $300 per month, is there a shortage or surplus in the apartment market and how much is the shortage or surplus? b. What is the equilibrium rent and quantity of apartments? Answer: a. If the rent is $300 per month, there is a shortage of 30,000 apartments. b. The equilibrium rent is $400 per month and the equilibrium quantity is 40,000 apartments. Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

17) In the figure above, if the price is $8 a unit, is there a shortage or surplus and what is the amount of any shortage or surplus? Answer: At a price of $8 there is a surplus because the quantity supplied exceeds the quantity demanded. The amount of the surplus is 4 units per month. Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 18) In the figure above, what is the equilibrium price and quantity? Answer: The equilibrium price is $4 a unit and the equilibrium quantity is 3 units per month. Topic: Equilibrium price and quantity Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

19) Last year a very severe ice storm hit the north counties of New York state, and the states of Vermont and Maine. Electric poles were down and no one had power for days. It was reported that the price of kerosene heaters skyrocketed and the number purchased increased during this time. Using a supply and demand diagram, show the impact of the ice storm on the market for kerosene heaters. Answer:

Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

20) Consumers can use either natural gas or heating oil to warm their houses. Suppose the price of natural gas increases. Use a demand and supply diagram to show the impact of the higher price of NATURAL GAS on the market for HOME HEATING OIL. Answer:

Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

Foundations of Economics, 9e (Bade), GE Chapter 5 GDP: A Measure of Total Production and Income 21.1 GDP, Income, and Expenditure 1) A measure of a country's production is its A) gross daily production. B) general daily product. C) general domestic production. D) gross domestic product. E) gross total output. Answer: D Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 2) The total production within an economy is measured as A) Gross Home Product. B) Total Domestic Output. C) Annual Production Value. D) Gross Domestic Product. E) Total Annual Output. Answer: D Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 3) Gross Domestic Product is equal to the market value of all the final goods and services ________ in a given period of time. A) produced within a country B) consumed within a country C) consumed by the citizens of a country D) produced by the citizens of a country E) produced and consumed within a country Answer: A Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

4) Gross Domestic Product measures the A) quantity of the goods and services produced in a given year, listed item by item, within a country. B) income of the business sector within a country. C) market value of the final goods and services produced in a given year within a country. D) measures the market value of the domestic labor in a given year within a country. E) market value of the final goods and services consumed by households in a given year within a country. Answer: C Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 5) Gross Domestic Product is the market value of all ________ produced within a country in a given period of time. A) final goods B) intermediate goods C) final services D) intermediate services E) final goods and services Answer: E Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 6) To calculate GDP it is necessary to A) add the total amounts of all the goods produced. B) use the market price to place a dollar value on each good produced. C) use production cost to place a dollar value on all goods produced. D) use the average market price over the last five years to place a dollar value on all goods produced. E) average the cost of producing a good with the price of the good to place a dollar value on all goods produced. Answer: B Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

7) How are final goods and services valued when measuring nominal GDP? A) at current market prices B) at base year prices C) at foreign exchange parity D) at factor market prices E) at producer cost Answer: A Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 8) Measuring total production by valuing items at their market value allows us to A) separate the value of different goods with identical prices. B) separate the value of different goods with different prices. C) add together the value of different goods that have different prices. D) add together the value of identical goods that have identical prices. E) ignore the problem that goods and services differ in how long they last. Answer: C Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 9) Wobet is a small country that produces only steak and potatoes. Steaks have a price of $10 each and potatoes have a price of $1 each. Suppose that Wobet produces 10 steaks and 20 potatoes in 2010. Using ________, Wobet has GDP equal to ________. A) market value; 30 units B) a market basket; 30 units C) market value; $120 D) real value; $120 E) a price index; $120 Answer: C Topic: GDP Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

10) To calculate GDP it is necessary to add up the market value of all the ________ produced within a country during a year. A) goods but not services produced B) goods AND services produced C) intermediate goods and services produced D) final goods and services produced E) intermediate goods and services produced AND all the final goods and services produced Answer: D Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 11) GDP is best defined as the ________ in a given time period. A) number of goods and services produced within a country B) number of final goods and services produced within a country C) market value of the final goods and services produced within a country D) market value of the final goods and services consumed by a nation's citizens E) market value of ALL the goods and services produced within a country Answer: C Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 12) If you make dinner for yourself A) the market value of your dinner is added to GDP. B) your service in preparing the meal is valued at a cook's wage and added to GDP. C) none of what you bought to prepare for dinner is included in GDP. D) only the market value of ingredients that you purchased this year is added to GDP. E) the difference between the cost of the ingredients that you purchased this year and the market value of the dinner is added to GDP. Answer: D Topic: GDP Skill: Level 3: Using models Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

13) Gross Domestic Product is defined to be the market value of all the final goods and services produced during a given time period A) within a country. B) within and outside a country by that country's citizens. C) by citizens of the country, regardless of their place of residence. D) by only legal residents of the country. E) within a county minus the market value of all the final goods and services produced by that country's citizens outside the country. Answer: A Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 14) Where are the final goods and services produced that are included in Germany's GDP? A) within Germany B) anywhere, as long as they are produced using German resources C) outside of Germany D) anywhere, as long as they are produced using German labor E) within Germany but only if they are produced using only German resources Answer: A Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 15) GDP includes the goods and services produced A) within a country's borders by citizens and by non-citizens. B) by a country's legal citizens regardless of where in the world they are located. C) by a country's citizens but not by non-citizens within the country's borders. D) within a country's borders by citizens and non-citizens plus goods produced abroad by the country's citizens. E) within a country's borders by citizens and by non-citizens minus the production abroad by the country's citizens. Answer: A Topic: GDP Skill: Level 3: Using models Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

16) Which of the following is included in Germany's GDP? i. BMWs produced in a German-owned factory in South Carolina ii. the value of the stocks sold on the German stock exchange, the Frankfurt Stock Exchange iii. china produced by the English-owned Wedgewood Company at a factory in Berlin, Germany A) i and iii B) ii only C) iii only D) i and ii E) None of the above answers is correct. Answer: C Topic: GDP Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 17) Which of the following is included in U.S. GDP? i. the rental value of homes owned by U.S. citizens ii. the production of Suburban SUVs by GM in its plant in Mexico iii. tickets sold by U2 for concerts held in the United States A) ii only B) ii and iii C) i, ii and iii D) i and iii E) i only Answer: D Topic: GDP Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 18) Which of the following is NOT directly included in Canadian GDP? A) the purchase of tickets to a Kanye West concert in Montreal B) the sale of tickets to the Vancouver Olympics to U.S. citizens C) gasoline purchased by a tour bus operator in Quebec D) bus tickets sold to tourists for a tour bus ride in Montreal E) All of the items would be included in Canadian GDP. Answer: C Topic: GDP, final goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

19) Which of the following is NOT directly included in U.S. GDP? A) sales to tourists of beach umbrellas in Hilton Head, South Carolina B) sales of sandwiches at a Subway store in Bangor, Maine C) ticket sales to Ripley's Aquarium in Gatlinburg, Tennessee D) popcorn purchased by a movie theater chain in Georgia E) movie tickets purchased by consumers in Georgia Answer: D Topic: GDP, final goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 20) Which of the following is classified as a final good or service? i. tires bought by GM to put on new Tahoes ii. mustard bought by Subway to put on its sub sandwiches iii. your purchase of online access to the Wall Street Journal A) i and ii B) i, ii and iii C) iii only D) ii and iii E) ii only Answer: C Topic: GDP, final goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 21) Which of the following correctly describes a final good? i. A final good is bought by its final consumer. ii. A final good can be used by a firm as a component of another good or service. iii. Investment goods cannot be a final good. A) i only B) i and ii C) i, ii and iii D) i and iii E) ii and iii Answer: A Topic: GDP, final goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

22) Which of the following is a final good or service? A) the grilled chicken purchased by Taco Bell for use in their burritos B) a new replacement muffler installed by Midas Mufflers C) the fertilizer purchased by Royal Lawn and Landscape D) the computers purchased by Office Depot for sale to its customers E) the CPUs purchased by Dell to be used in their computers Answer: B Topic: GDP, final goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 23) Which of the following is a final good or service? A) tires purchased by Ford for use on one of their SUVs B) the new economics textbook you are using C) the hair gels used by a hair stylist at the local hair salon D) the butter used by a chef to make butter cream frosting E) the taco shells purchased by Taco Bell for use in their tacos Answer: B Topic: Intermediate goods and services Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 24) A restaurant buys fish to offer as a daily menu special. The purchase of the fish by the restaurant is A) a consumption expenditure. B) an investment. C) an intermediate good. D) an example of government expenditures on goods and services. E) part of net exports if the fish was caught beyond the U.S. border. Answer: C Topic: Intermediate goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

25) Which of the following is classified as an intermediate good? i. the purchase of a Big Mac by a college student ii. McDonald's purchase of pickles iii. a McDonald's restaurant owner's interest payment for the loan on her building A) ii only B) ii and iii C) i only D) i and iii E) i, ii and iii Answer: A Topic: Intermediate goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 26) Which of the following is an example of an intermediate good or service? A) gasoline purchased by Sam for her commute to work B) flour purchased by Jake to bake a cake for his spouse C) training seminars for employees of an accounting firm D) golf balls sold to Tiger Woods E) None of the above are examples of intermediate goods or services. Answer: C Topic: Intermediate goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 27) Which of the following would NOT be directly included in the U.S. GDP in 2020? A) the market value of restaurant meals sold in 2020 B) the market value of the jet fuel bought by Delta to use for its flights in 2020 C) the value of the automobiles produced in 2020 at the Toyota plant located in Georgetown, Kentucky D) legal services provided to first time home buyers during 2020 E) the purchase of a new home in Atlanta, Georgia in 2020 Answer: B Topic: Intermediate goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Revised AACSB: Reflective thinking

28) One bag of coffee beans is sold for $7 to a cafe that uses it to brew coffee which it sells to customers for a total of $15. A second bag of coffee is sold directly to Joan for $7, who uses it to brew coffee for her family every morning. What is the contribution to GDP from the purchases of coffee beans and coffee? A) $7 B) $14 C) $15 D) $22 E) $29 Answer: D Topic: Intermediate goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 29) Consumption expenditure includes spending A) on intermediate goods and services by firms. B) on office supplies by firms. C) by households. D) by households and spending on office supplies by firms. E) by governments when they are buying goods and services that consumers also buy. Answer: C Topic: Consumption expenditure Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 30) Consumption goods and services include A) washing machines and tickets to football games. B) new homes and existing homes (as long as improvements have been made to the existing home). C) tickets to concerts and medical care provided to veterans by the government. D) new and used textbooks as long as they are sold via stores or online. E) vacation time accumulated by workers. Answer: A Topic: Consumption expenditure Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

31) Expenditures on U.S. produced steaks, shoes, and doctor visits are most likely classified as A) consumption expenditure. B) investment. C) government expenditure on goods and services. D) net exports of goods and services. E) net imports of goods and services. Answer: A Topic: Consumption expenditure Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 32) Investment is the expenditure done by A) savers. B) firms. C) governments. D) the rest of the world. E) Both answers A and B are correct. Answer: B Topic: Investment Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 33) Investment is defined as the purchase of A) any financial asset only. B) additions to inventories only. C) financial assets and inventories only. D) new capital goods and additions to inventories. E) new capital goods but not additions to inventories. Answer: D Topic: Investment Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

34) Which of the following is included as investment in GDP? i. cars produced during the year but unsold at the end of the year ii. new capital equipment produced and purchased during the year iii. purchases of a company's stocks and bonds A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Investment Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 35) Economists define investment to include purchases of A) capital goods and inventories. B) capital goods, household durable goods, and inventories. C) capital goods, such as tools, instruments, and buildings. D) capital goods, equity stocks, and bonds. E) capital goods, equity stocks, and inventories. Answer: A Topic: Investment Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 36) Investment includes A) GM's purchase of robotic machinery. B) student purchases of laptops. C) Walmart's purchase of health insurance for its workers. D) the New York City Library's purchase of new books. E) wages paid to military personnel. Answer: A Topic: Investment Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

37) In measuring GDP, which of the following is included? A) the value of preparing meals at home B) the value of stocks and bonds bought and sold C) the value of used goods when they are sold D) the value of increases in business inventories E) the value of durable consumption goods but not the value of nondurable consumption goods Answer: D Topic: Investment, inventory Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 38) If a firm does not sell all of the goods that it produces in a given time period, then the goods A) do not count in GDP ever. B) do not count in GDP for that time period but always count next period. C) count positively in GDP as inventory investment. D) count negatively in GDP as inventory investment. E) count in GDP the period they are sold to the final user. Answer: C Topic: Investment, inventory Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 39) This year a firm produces $100 million worth of cars this year and sells $102 million worth of cars. Which of the following is TRUE? A) GDP for this year will increase by $100 million. B) GDP for this year will increase by $102 million. C) Inventory investment will increase by $2 million. D) GDP for this year will increase by $202 million. E) The premise of the question is wrong because it is impossible for a firm to sell more than it produces in a given time period. Answer: A Topic: Investment, inventory Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

40) Bob's Funky T-shirts began the year with 1,000 shirts in inventory, produced 10,000 shirts during the year and ended the year with 1,100 shirts in inventory. The 100 shirts added to his inventory will be classified as A) consumption expenditure. B) investment. C) net exports of goods and services. D) exports of goods and services. E) nondurable consumption goods. Answer: B Topic: Investment, inventory Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 41) Kelly's Surf Shop orders 5,000 new surf boards at the beginning of the year but only sells 4,500 by the end of the year. How are the 500 unsold surfboards accounted for in Gross Domestic Product? A) They will be included in the nondurable consumption category of GDP. B) They will be included in the residential investment category of GDP. C) They will be included in the government spending category of GDP. D) They will be included in the inventory investment category of GDP. E) They will be included in the durable consumption category of GDP. Answer: D Topic: Investment, inventory Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 42) When measuring GDP A) the government sector is not included because it is the public sector not the private sector. B) the government sector is counted, and the value of the government sector in GDP is equal to its tax revenue. C) only the federal government's expenditure on goods and services are included. D) the expenditure on goods and services by all levels of government are included. E) the government sector is not counted because it does not produce goods and services. Answer: D Topic: Government expenditure on goods and services Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

43) Government expenditures on goods and services include i. the New York City Library's purchase of new books. ii. Washington D.C.'s purchase of gas for its city buses. iii. California's payment of wages to prison guards. A) i and ii B) i and iii C) ii and iii D) i, ii and iii E) i only Answer: D Topic: Government expenditure on goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 44) Net exports of goods and services is equal to the value of A) exports plus the value of imports. B) imports minus the value of exports. C) domestic consumption minus the value of imports. D) exports minus the value of imports. E) domestic consumption minus the value of exports. Answer: D Topic: Net exports of goods and services Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 45) Net exports of goods and services are defined as the A) value of the goods we sell to foreigners. B) income we receive from selling goods to foreigners. C) value of exports minus the value of imports. D) value of exports minus the income we receive from foreigners. E) value of exports plus the income we receive from foreigners. Answer: C Topic: Net exports of goods and services Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

46) U.S. net exports include A) sales of Hollywood movies to the rest of the world. B) the production of Ford Mustangs in China that are sold in China. C) Honda automobiles produced and sold in Japan. D) the sale of shares of Nike stock on the New York Stock Exchange. E) the sale of U.S. government securities to U.S. citizens. Answer: A Topic: Net exports of goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 47) In calculating GDP, we must A) add the market value of imports and subtract the market value of exports. B) add the market value of exports and subtract the market value of imports. C) exclude net exports of goods and services (NX). D) add the value of the goods produced outside of the United States by American firms. E) subtract the market value of imports, because these goods are produced in a country other than the United States, and subtract the market value of exports, because these goods are consumed in a country other than the United States. Answer: B Topic: Net exports of goods and services Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 48) Which of the following expenditure components of GDP can be negative or positive? A) consumption expenditure B) investment C) government expenditure on goods and services D) net exports of goods and services E) none of the above because expenditure can never be negative. Answer: D Topic: Net exports of goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

49) Last year U.S. net exports of goods and services was negative. This fact means that last year A) there was an error made when calculating net exports of goods and services for the United States. B) the value of U.S. exports was greater than the value of U.S. imports. C) the value of U.S. exports was less than the value of U.S. imports. D) U.S. consumption expenditure plus investment was less than the value of exports plus the value of imports. E) U.S. consumption expenditure plus investment plus government expenditures on goods and services was less than the value of exports plus the value of imports. Answer: C Topic: Net exports of goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 50) When an American college student in Davis, California spends $200 on a pair of Louis Vuitton jeans (a famous French brand made in France), U.S. consumption ________, U.S. net exports ________, and U.S. GDP ________. A) does not change; increases by $200; increases by $200 B) increases by $200; decreases by $200; does not change C) increases by $200; does not change; increases by $200 D) does not change; does not change; does not change E) does not change; decreases by $200; decreases by $200 Answer: B Topic: Net exports of goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 51) The purchase of a new Boeing fighter jet by Israel is classified in the U.S. GDP accounts as A) export expenditure. B) consumption expenditure. C) investment expenditure. D) government expenditure. E) import expenditure. Answer: A Topic: Net exports of goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

52) Gross Domestic Product equals A) Y = C + I - G + NX. B) Y = C - I + G + NX. C) Y = C + I + G + NX. D) Y = C - I - G - NX. E) Y = C + I + G - NX. Answer: C Topic: Total expenditure Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 53) Last year in Candamica, consumption expenditure was $20 billion, interest, rent, and profit were $2.5 billion, government expenditure on goods and services was $7 billion, net exports of goods and services was $5 billion, and investment was $2 billion. Hence total expenditure was A) $24.5 billion. B) $34.5 billion. C) $36.5 billion. D) $34 billion. E) undetermined without information about imports. Answer: D Topic: Total expenditure Skill: Level 3: Using models Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 54) Everything else the same, if government expenditure increases by $400 billion and imports increase by $400 billion, then GDP A) increases by $400 billion. B) increases by $200 billion. C) decreases by $400 billion. D) does not change. E) decreases by $200 billion. Answer: D Topic: Total expenditure Skill: Level 3: Using models Section: Checkpoint 21.1 Status: Old AACSB: Analytic skills

55) Suppose that business firms spend $500 million on new capital equipment this year. Of this $500 million, $300 million was spent on domestically produced capital and $200 million was spent on foreign-produced capital. All else equal, these transactions contribute ________ to GDP. A) $0 B) $200 million C) $300 million D) $500 million E) $800 million Answer: C Topic: Total expenditure Skill: Level 3: Using models Section: Checkpoint 21.1 Status: Old AACSB: Analytic skills 56) Undistributed profits ________ counted as part of GDP because ________. A) are not; households are not paid by the firms B) are; they can be used to buy other goods C) are; they are considered income paid to households and loaned back to firms D) are not; they are considered an intermediate good E) are; firms are required to pay corporate income taxes on them Answer: C Topic: Income approach Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 57) Total expenditure equals total income A) because firms pay out everything they receive as income to the factors of production. B) if firms earn zero profit. C) if firms do not save for future investment. D) only if firms sell all the goods they produce in a given time period. E) only if net taxes equals government expenditures on goods and services. Answer: A Topic: Circular flow Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

58) The circular flow shows that GDP measures i. total income. ii. total expenditures. iii. price changes. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Circular flow Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 59) Because of the circular flows of expenditure and income in the economy, total ________ equals total ________ equals total ________. A) expenditure; investment; income B) expenditure; income; value of production C) consumption; expenditure; value of production D) investment; income; consumption E) consumption; investment; expenditure Answer: B Topic: Circular flow Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 60) In the circular flow, how are the "value of production," "income," and "expenditures" related? A) They have no relationship to each other. B) Once tax payments are subtracted at each stage, they are equal. C) Expenditures on GDP equals the value of production which equals income. D) Once net exports of goods and services are subtracted from GDP, all three are equal. E) Value of production always equals income but expenditures is smaller because households save some of their income and do not spend it. Answer: C Topic: Circular flow Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

61) In a circular flow diagram i. the value of production = income. ii. the value of production = expenditure. iii. expenditure = income. A) i, ii and iii are true statements. B) Only iii is a true statement. C) i and ii are true statements. D) i and iii are true statements. E) Only i is a true statement. Answer: A Topic: Circular flow Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 62) The abbreviation "GDP" stands for A) Gross Domestic Product. B) Gross Domestic Prices. C) General Domestic Prices. D) Great Domestic Prices. E) Government's Domestic Politics. Answer: A Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 63) GDP is equal to the ________ value of all the final goods and services produced within a country in a given period of time. A) production B) market C) wholesale D) retail E) typical Answer: B Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

64) The following are all final goods EXCEPT A) flour used by the baker to make cupcakes. B) bread eaten by a family for lunch. C) pencils used by a 6th grader in class. D) Nike shoes used by a basketball player. E) a computer used by Intel to design new computer chips. Answer: A Topic: GDP, final goods and services Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 65) Which of the following is directly included in the U.S. GDP for 2020? i. a 2020 Cadillac Escalade produced and sold as a new car in the United States in 2020 ii. tires produced in the United States, purchased by General Motors, and installed on a new Cadillac Escalade sold in 2020 iii. General Motors cars produced in Canada because General Motors is an American corporation A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: A Topic: GDP within a country Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Revised AACSB: Reflective thinking 66) Production by Honda, a Japanese firm, in the United States is included in ________ GDP and production by Nike Corporation, a U.S. firm, in Vietnam is included in ________ GDP. A) Japanese; U.S. B) U.S.; Vietnamese C) U.S.; U.S. D) Japanese; Vietnamese E) U.S. AND Japanese; U.S. AND Vietnamese Answer: B Topic: GDP within a country Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

67) Investment is defined as A) the purchase of a stock or bond. B) financial capital. C) what consumers do with their savings. D) the purchase of new capital goods by firms. E) spending on capital goods by governments. Answer: D Topic: Investment Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 68) In one year, a firm increases its production by $9 million and increases sales by $8 million. All other things in the economy remaining the same, which of the following is TRUE? A) GDP increases by $8 million and inventory investment decreases by $1 million. B) GDP increases by $9 million and inventory investment increases by $1 million. C) Inventory investment decreases by $1 million. D) GDP increases by $8 million and investment increases by $1 million. E) GDP increases by $17 million. Answer: B Topic: Investment, inventory Skill: Level 3: Using models Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 69) Net exports of goods and services increase when A) exports of goods and services decrease and imports of goods and services do not change. B) consumption expenditure increases. C) exports of goods and services increase and imports of goods and services do not change. D) consumption expenditure decreases. E) imports of goods and services increase and exports of goods and services do not change. Answer: C Topic: Net exports of goods and services Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

70) Total expenditure equals A) C + I + G + NX. B) C + I + G - NX. C) C + I - G + NX. D) C - I + G + NX. E) C - I - G - NX. Answer: A Topic: Total expenditure Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 71) Total income in a country in 2020 is $780 billion. Total expenditure in the country A) cannot be determined. B) is greater than $780 billion. C) is $780 billion. D) is less than $780 billion. E) is either less than or equal to $780 billion. Answer: C Topic: Total expenditure Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Revised AACSB: Reflective thinking 72) Total expenditure in the United States is equal to consumption expenditure plus investment A) plus government expenditure on goods and services plus imports of goods and services. B) minus government expenditure on goods and services minus imports of goods and services. C) plus government expenditure on goods and services plus exports of goods and services. D) plus government expenditure on goods and services plus exports of goods and services minus imports of goods and services. E) plus government expenditure on goods and services plus exports of goods and services plus imports of goods and services. Answer: D Topic: Total expenditure Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking

73) The circular flow diagram includes the following players A) households, firms, government, rest of the world B) households, factor markets, goods markets, firms C) factor markets, goods markets, financial markets, firms D) government, firms, financial markets, goods markets Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 74) In the circular flow diagram, S and NT are A) flows of money B) flows of expenditures C) flows of income D) none of the above Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 21.1 Status: Old AACSB: Reflective thinking 21.2 Measuring U.S. GDP 1) In order to measure gross domestic product, we can follow A) only one approach: the circular flow approach. B) only one approach: the national accounts approach. C) two approaches: the expenditure approach and the income approach. D) three approaches: the expenditure approach, the income approach, and the production approach. E) three approaches: the expenditure approach, the income approach, and the market-based approach. Answer: C Topic: Measuring GDP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

2) In 2019, U.S. GDP was A) $21 trillion using the expenditure approach. B) $21 trillion using the income approach. C) $21 trillion using the expenditure approach and $19 trillion using the income approach. D) $21 trillion using the income approach and $19 trillion using the expenditure approach. E) both A and B are correct. Answer: E Topic: Measuring GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Revised AACSB: Reflective thinking 3) The expenditure approach to measuring GDP is done by using data on only A) consumption expenditure. B) consumption expenditure and investment. C) consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services. D) consumption expenditure, investment, and government expenditures. E) wages, rent, interest, and profit. Answer: C Topic: Expenditure approach Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 4) In comparing the magnitudes of the components of GDP according to the expenditure approach, we see that in the United States A) government expenditure on goods and services is the largest category. B) investment is the largest category. C) investment is much larger than government expenditure on goods and services. D) investment is less than government expenditure on goods and services. E) investment, government expenditure on goods and services, and consumption expenditure are all about the same size. Answer: D Topic: Expenditure approach Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

5) The largest expenditure category in the United States is A) consumption expenditure. B) investment. C) government expenditure on goods and services. D) net exports of goods and services. E) wages. Answer: A Topic: Expenditure approach Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 6) If consumption was 70 percent of GDP and investment and government expenditure were both 18 percent each, then we see that A) GDP can be over 100 percent because it is "gross" rather than "net." B) the error is due to rounding. C) exports must be less than imports. D) exports must be more than imports. E) we must subtract depreciation from investment so that the components of GDP do not exceed 100 percent. Answer: C Topic: Expenditure approach Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 7) In recent years, which of the following has been negative? A) consumption expenditure B) investment C) government expenditure on goods and services D) net exports of goods and services E) wages Answer: D Topic: Expenditure approach Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

8) In 2009 in the United States, consumption expenditure was $9,996 billion, investment was $1,559 billion, government expenditures on goods and services were $2,927 billion, and total exports were $1,492 billion. GDP equaled A) $12,641 billion. B) $10,120 billion. C) $11,488 billion. D) $14,415 billion. E) some amount, but there is not enough information given to calculate GDP. Answer: E Topic: Expenditure approach Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills 9) The following table reports transactions that occurred in Whoville. Nominal GDP in Whoville is Item Bottles of French Wine Boxes of Cereal Used Tires Shares of Twitter Stock Hours of Swimming Lessons

Price per Unit $20 $4 $15 $10 $5

Quantity 10 20 5 15 8

A) $320. B) $545. C) $120. D) $395. E) $195. Answer: C Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills

10) Based on the data in the table above, what does GDP equal? A) $10,200 billion B) $10,400 billion C) $10,000 billion D) $9,800 billion E) $8,900 billion Answer: C Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills

11) The table gives data for a nation. What is the amount of the country's GDP? A) $6,000 billion B) $6,200 billion C) $6,600 billion D) $6,900 billion E) $5,800 billion Answer: B Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills

12) The table gives data for a nation. The value of the country's net exports of goods and services shows that the country's A) value of its exports exceeded the value of its imports. B) value of its imports are negative. C) net exports of goods and services are decreasing. D) value of its imports exceeded the value of its exports. E) value of its imports must equal zero. Answer: A Topic: Expenditure approach, net exports of goods and services Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills 13) The value of used goods ________ counted as part of GDP ________. A) are; as long as they are classified as consumption goods B) are; as long as they are classified as investment goods C) are not; because they were counted during the period when they were counted as new goods D) are not; because most fall in value and would cause a decrease in the value of GDP E) may be; as long as their value has risen Answer: C Topic: Expenditures not in GDP, used goods Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 14) If the purchase of used goods was to be incorporated into measuring GDP using the expenditure approach, then A) we also will have to account for spending on financial assets. B) it will be very difficult to assign a fair market value to a used good. C) we will be counting the value of the used goods both at the time of their production and at the time of their resale. D) we will have to account for the natural depreciation that a used good experiences. E) consumption spending would need to be adjusted for depreciation. Answer: C Topic: Expenditures not in GDP, used goods Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

15) When calculating GDP, purchases of used goods are A) included at the original price. B) included by taking the original price and subtracting the (current) used price. C) included at the (current) used price. D) not included. E) included at the original price minus any depreciation. Answer: D Topic: Expenditures not in GDP, used goods Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 16) If you buy a five-year-old TV from a friend, the amount you paid for the TV is A) always added to consumption expenditures but not investment. B) always added to investment but not consumption. C) not included in this year's GDP. D) added to investment if the TV is expected to last more than 5 additional years and added to consumption if the TV is expected to last less than 5 additional years. E) included in this year's GDP only if the TV set was manufactured in the United States. Answer: C Topic: Expenditures not in GDP, used goods Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 17) When Jamie purchases a classic 1968 Plymouth Cuda convertible from Shane, GDP A) does not change, because the car was not produced this year. B) increases, because the car is a durable good and increases consumption. C) increases, because the car is a durable good and increases investment. D) does not change, because Jamie did not buy the car from a dealership. E) increases, because this expenditure decreases saving. Answer: A Topic: Expenditures not in GDP, used goods Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

18) Spending on financial assets ________ counted as part of GDP ________. A) are; because the cash exchanged represents an expenditure B) are not; because their purchase is not spending on goods or services C) are; as long as their purchase produces income D) are not; because interest must be paid on them E) may be; as long as their value increases Answer: B Topic: Expenditures not in GDP, financial assets Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 19) The purchase of 500 shares of Honda stock by the California State Employees' Pension fund A) is counted as consumption expenditure. B) is not counted as part of GDP. C) is counted as investment in the GDP accounts. D) is counted as part of export expenditure in the GDP accounts because Honda is a foreign firm. E) is counted as part of import expenditure in the GDP accounts because Honda is a foreign firm. Answer: B Topic: Expenditures not in GDP, financial assets Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 20) in 1999 the government made adjustments to how GDP is calculated that included placing software purchases into the category of A) intermediate goods because software is not a final good. B) inventory and now software purchases are not directly counted as part of GDP. C) investment and now directly counts software purchases as part of GDP. D) net exports of goods and services because most software is written abroad. E) net operating surplus. Answer: C Topic: Eye on the U.S. economy, is a computer program an intermediate good? Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

21) Which of the following is TRUE regarding the measurement of GDP? A) Wages and profit income are used in the income approach to GDP. B) Wages and consumption are used in the expenditure approach to GDP. C) Consumption and investment are used in the income approach to GDP. D) Government expenditure is only counted in the income approach to GDP. E) Investment and wages are expenditures, and are therefore are used in the expenditure approach to GDP. Answer: A Topic: Income approach Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 22) The income approach measures GDP by summing A) C + I + G + NX. B) the total production of all final goods and services produced in a year within a country's borders. C) the wealth of households, business and government. D) the incomes paid households for the resources they own. E) Both answers A and D are correct. Answer: D Topic: Income approach Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 23) The income approach to measuring GDP is based on summing A) the production of each industry. B) wages, interest, rent, and profits. C) the values of final goods, intermediate goods and services, used goods, and financial assets. D) consumption expenditure, investment, government expenditures on goods and services, and net exports of goods and services. E) consumption expenditure and wages. Answer: B Topic: Income approach Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

24) According to the income approach to measuring GDP, the largest income category is A) wages. B) interest. C) rent. D) profits. E) consumption expenditure. Answer: A Topic: Income approach Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 25) In 2009 in the United States, net domestic product at factor cost was $11,091 billion. Additionally, rent was $2,000 billion, profits were $1,000 billion, and interest was $358 billion. Hence wages were A) $7,733 billion. B) $9,091 billion. C) $10,091 billion. D) $8,091 billion. E) $12,091 billion. Answer: A Topic: Income approach Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills 26) When measuring GDP by the income approach, wage income includes i. health-care insurance paid for by the firm for its employees. ii. Social Security contributions made by the firm. iii. wages paid during a worker's vacation time. A) i, ii and iii B) i and ii only C) i only D) ii only E) ii and iii only Answer: A Topic: Income approach, wage income Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

27) Which of the following are included in interest income? i. payments made for the use of land ii. income paid to households for loans they make iii. payments made by households for their borrowing A) i, ii and iii B) ii and iii only C) i and ii only D) ii only E) iii only Answer: B Topic: Income approach, interest income Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 28) The category of "rent" in the income approach to GDP A) includes the money paid to rent apartments only. B) includes the money paid to rent machinery only. C) includes the money paid to use land and other rented inputs. D) does not have any connection to owner-occupied housing. E) includes only the imputed rent for owner-occupied housing. Answer: C Topic: Income approach, rental income Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 29) Adding wages, interest, rent, and profits yields A) gross domestic product. B) gross domestic product at factor cost. C) net domestic product at factor cost. D) GNP. E) total expenditure. Answer: C Topic: Net domestic product at factor cost Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

30) The sum of all the income categories listed in the National Income and Product Accounts adds up to A) gross domestic product. B) net national product. C) disposable income after taxes. D) net domestic product at factor cost. E) gross national product. Answer: D Topic: Net domestic product at factor cost Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 31) Once the categories of income are totaled, the sum is called A) "GDP measured by the income approach." B) "net domestic product at factor cost" and is not equal to GDP. C) "net domestic product at factor cost" and is equal to GDP. D) "total income earned" and is equal to GDP. E) GNP and is not equal to GDP. Answer: B Topic: Net domestic product at factor cost Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 32) One reason the total sum of the income categories does not equal GDP is that A) GDP values goods and services at market prices and the income approach values them at factor cost. B) GDP values goods and services at retail prices and the income approach values them at wholesale cost. C) taxes are generally larger than subsidies and the depreciation of capital is negligible. D) GDP does not include depreciation, which is part of the income categories. E) people do not spend all their income, so the value of consumption expenditure is less than the value of wages. Answer: A Topic: Income approach, adjustments Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

33) After calculating net domestic product at factor cost, to calculate GDP using the income approach, in part we must add A) wages. B) net operating surplus. C) indirect taxes and depreciation. D) interest, rent, and profit. E) subsidies. Answer: C Topic: Income approach, adjustments Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 34) To measure GDP by using the income approach, we must add all incomes and then ________ depreciation and ________ net taxes less subsidies. A) neither add nor subtract; add B) add; neither add nor subtract C) add; add D) add; subtract E) subtract; add Answer: C Topic: Income approach, adjustments Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 35) If the statistical discrepancy is zero, in order to calculate GDP from the value of net domestic product at factor cost, we must add A) the value of intermediate goods and subtract the value of imports. B) direct taxes, subtract corporate profit, and add investment. C) indirect taxes, subtract subsidies, and add depreciation. D) subsidies, subtract indirect taxes and depreciation. E) indirect taxes, subsidies, and depreciation. Answer: C Topic: Income approach, adjustments Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

36) To calculate GDP using the income approach, one of the adjustments made to net domestic product at factor cost is to A) add depreciation. B) add investment. C) subtract investment. D) add consumption expenditure. E) subtract indirect taxes less subsidies. Answer: A Topic: Income approach, adjustments Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 37) Which adjustment(s) must be made to convert net domestic product to GDP? i. add indirect taxes ii. subtract subsidies iii. add depreciation A) i and iii only B) i, ii and iii C) ii only D) iii only E) i and ii Answer: B Topic: Income approach, adjustments Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 38) Last year in a nation to the south, net domestic product at factor cost equaled $3,300 billion. Indirect taxes minus subsidies equaled $200 billion, depreciation equaled $800 billion, the statistical discrepancy equaled zero, and net operating surplus equaled $150 billion. The country's GDP was A) $2,300 billion. B) $3,500 billion. C) $4,300 billion. D) $4,450 billion. E) $4,150 billion. Answer: C Topic: Income approach, adjustments Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills

39) The table above has information about an economy. Using this information, GDP equals A) $6,500 billion. B) $7,800 billion. C) $7,000 billion. D) $8,500 billion. E) some amount that cannot be calculated without information on the amount of government expenditures. Answer: B Topic: Income approach Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills

40) Using the information in the table above, what does GDP equal? A) $365 billion B) $350 billion C) $650 billion D) $380 billion E) GDP cannot be calculated without information on the amount of investment. Answer: D Topic: Income approach Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills

41) The expenditure approach values ________ and the income approach values ________. A) goods and services at market prices; services at factor prices B) goods and services at market prices; goods and services at factor prices C) only goods at market prices; only services at factor prices D) services only at factor prices; goods only at market prices E) goods and services at factor prices; goods and services at market prices Answer: B Topic: Expenditure approach and income approach Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 42) Which of the following would be included in Germany's GNP? A) the production of BMWs (made by a German-based company) in South Carolina B) the production of Michelin tires made in Germany by a French company and then sold directly to French consumers C) the production of BMWs in Germany D) the production of Michelin tires made in France by a French company and then sold to BMW in Germany for use in BMW cars E) Answers A and C are correct. Answer: E Topic: GNP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 43) Real GDP measures the value of goods and services produced in a given year valued using A) base year prices. B) prices that prevail the same year. C) no prices. D) future prices. E) real rather than nominal prices. Answer: A Topic: Real GDP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

44) Real GDP is the value of final goods and services produced in a year A) expressed in the prices of that same year. B) during a recession. C) minus depreciation. D) expressed in the prices of a base year. E) minus the value of all the intermediate goods produced. Answer: D Topic: Real GDP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 45) Real GDP can increase if the i. quantities of goods and services produced decrease and prices fall by a smaller percentage. ii. quantities of goods and services produced decrease and prices fall by a larger percentage. iii. quantities of goods and services produced decrease and prices do not change. iv. quantities of goods and services produced increase. A) i only B) iii only C) iv only D) i and iii E) i, ii, and iii Answer: C Topic: Real GDP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 46) ________ is most likely to contribute to an improvement in our living standard. A) An increase in real GDP B) An increase in the price level C) A decrease in nominal GDP D) An increase in depreciation E) An increase in the GDP deflator combined with a decrease in nominal GDP Answer: A Topic: Real GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

47) Nominal GDP measures the value of goods and services produced in a given year valued using A) constant prices. B) prices of the same year. C) no prices. D) future prices. E) base year prices. Answer: B Topic: Nominal GDP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 48) Nominal GDP is GDP A) computed with current market values. B) during a recession. C) minus depreciation. D) after adjusting for any price changes. E) that ignores depreciation. Answer: A Topic: Nominal GDP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 49) An increase in nominal GDP could result from an increase in i. production. ii. prices. iii. subsidies. A) i only B) ii only C) i and ii D) i and iii E) i, ii, and iii Answer: C Topic: Nominal GDP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

50) Nominal GDP increases A) only if total production increases. B) only if prices increase. C) if either prices and/or total production increase. D) only if the productivity of resources increase. E) only if depreciation decreases. Answer: C Topic: Nominal GDP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 51) When the value of nominal GDP increases from one year to the next, we know that one or two things must have happened during that time A) The nation produced fewer goods and services and/or prices fell for goods and services. B) Consumption expenditure increased and/or corporate profits increased. C) Investment increased and/or payments to employees increased. D) The nation produced more goods and services and/or prices rose for goods and services. E) the value of real GDP must have increased and/or the price level must have decreased. Answer: D Topic: Nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 52) If nominal GDP increases from one year to the next, then A) production must have increased. B) production could have increased, decreased, or stayed the same. C) prices must have increased. D) prices and production must both have increased. E) prices and production must both have decreased. Answer: B Topic: Nominal GDP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

53) Which of the following statement is correct? A) If nominal GDP increases, then real GDP must increase. B) If nominal GDP decreases, then real GDP must increase. C) If real GDP decreases, then nominal GDP must decrease. D) Nominal and real GDP can change either in the same direction or the opposite direction. E) If nominal GDP does not change, then real GDP cannot change. Answer: D Topic: Real GDP versus nominal GDP Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 54) If nominal GDP increases this year, then real GDP A) must decrease. B) must increase. C) must not change. D) could increase, decrease, or not change. E) could either increase or not change but cannot decrease. Answer: D Topic: Real GDP versus nominal GDP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 55) Bobby was researching the economic growth of a country between 2016 and 2021. Using 2016 as the base year, he calculated a twelve percent increase for real GDP and a ten percent increase for nominal GDP. His results indicate that A) he made an error when calculating nominal GDP. B) the quantity of goods and services produced decreased over the period. C) the quantity of goods and services produced increased and prices decreased over the period. D) the quantity of goods and services produced and prices both decreased over the period. E) the quantity of goods and services produced did not change and prices decreased over the period. Answer: C Topic: Real GDP versus nominal GDP Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills

56) If real GDP is greater than nominal GDP for a particular year, then A) production must have fallen between the current year and the base year. B) production must have increased between the current year and the base year. C) prices must have fallen between the current year and the base year. D) prices must have risen between the current year and the base year. E) prices must have fallen between the current year and the immediate past year. Answer: C Topic: Real GDP versus nominal GDP Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills 57) During last year, a country produced 20,000 pizzas and 10,000 hamburgers and nothing else. The pizzas sold for $10.00 each and the hamburgers for $3.00 each. Nominal GDP was A) $230,000. B) $70,000. C) $460,000. D) $390,000. E) $360,000. Answer: A Topic: Nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills 58) The base year is 2020. A country only produces purses. The price of a purse in 2018 was $50. The price of a purse was $30 in 2020. The quantity of purses produced in 2018 was 10,000 units and in 2020 was 20,000 units. Nominal GDP in 2020 equals A) $1,000,000. B) $500,000. C) $600,000. D) $200,000. E) an amount that cannot be determined without information about real GDP in 2020. Answer: C Topic: Nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Revised AACSB: Analytic skills

59) The base year is 2020. A country only produces pasta makers. The price of a pasta maker in 2020 was $100. The price of a pasta maker was $90 in 2021. The quantity of pasta makers produced in 2020 was 10,000 units and in 2021 was 10,500 units. Nominal GDP in 2021 equals A) $900,000. B) $945,000. C) $1,000,000. D) $1,050,000. E) an amount that cannot be determined without information about nominal GDP in 2020. Answer: B Topic: Nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Revised AACSB: Analytic skills 60) The base year is 2012. A country only produces Blu-ray players. The price of a Blu-ray player in 2012 was $100. The price of a Blu-ray player was $90 in 2013. The quantity of Blu-ray players produced in 2012 was 10,000 units and in 2013 was 10,500 units. Real GDP in 2012 equals A) $900,000. B) $945,000. C) $1,000,000. D) $1,050,000. E) an amount that cannot be determined without information about real GDP in 2007. Answer: C Topic: Real GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills

61) Assume that a small country produces only green peppers and red peppers. Last year, it produced 100 green peppers and 50 red peppers and sold them at prices of $2 per green pepper and $3 per red pepper. This year, it produced 150 green peppers and 60 red peppers and sold them at prices of $2 per green pepper and $4 per red pepper. What is real GDP this year if the base year is last year? A) $540 B) $400 C) $480 D) $350 E) $890 Answer: C Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills Data for 2019

Data for 2020

62) The table above gives the production and prices for a small nation that produces only bread and soda. The base year is 2019. What is nominal GDP in 2019? A) $410 B) $450 C) $900 D) $550 E) $460 Answer: B Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills

63) The table above gives the production and prices for a small nation that produces only bread and soda. The base year is 2020. What is real GDP in 2020? A) $530 B) $1080 C) $510 D) $210 E) $300 Answer: C Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Revised AACSB: Analytic skills 64) When calculating real GDP, the reference base year A) allows us to account for changes in GNP compared to GDP. B) always reduces the value of GDP compared to GNP. C) allows us to calculate the value of the goods and services in terms of prices of that base year. D) usually increases the value of GNP compared to GDP. E) allows us to increase the value of goods and services. Answer: C Topic: Real GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 65) In calculating GDP, economists A) measure total expenditure as the only true measure. B) can measure either total expenditure or total income. C) measure total income as the only true measure. D) measure total income minus total expenditure. E) measure total income plus total expenditure. Answer: B Topic: Expenditure approach and income approach Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

66) The expenditure approach to measuring GDP is based on summing A) wages, interest, rent, and profit. B) each industry's production. C) the total values of final goods, intermediate goods and services, used goods, and financial assets. D) consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services. E) consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services minus wages, interest, rent, and profit. Answer: D Topic: Expenditure approach Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 67) Which of the following is NOT included in the expenditure approach to calculating GDP? A) government expenditures on goods and services B) investment C) net exports of goods and services D) wages E) consumption expenditure Answer: D Topic: Expenditure approach Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 68) Suppose GDP is $10 billion, consumption expenditure is $7 billion, investment is $2 billion, and government expenditure on goods and services is $2 billion. Net exports of goods and services must be A) $1 billion. B) -$1 billion. C) $2 billion. D) -$2 billion. E) $10 billion. Answer: B Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills

69) According to the expenditure approach to measuring GDP, in the United States, the largest component of GDP is A) consumption expenditure. B) investment. C) government expenditure on goods and services. D) net exports of goods and services. E) wages. Answer: A Topic: Expenditure approach Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 70) Expenditures in GDP do not include A) used goods or financial assets. B) financial assets or investment. C) used goods or investment. D) investment, stocks, or bonds. E) government expenditures on goods and services. Answer: A Topic: Expenditure approach Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 71) Which of the following is NOT part of the income used in the income approach to measuring GDP? A) wages B) rent C) interest D) taxes paid by persons E) profit Answer: D Topic: Income approach Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

72) Which of the following is NOT included in the income approach to calculating GDP? A) interest B) wages C) net exports of goods and services D) profits E) rent Answer: C Topic: Income approach Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 73) The sum of the components of incomes is called A) net domestic product at market prices. B) gross domestic product at market prices. C) gross domestic product at factor cost. D) net domestic product at factor cost. E) GNP. Answer: D Topic: Net domestic product at factor cost Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 74) Nominal GDP can change A) only if prices change. B) only if the quantities of goods and services change. C) only if prices increase. D) if either prices OR the quantities of goods and services change. E) only if prices AND the quantities of the goods and services change. Answer: D Topic: Nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

75) A south sea island produces only coconuts. In 2019, the price of a coconut is $1 and the quantity produced is 200. In 2020, the price of a coconut is $1.50 and the quantity produced is 250. 2019 is the base year. Real GDP in 2020 is A) $375. B) $350. C) $200. D) $250. E) $1.50. Answer: D Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Revised AACSB: Analytic skills 76) The difference between nominal GDP and real GDP is A) the indirect taxes used in their calculations. B) the prices used in their calculations. C) that nominal GDP includes the depreciation of capital and real GDP does not. D) that nominal GDP includes net exports of goods and services and real GDP includes net imports. E) that real GDP includes the depreciation of capital and nominal GDP does not. Answer: B Topic: Real GDP versus nominal GDP Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 77) Since 1999, the purchase of computer software by firms has been considered A) an investment. B) an intermediate good. C) depreciation. D) none of the above. Answer: A Topic: Eye on the U.S. economy, is a computer program an intermediate good? Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking

78) Statistical discrepancy is calculated as A) GDP expenditure total - GDP income total B) Real GDP-nominal GDP C) Gross GDP-Net GDP D) none of the above Answer: A Topic: Income approach, adjustments Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 21.3 The Use and Limitations of Real GDP 1) GDP is A) a perfect measure of the standard of living. B) a perfect measure of the value of production. C) a measure which includes the value of all newly produced goods and services. D) an imperfect measure of the standard of living. E) the only factor that affects our standard of living. Answer: D Topic: Standard of living Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 2) Even though it is not a perfect measure, economists can use real GDP to i. compare how the value of the goods and services produced in China have changed over the past 10 years. ii. look at the length of recessions and expansions in the United States. iii. compare the standard of living in China versus the standard of living in Vietnam. A) ii only B) i, ii and iii C) i and iii D) i and ii E) ii and iii Answer: B Topic: Standard of living Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

3) Although imperfect, which of the following is used as a measure of the standard of living? A) real GDP ÷ population B) real GDP × population C) nominal GDP × population D) nominal GNP ÷ population E) nominal GNP × population Answer: A Topic: Standard of living Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 4) In the United States, between 1960 and 2019, there has been i. a consistent, non-changing growth rate of potential GDP per person. ii. an increase in the standard of living based on real GDP per person. iii. fluctuations in real GDP per person around potential GDP per person. A) ii only B) i, ii and iii C) i and ii only D) ii and iii E) i only Answer: D Topic: Standard of living Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Revised AACSB: Reflective thinking 5) In 1961, real GDP totaled $575 billion and in 2011 it totaled $1,255 billion. Between 1961 and 2011, the population increased from 50 million to 100 million. Between 1961 and 2011, the standard of living based on real GDP per person A) increased from $11,500 to $12,550. B) increased by over 300 percent. C) increased by about 118 percent. D) decreased from $125,500 to $28,750. E) decreased by 9 percent. Answer: A Topic: Real GDP and nominal GDP Skill: Level 3: Using models Section: Checkpoint 21.3 Status: Old AACSB: Analytic skills

6) If we use GDP to measure our standard of living, then our procedure is A) inaccurate because our standard of living does not depend only on goods and services. B) accurate because our standard of living depends solely on goods and services. C) inaccurate because our standard of living has nothing to do with goods and services. D) inaccurate because our standard of living only depends on used goods and services. E) accurate only if we use nominal GDP rather than real GDP. Answer: A Topic: Standard of living Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 7) The business cycle describes A) the change in potential GDP over time. B) the change in the standard of living across countries. C) the behavior of real GDP over time. D) the behavior of nominal GDP over time. E) the behavior of GNP over time. Answer: C Topic: Business cycle Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 8) The business cycle is defined as A) changes in the stock market. B) changes in financial markets. C) persistent growth in potential GDP. D) irregular ups and downs in production and jobs. E) the period of time during which the unemployment rate is rising. Answer: D Topic: Business cycle Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

9) The relationship between real GDP and potential GDP over the business cycle can be best summarized by which of the following statements? A) Real GDP fluctuates around potential GDP. B) Real GDP is always equal to potential GDP. C) Real GDP cannot be greater than potential GDP. D) Real GDP cannot be less than potential GDP. E) Real GDP cannot be equal to potential GDP. Answer: A Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 10) Over the business cycle A) potential GDP fluctuates around its trend. B) real GDP fluctuates around its trend. C) only potential GDP fluctuates around its trend and real GDP remains equal to its trend. D) only real GDP fluctuates around its trend and potential GDP remains equal to its trend. E) neither real GDP nor potential GDP fluctuates because they just grow smoothly along their trends. Answer: B Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 11) During the business cycle A) real GDP fluctuates around nominal GDP. B) nominal GDP fluctuates around real GDP. C) real GDP fluctuates around its trend. D) trend GDP fluctuates around real GDP. E) real GDP falls after the trough. Answer: C Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

12) A business cycle has two turning points, which are the A) recession and trough. B) peak and recession. C) trough and peak. D) expansion and recession. E) peak and expansion. Answer: C Topic: Business cycle Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 13) The business cycle has two phases A) expansion and peak. B) recession and trough. C) peak and trough. D) recession and expansion. E) expansion and trough. Answer: D Topic: Business cycle Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

14) Based on the figure above, in which quarter or quarters did a recession occur? A) between 2015, 2nd quarter to 2016, 2nd quarter and also between 2017, 2nd quarter to the end of the figure B) in 2016, 2nd quarter C) between 2016, 2nd quarter to 2017, 2nd quarter D) between 2017, 1st quarter to 2017 2nd quarter E) after 2016, 2nd quarter Answer: C Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Revised AACSB: Reflective thinking 15) Based on the figure above, in which quarter or quarters did an expansion occur? A) between 2015, 2nd quarter to 2016, 2nd quarter and also between 2017, 2nd quarter to the end of the figure B) in 2016, 2nd quarter C) between 2016, 2nd quarter to 2017, 2nd quarter D) in 2017, 2nd quarter E) There are no expansions illustrated in the figure. Answer: A Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Revised AACSB: Reflective thinking

16) Based on the figure above, in which quarter or quarters did a trough occur? A) between 2015, 2nd quarter to 2016, 2nd quarter and also between 2017, 2nd quarter to the end of the figure B) in 2016, 2nd quarter C) between 2016, 2nd quarter to 2017, 2nd quarter D) in 2017, 2nd quarter E) There are no troughs illustrated in the figure. Answer: D Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Revised AACSB: Reflective thinking 17) Based on the figure above, in which quarter or quarters did a peak occur? A) between 2015, 2nd quarter to 2016, 2nd quarter and also between 2017, 2nd quarter to the end of the figure B) in 2016, 2nd quarter C) between 2016, 2nd quarter to 2017, 2nd quarter D) in 2017, 2nd quarter E) There are no peaks illustrated in the figure. Answer: B Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Revised AACSB: Reflective thinking 18) A standard definition of recession is A) a period of expansion in many sectors of the economy. B) an increase in GDP that lasts for at least 6 months. C) a decrease in real GDP for at least two successive quarters. D) an increase in unemployment from one month to the next. E) a period of time when the unemployment rate exceeds 6.5 percent. Answer: C Topic: Business cycle, recession Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

19) In order to be classified as a recession, a contraction of general economic activity must last at least A) one year. B) six months. C) one period. D) one quarter. E) None of the above because recessions do not have a minimum length. Answer: B Topic: Business cycle, recession Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 20) A recession conventionally is defined as a decrease in A) real GDP that lasts for at least six months. B) the growth rate of real GDP that lasts for at least six months. C) potential GDP that lasts for at least six months. D) real GDP that lasts for at least three months. E) the inflation rate that lasts for at least six months. Answer: A Topic: Business cycle, recession Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 21) A recession runs from the A) peak of the business cycle to its trough. B) peak of the business cycle to a recovery. C) expansion of a business cycle to its peak. D) trough of a business cycle to its peak. E) trough of a business cycle to its expansion. Answer: A Topic: Business cycle, recession Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

22) The U.S. economy is experiencing falling output, falling employment, falling incomes and rising unemployment. These conditions best describe a business cycle A) expansion. B) peak. C) trend. D) recession. E) trough. Answer: D Topic: Business cycle, recession Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 23) The U.S. economy is experiencing rising output, rising employment, rising incomes and falling unemployment. These conditions best describe a business cycle A) expansion. B) peak. C) trend. D) recession. E) trough. Answer: A Topic: Business cycle, expansion Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 24) The NBER describes a recession as A) "a period of significant decline in economic activity spread across the economy, lasting more then a few months." B) "a decrease in real GDP for two successive quarters." C) "a decrease in potential GDP for at least six months." D) "a decrease in the standard of living for at least one year." E) "a one year period with increases in the unemployment rate." Answer: A Topic: Business cycle, NBER Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

25) The Great Moderation describes the period A) of relatively steady growth in real GDP between 1991 and 2008. B) of relatively steady growth in real GDP after the year 2000. C) between 2000 and 2008 when potential GDP did not increase. D) between 1990 and 2005 when real GDP grew significantly more slowly than did potential GDP. E) of very slow growth in real GDP after 1990. Answer: A Topic: Business cycle, history Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 26) Which of the following describe the United States economy in 2008 and and the start of 2009? A) The economy was in an expansion. B) The economy was in a recession. C) Real GDP per person increased. D) Real GDP reached a peak. E) None of the above answers is correct. Answer: B Topic: Business cycle, recession Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 27) U.S. real GDP A) precisely measures the improving standard of living in the United States. B) measures the change in the price level over time. C) excludes the value of underground production and leisure time. D) is not as accurate as nominal GDP when measuring standard of living changes over time. E) includes the value of underground production but excludes the value of leisure time. Answer: C Topic: Omissions from GDP Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

28) As measured, GDP omits which of the following? i. Illegal sales of goods and services ii. Changes in the amount of leisure time iii. Household production of goods and services A) i only B) i and ii C) ii and iii D) i and iii E) i, ii, and iii Answer: E Topic: Omissions from GDP Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 29) Excluding household and underground production leads to A) underestimation of real GDP but not nominal GDP. B) overestimation of real GDP but not nominal GDP. C) overestimation of both real GDP and nominal GDP. D) underestimation of both real GDP and nominal GDP. E) underestimation of real GDP an overestimation of nominal GDP. Answer: D Topic: Omissions from GDP Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 30) Goods and services such as environmental quality, leisure time, and household production are not included in GDP because they are NOT A) productive activities. B) for consumption. C) bought in markets. D) made for profit. E) really durable goods. Answer: C Topic: Omissions from GDP Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

31) Household production, such as baking bread at home, is NOT included in GDP because it A) has better quality than the bread in the store. B) has lower quality than the bread in the store. C) does not add anything of value to GDP. D) does not involve a market transaction. E) is not really production. Answer: D Topic: Household production Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 32) The calculation of GDP excludes the value of A) government expenditure on office supplies. B) households' purchases of shampoo. C) businesses' purchase of new machine tools. D) a family member painting the family home. E) expenditure on durable goods. Answer: D Topic: Household production Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 33) An example of household production excluded from GDP is A) household cleaning services provided by Merry Maids Incorporated. B) child care provided by a certified nanny. C) tree trimming you provide at your parents' home. D) plumbing work completed by Joe Fix-it. E) lawn care provided by a local lawn care company. Answer: C Topic: Household production Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

34) Babysitting services the oldest son provides his parents A) counts as nominal GDP but not real GDP. B) counts as real GDP but not nominal GDP. C) counts as real GDP and nominal GDP. D) does not count as real GDP nor nominal GDP. E) counts in both real and nominal GDP only if the son is not paid. Answer: D Topic: Household production Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 35) As more women decide to work outside the home and therefore hire others to work around their home, GDP will increase by A) only the value of the output produced by the newly working women. B) the value of the output produced by the newly working women minus the value of the household work they were previously performing. C) the value of the output produced by the newly working women plus the value of any household work they are now hiring someone to perform. D) only the value of the household work they are now hiring someone to perform. E) the value of the household work they were previously performing minus the value of the output produced by the newly working women. Answer: C Topic: Household production Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 36) Instead of taking the dirty laundry with you when you go back to visit your parents, you use a Laundromat. Your use of the Laundromat means that A) GDP will decrease and the country's standard of living will fall. B) your parents' contribution to GDP will increase. C) GDP will remain the same. D) what you paid for use of the Laundromat will be included in GDP. E) real GDP does not change because the clothes are still being laundered but nominal GDP rises since you are now paying for the service. Answer: D Topic: Household production Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

37) If you mow the lawn yourself, the lawn mowing is considered household production. If you pay Larry's Lawn Service to mow your lawn, the lawn mowing is considered A) a leisure time activity. B) a service, that will be counted as part of GDP. C) a service, but is not counted as part of GDP because it simply replaces a service you used to perform. D) rent, and therefore is counted as part of GDP. E) underground production because it replaces the underground production of you mowing your lawn. Answer: B Topic: Household production Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 38) Pat gives up a $40,000 per year job to stay at home and take care of the house. By so doing, Pat saves $15,000 in child care and house cleaning services which he now performs himself. The direct effect on GDP from Pat's decision is a decrease of A) $40,000. B) $55,000. C) $25,000. D) $15,000. E) $30,000. Answer: B Topic: Household production Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Analytic skills 39) Which of the following is likely to be an unreported economic activity? A) a $250,000 bonus paid to the CEO of a company B) tips paid to a taxi driver C) the minimum wage paid to a teenager working at a McDonald's D) the brokerage fees paid to a broker at Merrill Lynch E) the purchase of shares of stock in Walgreen's Pharmacy Answer: B Topic: Underground production Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

40) The measurement of GDP handles underground production by A) including the amount produced in this sector of the economy in exactly the same way that all other production is included. B) omitting it because underground production is unreported to the government by the people involved. C) adding it at fixed prices that change only infrequently. D) adding an estimate of it because it is difficult to precisely measure underground production. E) omitting it because, being illegal, it has no effect on the nation's total production. Answer: B Topic: Underground production Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 41) Leisure time is ignored when calculating GDP because leisure time A) does not affect our standard of living. B) has been declining over time. C) is not an economic good. D) is not bought in a market. E) is not productive. Answer: D Topic: Leisure time Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 42) Which of the following is NOT included in measured U.S. GDP? A) the value of the pizzas produced at Pizza Hut in Kansas City B) the value of leisure time C) the value of the goods produced at a French owned plant in Atlanta, Georgia D) the value of the services produced by a lawyer in Tampa, Florida E) the value of a plane produced by Boeing in Washington and sold to Air France Answer: B Topic: Leisure time Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

43) Which of the following is directly accounted for in the calculation of GDP? A) the value of one hour of leisure as measured by the hourly wage one would otherwise earn by working B) the value of repairing your own kitchen sink as measured by the average rates charged by local plumbers C) cash earnings from an illegal poker game D) improvements in quality of life from the reduction of pollution E) None of the above items is accounted for in GDP. Answer: E Topic: Household production Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 44) Mexico City is notorious for its excessive pollution. Mexico's measure of GDP is A) decreased by the estimated value of the pollution's harm. B) not affected by the estimated value of the pollution's harm. C) increased by the estimated value of the pollution's harm. D) changed by the pollution only when comparing its GDP with the U.S. GDP. E) None of the above answers is correct. Answer: B Topic: Environmental quality Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 45) A new technology is discovered which results in all new cars producing 50 percent less pollution. Which of the following is TRUE? A) GDP will increase to reflect the fact that the air we breathe is cleaner. B) GDP will increase if there is an increase in the production cost and price of the car. C) GDP increases anytime pollution is reduced. D) GDP will decrease. E) Real GDP increases because the air is cleaner, but nominal GDP does not change since air is free. Answer: B Topic: Environmental quality Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

46) The calculation of GDP using the income approach EXCLUDES A) rent. B) interest. C) environment quality. D) wages. E) profit. Answer: C Topic: Environmental quality Skill: Level 3: Using models Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 47) The Human Development Index was proposed because A) people confuse nominal GDP and real GDP. B) nominal GDP and real GDP are subjective measures. C) of the limitations of real GDP as a measure comparing the standard of living in different nations. D) the GDP deflator changes if the base year is changed. E) different nations have different populations. Answer: C Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 48) Which of the following is NOT part of the business cycle? A) recession B) peak C) inflation D) trough E) expansion Answer: C Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

49) In the business cycle, what immediately precedes the time when real GDP is falling? A) recession B) peak C) depression D) trough E) expansion Answer: B Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 50) Which of the following goods and services are omitted from GDP? A) household production B) capital goods C) expenditure on resources used to protect the environment D) government weather satellites E) services such as hair styling Answer: A Topic: Household production Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 51) GDP handles household production by A) estimating a dollar value of the goods purchased to do housework. B) estimating a dollar value of the services provided. C) ignoring it. D) including it in exactly the same way that all other production is included. E) including it in real GDP but not in nominal GDP because there are no prices paid for the work. Answer: C Topic: Household production Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

52) The underground economy A) is measured by government officials through tax returns. B) is difficult to describe but easy to measure. C) includes production that uses illegal workers who are paid less than minimum wage. D) includes mining production. E) is estimated by the government and the estimate is part of official GDP. Answer: C Topic: Underground production Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 53) You hire some of your friends to help you move to a new house. You pay them a total of $200 and buy them dinner at Pizza Hut. Which of the following is TRUE? A) The $200 should be counted as part of GDP but not the dinner at Pizza Hut. B) If your friends do not report the $200 on their tax forms, it becomes part of the underground economy. C) The dinner at Pizza Hut should be counted as part of GDP, but not the $200. D) Hiring your friends is an illegal activity and should not be counted in GDP. E) Neither the $200 nor the dinner should be counted in GDP because both are household production. Answer: B Topic: Underground production Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 54) The value of leisure time is A) included in GDP and, in recent years, has become an increasing large part of GDP. B) excluded from GDP. C) zero. D) directly included in GDP but, in recent years, has become a decreasing large part of GDP. E) directly included in GDP and, in recent years, has not changed much as a fraction of GDP. Answer: B Topic: Leisure time Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

55) Leisure time A) is less valuable to us than the wage we earn for working. B) has steadily decreased over the years. C) is not valued as part of GDP. D) is not an economic good. E) is included in GDP and has become an increasingly large part of GDP. Answer: C Topic: Leisure time Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 56) A new technology is discovered that results in all new cars producing 50 percent less pollution. The technology costs nothing to produce and cars do not change in price. As a result of the technology, there is a reduction in the number of visits people make to the doctor to complain of breathing difficulties. Which of the following is TRUE? A) Real GDP decreases as a result of fewer doctor services being provided. B) Real GDP is not affected. C) Nominal GDP increases to reflect the improvement in the health of the population. D) Real GDP decreases to reflect the decrease in pollution. E) Nominal GDP does not change and real GDP increases. Answer: A Topic: Environmental quality Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 57) A country with a real GDP per person similar to real GDP per person in the United States but with limited political freedom is generally considered to have A) a lower standard of living than the United States. B) a larger Human Development Index because the other country still needs to develop more political freedom. C) the same standard of living as the United States. D) an understated GDP. E) an overstated nominal GDP. Answer: A Topic: Political freedom Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

58) The alternative measure of the standard of living which adjusts GDP for the costs of greenhouse gas emissions and other negative influences on the environment is called A) Green GDP. B) Human Development Index. C) the standard of living. D) an understated GDP. E) environmental GDP. Answer: A Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 59) The alternative measure of the standard of living that adjusts GDP for the cost of depleting nonrenewable resources is called A) Happy Planet Index. B) Human Development Index. C) the standard of living. D) Green GDP. E) environmental GDP. Answer: A Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 60) Of the following, which country had the highest HDI in 2018? A) Norway B) Qatar C) Russia D) USA E) Canada Answer: A Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 3: Using models Section: Checkpoint 21.3 Status: Revised AACSB: Reflective thinking

61) Of the following, which country had the highest income per person in 2018? A) Norway B) Qatar C) Russia D) USA E) Canada Answer: B Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 3: Using models Section: Checkpoint 21.3 Status: Revised AACSB: Reflective thinking 62) The HDI does NOT include A) income. B) political freedom. C) life expectancy. D) health. E) education. Answer: B Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

63) Based on the figure above, a recession took place ________, and expansion occurred in ________. A) between 2nd quarter 2015 to 2nd quarter 2016, and also between 2nd quarter 2017 to the end of the figure; the 2nd quarter 2017 B) in 2016, 2nd quarter C) between 2nd quarter 2016 to 2nd quarter 2017; between 2nd quarter 2015 to 2nd quarter 2016, and also between 2nd quarter 2017 to the end of the figure D) between the 1st quarter 2017 to the 2nd quarter 2017; the 2nd quarter 2017 E) after 2nd quarter 2016; before the 2nd quarter 2016 Answer: C Topic: Business cycle Skill: Level 5: Critical thinking Section: Checkpoint 21.3 Status: Revised AACSB: Analytic skills 64) Based on the figure above, a trough occurred ________, while the peak occurred ________. A) between the 2nd quarter 2015 to the 2nd quarter 2016; between the 2nd quarter 2017 to the end of the figure B) in the 2nd quarter 2016; in the 2nd quarter 2017 C) between the 2nd quarter 2016 to the 2nd quarter 2017; 2nd quarter of 2017 D) in 2nd quarter 2017; in the 2nd quarter 2016 E) There are no troughs and peaks illustrated in the figure. Answer: D Topic: Business cycle Skill: Level 5: Critical thinking Section: Checkpoint 21.3 Status: Revised AACSB: Analytic skills

65) Based on the figure above, a peak occurred in ________, followed by the ________. A) the 2nd quarter 2015; expansion to the end of the figure B) in the 2nd quarter 2016; recession til the 2nd quarter 2017 C) the 2nd quarter 2017; expansion to the end of the figure D) in the 2nd quarter 2017; recession to the end of the figure E) the 2nd quarter 2015; expansion til the 2nd quarter 2016 Answer: B Topic: Business cycle Skill: Level 5: Critical thinking Section: Checkpoint 21.3 Status: Revised AACSB: Analytic skills 66) Based on the figure above, a trough occurred in ________, followed by the ________. A) the 2nd quarter 2015; expansion to the end of the figure B) in the 2nd quarter 2016; recession til the 2nd quarter 2017 C) the 2nd quarter 2017; expansion to the end of the figure D) in the 2nd quarter 2017; recession to the end of the figure E) the 2nd quarter 2015; expansion til the 2nd quarter 2016 Answer: C Topic: Business cycle Skill: Level 5: Critical thinking Section: Checkpoint 21.3 Status: Revised AACSB: Analytic skills 67) In order to identify the date of a business cycle peak, the NBER committee looks at data on A) industrial production. B) total employment. C) wholesale and retail sales. D) all of the above Answer: D Topic: Eye on Boom and busts, how do we track economic booms and busts? Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking

21.4 Appendix: Measuring Real GDP 1) Using the chained-dollar method to calculate real GDP, real GDP is calculated by A) valuing the current output at last year's real GDP prices. B) valuing the current output at current year prices. C) averaging the growth of output from one year to the next when the growth rates are calculated using this year's prices and using last year's prices. D) either A or C, depending which gives the larger value for real GDP. E) averaging the value of current output valued using base year prices and current output valued using current year prices. Answer: C Topic: Real GDP Skill: Level 2: Using definitions Section: Chapter 21 Appendix Status: Old AACSB: Reflective thinking 2) Janet calculated the GDP growth rates for France between 2015 and 2016. Using 2015 prices for both years, GDP increased 5 percent. Using 2016 prices for both years, GDP increased 1 percent. Hence the chained-price method will calculate that between these years, real GDP increased by A) 1 percent. B) 3 percent. C) 5 percent. D) 6 percent. E) 4 percent. Answer: B Topic: Real GDP Skill: Level 3: Using models Section: Chapter 21 Appendix Status: Old AACSB: Analytic skills

3) The table above gives some data about GDP in a country for two years. Using these the chained-dollar method for calculating real GDP, real GDP increased by ________ percent between these two years. A) 4 B) 5 C) 6 D) 10 E) 2 Answer: B Topic: Real GDP Skill: Level 4: Applying models Section: Chapter 21 Appendix Status: Old AACSB: Analytic skills

4) Bananaland produces only bananas and sunscreen and the quantities and prices for 2018 and 2019 are given in the table above. The base year is 2018. Nominal GDP in 2018 is equal to A) $500. B) $625. C) $640. D) $800. E) $100. Answer: A Topic: Nominal GDP Skill: Level 3: Using models Section: Chapter 21 Appendix Status: Revised AACSB: Analytic skills

5) Bananaland produces only bananas and sunscreen and the quantities and prices for 2018 and 2019 are given in the table above. The base year is 2018. Nominal GDP in 2019 is equal to A) $500. B) $800. C) $640. D) $625. E) $200. Answer: B Topic: Nominal GDP Skill: Level 3: Using models Section: Chapter 21 Appendix Status: Revised AACSB: Analytic skills 6) Bananaland produces only bananas and sunscreen and the quantities and prices for 2018 and 2019 are given in the table above. The base year is 2018. Real GDP in 2018 is equal to A) $800. B) $640. C) $625. D) $500. E) $200. Answer: D Topic: Real GDP Skill: Level 3: Using models Section: Chapter 21 Appendix Status: Revised AACSB: Analytic skills 7) Bananaland produces only bananas and sunscreen and the quantities and prices for 2018 and 2019 are given in the table above. Between 2018 and 2019, which grew more rapidly, nominal GDP or real GDP? A) Nominal GDP grew more rapidly. B) Real GDP grew more rapidly. C) Both grew at the same rate. D) Because real GDP and nominal GDP use different prices, it is not possible to determine which grew most rapidly. E) More information is needed to determine which grew more rapidly. Answer: A Topic: Real GDP Skill: Level 3: Using models Section: Chapter 21 Appendix Status: Revised AACSB: Analytic skills

8) Bananaland produces only bananas and sunscreen and the quantities and prices for 2018 and 2019 are given in the table above. The base year is 2018. In 2019 which is larger, nominal GDP or real GDP? A) Nominal GDP is larger. B) Real GDP is larger. C) Both are the same size. D) The answer is ambiguous. E) More information is needed to determine which is larger. Answer: A Topic: Real GDP Skill: Level 3: Using models Section: Chapter 21 Appendix Status: Revised AACSB: Analytic skills 9) Real GDP measures the value of goods and services produced in a given year using A) base year prices. B) prices of that same year. C) no prices. D) future prices. E) government approved prices. Answer: A Topic: Real GDP Skill: Level 1: Definition Section: Chapter 21 Appendix Status: Old AACSB: Reflective thinking 10) In a small country, using prices of 2018, GDP in 2018 was $100 and GDP in 2019 was $110. Using prices of 2019, GDP in 2018 was $200 and GDP in 2019 was $210. The country's BEA will calculate ________ percent as the growth in real GDP between those years. A) 10 B) 5 C) 15 D) 7.5 E) None of the above answers is correct. Answer: D Topic: Real GDP Skill: Level 3: Using models Section: Chapter 21 Appendix Status: Revised AACSB: Analytic skills

11) Using prices from 2018, GDP grew 10 percent between 2018 and 2019; using prices from 2019, GDP grew 8 percent between 2018 and 2018. For its link back to the base year, the BEA will use ________ percent as the growth in real GDP between 2018 and 2019. A) 10 B) 8 C) 2 D) 18 E) 9 Answer: E Topic: Real GDP Skill: Level 3: Using models Section: Chapter 21 Appendix Status: Revised AACSB: Analytic skills 21.5 Integrative Questions 1) Depreciation is A) fall in the value of an exchange rate. B) the decrease in the value of capital resulting from its use and obsolescence. C) the decrease in the purchasing power of a dollar because of inflation. D) part of consumption expenditure. E) part of net domestic product at factor cost. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 2) Comparing nominal GDP of 2019 to nominal GDP of twenty years ago A) is an inaccurate measure of the change in total production. B) has no economic meaning. C) will be an accurate measure of the change in total production. D) determines the extent to which the cost of living changed. E) cannot be done because the two GDP measures use different prices. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Revised AACSB: Reflective thinking

3) If real GDP increases over time, the cost of living will A) always remain constant. B) always decrease. C) always increase. D) either remain constant or increase. E) More information is needed to determine how the cost of living changes. Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 4) If both the production of goods and services increase and prices rise, then the change in nominal GDP A) definitely understates the change in production. B) definitely accurately reflect the change in production. C) definitely overstates the change in production. D) either understates or might accurately reflect the change in production. E) More information is needed to determine how the change in nominal GDP compares to the change in production. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 5) The nation's supply of productive resources increases if A) investment is greater than depreciation. B) investment equals depreciation. C) investment is less than depreciation. D) Both answers A and B can be correct. E) None of the above answers is correct because the relationship between investment and depreciation has no bearing on the amount of the nation's productive resources. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills

6) If a wealthy woman marries her butler, quits paying him and does not hire a new butler, then A) GDP definitely decreases. B) GDP definitely does not change. C) GDP definitely increases. D) GDP either does not change or increases. E) There is not enough information given to reach a conclusion. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 21.6 Essay: GDP, Income, and Expenditure 1) Define and discuss GDP. Answer: GDP is the market value of all final goods and services produced within a country in a given time period. Only final goods and services are included. Goods produced as intermediate goods are excluded. The goods and services must be produced within the time period under consideration and so sales of used goods are excluded. The goods and services also are those produced within the country, so production by the country's firms that takes place in a foreign nation is not included. Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Written and oral communication 2) Is every product produced in the United States included in U.S. gross domestic product? Answer: No, not every product produced is included in U.S. GDP. For instance, goods produced as intermediate goods are excluded. Only final goods and services are included. In addition, GDP counts only goods traded in markets, so goods and services that people produce for their own use are excluded. Topic: GDP Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Written and oral communication

3) Define and distinguish between final goods and intermediate goods. Answer: Final goods are those goods that are purchased by their final user. Essentially, these goods (and services) have been completed and do not need to go through further processes of completion. Examples of final goods include restaurant meals, lamps, railroad engines, and books. Intermediate goods and services are goods or services produced by one firm, bought by another, and then used as a component in the manufacture of another good or service. Basically, intermediate goods and services are used as a part of another good or service. Lumber used by a carpenter to build a table is an example of an intermediate good. Topic: Final and intermediate goods Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Written and oral communication 4) What are the categories of total expenditure? Answer: There are four categories: Consumption expenditure, spending by households; investment, spending by firms to buy new capital equipment or add to inventories; government expenditure on goods and services, spending by all levels of the government to buy goods and services; and net exports of goods and services, which equals the exports of goods and services minus the imports of goods and services. Topic: Expenditure Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Written and oral communication 5) Investment, as included in GDP, consists of what? Answer: Investment is the purchase of new capital goods such as tools, instruments, machines, buildings, and other constructions and additions to inventories. Investment does not include the purchase or sale of stocks and bonds. Topic: Investment Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Written and oral communication 6) "The amount of new stocks and bonds issued in a year adds to the country's GDP." Is this assertion correct or incorrect? Explain your answer. Answer: The assertion is incorrect. Stocks and bonds are not counted in the country's GDP. GDP measures the production of final goods and services. Issuing new stocks or bonds does not produce a final good or service and so stocks and bonds are not included in GDP. Topic: Investment Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Written and oral communication 84 Copyright © 2023 Pearson Education Ltd.

7) Are stocks and bonds considered part of the investment component of GDP? Answer: No, stocks and bonds are not part of the investment component of GDP. The investment component of GDP includes the purchase of new capital goods and changes in inventories. Stocks and bonds are not capital goods and are not changes in inventories, so they are not part of investment. Topic: Investment Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Written and oral communication 8) How are changes in inventory treated in GDP? Answer: Changes in inventory are part of the investment component of GDP. So, if Dell produces 100,000 computers this year and sells 95,000, the 5,000 unsold computers that are added to Dell's inventory are part of the investment component of GDP for this year. Topic: Investment, inventory Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Written and oral communication 9) Use the idea of the circular flow diagram to explain why the value of production equals total income equals total expenditure. Answer: The basic point is that nothing escapes the system. Firms receive the value of their production in the form of revenue. With this revenue, they pay for the factors of production they hire and what is left over after paying their costs is profit. Thus the value of production equals total income. These incomes flow from firms to households. Households then allocate their income to taxes, saving, and consumption. Taxes are collected and spent by the government. Saving by households is spent as investment by firms after being cycled through the banking system. Thus total expenditure equals the value of total income, which equals the value of production by firms. Topic: Circular flow Skill: Level 1: Definition Section: Checkpoint 21.1 Status: Old AACSB: Written and oral communication

10) What is the relationship shown by the circular flow among income, total expenditure, and GDP? Answer: They are all equal. The value of production, which is GDP, equals income because firms pay factors (income) the revenue they receive from selling the goods and services they produce (GDP). Next, the revenue that firms receive from selling the goods and services they produce (GDP) is equal to what is spent as expenditures on the goods and services. (total expenditure). Topic: Circular flow Skill: Level 2: Using definitions Section: Checkpoint 21.1 Status: Old AACSB: Written and oral communication 21.7 Essay: Measuring U.S. GDP 1) "To calculate GDP, economists begin with total income earned and then subtract total expenditure by the four sectors of the economy." Is the previous sentence true or false? Explain your answer. Answer: The sentence is false. To calculate GDP, economists can begin with total income and then make a few adjustments but they do not subtract total expenditure. Alternatively, economists can sum total expenditure by the economy's four sectors, but this summation IS GDP. Topic: Measuring GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication 2) What are the categories of expenditure used in the expenditure approach to measuring GDP? Answer: There are four expenditure categories. The expenditure approach calculates the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services. Net exports of goods and services are the difference between exports of goods and services and imports of goods and services. Topic: Expenditure approach Skill: Level 1: Definition Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication 3) The purchase and sale of three types of legal items are NOT included in this year's GDP. What are these three items? Answer: The three items are: used goods; financial assets; and, intermediate goods. Topic: Expenditures not in GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Reflective thinking 86 Copyright © 2023 Pearson Education Ltd.

4) Are sales and purchases of used goods counted as part of GDP? Why or why not? Answer: Sales and purchases of used goods are not counted as part of GDP. GDP measures the production of final goods and services produced within a country in a given time period. So GDP for the United States for 2019 includes the goods and services produced within the United States during 2019. The point is that a used good has NOT been produced within the specified time period. In other words, a used automobile produced in 2017, then in 2019 traded in and resold within the United States was not produced in 2019. Because it was not produced in 2019, it is not a part of the GDP in 2019. (If the automobile was produced within the United States in 2017, the automobile was part of the U.S. GDP in 2017.) Topic: Expenditures not in GDP, used goods Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Revised AACSB: Written and oral communication 5) If you sell your textbook to your friend this year, does the sale count in this year's GDP? Answer: No, the sale would not count in this year's GDP because it is the sale of a used item. The sale of used items is not counted in GDP because GDP measures goods and services produced within a specified time frame. Unless your textbook was produced in this year, it will not count in this year's GDP. And, even if was produced this year, it has already been included in this year's GDP when it was initially sold as a new textbook. Topic: Expenditures not in GDP, used goods Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication 6) Explain how the purchases of used goods and of financial assets affect GDP. Answer: Used goods count in GDP for the year in which they were produced. Hence the purchase of a used good is not included in GDP. Purchases of financial assets, such as stocks, are a transfer of funds and not the purchase of a newly produced good or service. When the firm uses the funds it acquires from selling the stocks or bonds to purchase capital, the purchase of the capital will count as investment, but the initial purchase (and sale) of the financial asset itself does not count in GDP. Topic: Expenditures not in GDP, used goods and financial assets Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication

7) Explain why the purchase and sale of used goods and of financial assets are not included in the calculation of GDP even though transactions in these items amount to billions of dollars daily. Answer: GDP measures the value of the goods and services produced in a given year. The key phrase in the definition is "produced in a given year." Used goods are counted in the GDP of the year in which they are produced and so they are not counted if they are bought and sold again. Financial assets, such as buying and selling stocks and bonds, are not production. These transactions are purely financial and are simply the changing of the ownership of assets. Hence neither the purchase nor the sale of used goods nor of financial assets are included in GDP. Topic: Expenditures not in GDP, used goods and financial assets Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication 8) "When you purchase $1,000 of stock in Microsoft, your purchase is an investment and hence is part of GDP." Is this assertion correct? Explain your answer. Answer: The assertion is incorrect. Your purchase of $1,000 of Microsoft stock does not increase GDP because it is the purchase of a financial asset. The investment component of GDP is the purchase of new capital goods. Your purchase of stock is not the purchase of a new capital good and hence, as a purely financial transaction, it is not included in GDP. Topic: Expenditures not in GDP, financial assets Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication

9) What must be done to net domestic product at factor cost in order to transform it to gross domestic product? Explain why these adjustments are necessary. Answer: Several adjustments must be made to net domestic product at factor cost in order to set it equal to GDP. First, indirect taxes must be added and subsidies must be subtracted. These changes are necessary because GDP is measured using market prices whereas net domestic product at factor cost measures what the goods and services cost to produce. The price can be different than the cost when there are taxes and subsidies present. Thus taxes must be added to the cost and subsidies subtracted in order to determine the price that was actually paid. (For instance, a DVD might cost $20 but a $1 sales tax makes the price $21.) Then, the second adjustment is that depreciation also needs to be added. Depreciation is the wear and tear on capital when it is used and when it becomes obsolete. GDP includes expenditure on investment and some investment is used to replace the capital stock that has depreciated. So, when calculating GDP using the income approach, depreciation must be included. But depreciation is NOT included in net domestic product at factor cost because that amount includes only payments made (as income) to the inputs that helped produce the products and no payment is made for the depreciation of capital. So the addition of depreciation (as well as the adjustments for taxes and subsidies) is necessary in order to convert net domestic product at factor cost into GDP. Finally, because records cannot be 100 percent complete, any statistical discrepancy needs to be added (or subtracted). Topic: Income approach, adjustments Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication 10) Several adjustments must be made to net domestic product at factor cost in order to calculate GDP. One of these adjustments is adding depreciation. What is depreciation and why must it be added? Answer: Depreciation is the wear and tear of capital when it is used and when it becomes obsolete. GDP includes expenditure on investment and some investment is used to replace the capital stock that has depreciated. So, when calculating GDP using the income approach, depreciation must be included. But depreciation is NOT included in net domestic product at factor cost because that includes only payments made (as income) to the inputs that helped produce the products and no payment is made for the depreciation of capital. Hence depreciation must be added to net domestic product at factor cost in order to calculate GDP. Topic: Income approach, adjustments Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication

11) Explain how GDP is measured according to the expenditure and income approaches. Answer: GDP can be measured using the expenditure approach or the income approach. The expenditure approach uses the streams of spending and adds together the total expenditure, or spending, on final goods and services. Thus the expenditure approach calculates the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports. The income approach uses another of the circular flows to calculate GDP. The income approach adds together all sources of income and then incorporates a few additional adjustments. Thus the income approach calculates the sum of wages (which is the compensation of employees) plus the net operating surplus (which is the sum of interest, rent, and profit). The sum is "net domestic product at factor cost." To change this sum to GDP, which is calculated at market prices rather than factor costs, and which is the gross product rather than net product, indirect taxes are added and subsidies subtracted, then depreciation is added, and finally any statistical discrepancy is added. Topic: Expenditure approach and income approach Skill: Level 4: Applying models Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication 12) Assume a small nation has the following statistics: its consumption expenditure is $15 million, investment is $2 million, government expenditure on goods and services is $1 million, exports of goods and services to foreigners is $1 million, and imports of goods and services from foreigners is $1.5 million. Calculate this nation's GDP. Answer: The nation's GDP equals the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services, where net exports of goods and services equals of goods and services exports minus imports of goods and services. So, GDP = $15 million + $2 million + $1 million + $1 million - $1.5 million = $17.5 million. Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills

13) The table above gives the values of different expenditures in the United States during 1999. Answer the following questions about the United States. a. What was the value of net exports of goods and services in 1999? b. What was (nominal) GDP equal to in 1999? c. What was the (nominal) value of total production equal to in 1999? Answer: a. Net exports of goods and services equals the value of exports of goods and services, $998 billion, minus the value of imports of goods and services, $1,252 billion, or -$254 billion. b. GDP equals the sum of consumption expenditure, $6,258, plus investment, $1,623, plus government expenditure on goods and services, $1,630, plus net exports, -$254, or $9,257 billion. c. The value of total production equals the value of GDP, so total production was $9,257 billion in 1999. Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 21.2 Status: Old AACSB: Analytic skills 14) What is the difference between real and nominal GDP, and why do economists make this distinction? Answer: Real GDP is a measure of the final goods and services produced in a year valued at constant prices. Nominal GDP is the final goods and services produced in a year valued at the prices that existed during the year. Economists make the distinction between real GDP and nominal GDP because nominal GDP changes for two reasons: When the production of goods and services changes and when the prices of the goods and services change. Economists want to be able to distinguish between changes brought about by production changes and changes brought about by price changes. Real GDP allows economists to make this distinction. In particular, by using prices that are constant, a change in real GDP represents a change in the production of goods and services and factors out the change in prices. Thus real GDP removes the effect from changes in prices and thereby reveals the change in the underlying production of goods and services. Topic: Real GDP versus nominal GDP Skill: Level 4: Applying models Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication

15) Is it possible for nominal GDP to increase while real GDP does not change? Answer: Yes, it is possible for nominal GDP to increase while real GDP does not change. Nominal GDP changes if either prices or production change, while real GDP changes only if production changes. If production does not change while the prices of the goods and services increase, real GDP does not change while nominal GDP increases. Topic: Real GDP versus nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication 16) Can nominal GDP ever be less than real GDP? Answer: Yes, nominal GDP can be less than real GDP. If prices generally fall from one period to the next, then nominal GDP is less than real GDP. However, in the U.S. economy, because prices generally rise, nominal GDP typically is greater than real GDP (except in the base period.) But, there is no economic law that states that prices must generally rise and so there is no necessity for nominal GDP to be larger than real GDP. Topic: Real GDP versus nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 21.2 Status: Old AACSB: Written and oral communication 21.8 Essay: The Use and Limitations of Real GDP 1) Explain how our standard of living depends upon our level of real GDP per person, but there might not be a one-to-one relationship between the standard of living and real GDP per person. Give examples of things that can affect one, but not the other. Answer: Although GDP has a significant impact on our standard of living, it is not a perfect measure of the standard of living. GDP omits some factors that affect our standard of living. GDP does not include household production, all the tasks performed around the house. It omits underground production, the part of the economy hidden from the government. Real GDP does not include the value of people's leisure time. And, GDP does not make allowances for environmental quality, health and life expectancy, or political freedom and social justice. All of these factors influence the quality of our life and hence our standard of living. Indeed, occasionally a change will affect GDP and the standard of living in different directions. For instance, if people decide they want more leisure and hence retire early, GDP will decrease because fewer people are working, but the standard of living will increase. Or, if there is an increase in production that creates massive amounts of pollution, GDP increases even though the standard of living likely decreases. Topic: Real GDP and the standard of living Skill: Level 4: Applying models Section: Checkpoint 21.3 Status: Old AACSB: Written and oral communication

2) "If country A has a higher level of real GDP per person than country B, then people in Country A must enjoy a higher standard of living than people in Country B." Is this statement true or false and explain your answer. Answer: The statement is false. Factors other than real GDP per person affect the standard of living. For instance, factors such as household production, underground production, leisure time, and environmental quality all affect the standard of living and all are omitted from real GDP per person. In addition, the standard of living is influenced by health and life expectancy as well as by the nation's political freedom and social justice, none of which is measured by real GDP per person. Although real GDP per person is an important factor in determining a country's standard of living, it is not the only factor. Topic: Real GDP and the standard of living Skill: Level 4: Applying models Section: Checkpoint 21.3 Status: Old AACSB: Written and oral communication 3) What is a business cycle? What are its phases and turning points? Answer: A business cycle is the periodic but irregular up-and-down movement in production and jobs. It has two phases and two turning points. As the economy slows and the growth in real GDP turns negative, the economy enters the recession phase of the business cycle. At the bottom of the recession phase is one turning point, the trough. As the economy moves through the trough, it enters the expansion part of the business cycle during which real GDP grows. Finally, as the economy reaches its high point and swings from an expansion to a recession, the economy passes through the other turning point, the peak. Topic: Business cycle Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Written and oral communication 4) When total output, income, employment, and trade decline for 6 to 12 months, the economy is in what part of the business cycle? Answer: When these real variables decline, the economy is in the recession phase of the business cycle. Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Written and oral communication

5) List and discuss various types of goods and services omitted from measured GDP. Answer: Household production, such as preparing meals and taking care of children, includes productive activities but does not involve market transactions. Therefore, household production is omitted as part of GDP. Underground production, such as working for cash to avoid taxes or engaging in illegal activities, is not reported to the government and hence is not counted as part of GDP. Leisure time and preserving and improving the natural environment are not production per se but are clearly economic goods. They are not counted as part of GDP because it is hard to quantify and put a monetary value on them. Topic: Omissions from GDP Skill: Level 3: Using models Section: Checkpoint 21.3 Status: Old AACSB: Written and oral communication 6) What would happen to measured GDP if more people started hiring workers to do household chores such as cooking and cleaning? Answer: GDP is the value of the final goods and services that are produced in an economy over a specified time period. However, GDP, as measured, does not include the value of household production people do for themselves around their homes. Therefore if you wash your car at your home or apartment, the value of the car washing is not included in GDP. However if you hired someone to wash your car at your home or apartment, the value of the car washing would be included in GDP. Thus if more people started hiring workers to do household chores, measured GDP would increase. Topic: Household production Skill: Level 3: Using models Section: Checkpoint 21.3 Status: Old AACSB: Written and oral communication 7) What is "underground production"? Is it included in GDP? Answer: Underground production is the production of goods and services that remain hidden from the government. Underground production includes the production of illegal goods and services and the production of legal goods and services but in a way that avoids taxes or regulations. Underground production is not included in GDP. Topic: Underground production Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Written and oral communication

8) While studying with your friend, your friend states, "Our leisure time increases GDP but lowers our standard of living because it reduces the amount of goods and services we can consume." Is your friend's statement correct? Answer: Your friend's assertion is incorrect on two counts. First, leisure time does not increase GDP. Indeed, by taking time away from production, leisure time decreases GDP. Second, leisure time increases our standard of living. People enjoy their leisure time and therefore having more leisure time raises their standard of living. Topic: Leisure time Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Written and oral communication 9) You buy new water skis and other new equipment for $2,500 and take a week off of your job, where you earn $1,000 a week, to go water skiing. The equipment you purchased was all produced in the United States. You think that the week was worth $4,000. As a result of your vacation, GDP changes by how much? Answer: GDP changes by only the $2,500 you spent on the water skis and other equipment. Topic: Leisure time Skill: Level 3: Using models Section: Checkpoint 21.3 Status: Old AACSB: Reflective thinking 10) What is the Human Development Index? Answer: The Human Development Index, or HDI, has been developed by the United Nations. The HDI attempts to measure the well-being of people in a given country. This index takes into account the country's material well-being by looking at real GDP per person and also considers other key factors, such as life expectancy, health, and education levels. Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 1: Definition Section: Checkpoint 21.3 Status: Old AACSB: Written and oral communication 11) Explain how the United Nations uses the Human Development Index (HDI) to better measure the standard of living around the globe. Answer: Economists have long realized that the level of real GDP per person is not a total measure of a country's standard of living. The United Nations has constructed an index, referred to as HDI, that attempts to measure the well-being of people in a given country. This index takes into account the country's level of real GDP per person as well as also other key factors, such as life expectancy, health, and education levels. Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 2: Using definitions Section: Checkpoint 21.3 Status: Old AACSB: Written and oral communication 95 Copyright © 2023 Pearson Education Ltd.

21.9 Essay: Appendix: Measuring Real GDP

1) The table gives data on the production and prices in a small economy. Use 2018 as the base period. a. What does nominal GDP equal in 2018? b. What does real GDP equal in 2018? c. What does nominal GDP equal in 2019? d. Using the chained-price method, what does real GDP equal in 2019? Answer: a. Nominal GDP in 2018 equals $8.00. Nominal GDP equals the sum of the market value of hot dogs ($6.00) plus the market value of Pepsi ($2.00). b. Real GDP in 2018 equals $8.00. Real GDP equals nominal GDP in the base period. c. Nominal GDP in 2019 equals $14.25. Nominal GDP equals the sum of the market value of hot dogs ($10.50) plus the market value of Pepsi ($3.75). d. Real GDP in 2019 equals $12.00. To calculate real GDP in 2019, we need the percentage change in production between 2018 and 2019 valuing the production at 2018 prices and at 2019 prices. Both percentage changes are 50 percent. (For example, using 2018 prices, production in 2018 is $8.00 and in 2019 is $12.00, a 50 percent increase.) Because both percentage changes are 50 percent, the average production change is 50 percent. Therefore real GDP in 2019 equals real GDP in 2018 multiplied by 150 percent, or ($8.00 × 1.50) = $12.00. Topic: Real GDP and nominal GDP Skill: Level 4: Applying models Section: Chapter 21 Appendix Status: Revised AACSB: Analytic skills

2) The table gives data on the production and prices in a small economy. Use 2018 as the base period. Using the chained-price method, what is the growth rate of real GDP from 2018 to 2019? Answer: To calculate the growth rate, it is necessary to calculate the growth rates using first 2018 and then 2019 prices and then take the average of the two rates. This procedure gives: Real GDP in 2018 using 2018 prices = 150 Real GDP 2019 using 2018 prices = 350 Real GDP 2018 using 2019 prices = 250 Real GDP 2019 using 2019 prices = 600 Growth rate using 2018 prices = 133.3 percent Growth rate using 2019 prices = 140.0 percent Hence the growth rate equals 136.7 percent, the average of 133.3 percent and 140.0 percent. Topic: Real GDP and nominal GDP Skill: Level 4: Applying models Section: Chapter 21 Appendix Status: Revised AACSB: Analytic skills

Foundations of Economics, 9e (Bade), GE Chapter 6 Jobs and Unemployment 22.1 Labor Market Indicators 1) The purpose of the Current Population Survey is to determine the A) number of people in the population. B) employment status of the population. C) age structure of the population. D) income level of the population. E) prices consumers pay for the goods and services they buy. Answer: B Topic: Current population survey Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 2) The working-age population includes A) those in jails and hospitals. B) youngsters between the ages of 14 and 16 if they are working at least part time. C) employed and unemployed people over the age of 16. D) only employed people over the age of 16. E) people over the age of 16 who are in the Army. Answer: C Topic: Current population survey, working-age population Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 3) Which of the following is TRUE? One way to be classified as employed is by i. working 1 hour per week at a paid job. ii. working 15 or more hours as an unpaid worker in family business. iii. making specific efforts to find a job within the last four weeks. A) i only. B) ii only. C) iii only. D) i and ii only. E) If you are not working and turn down a job offer in the previous week, you are no longer classified i, ii, and iii. Answer: D Topic: Current population survey, employed Skill: Level 1: Definition Section: Checkpoint 22.1 Status: New AACSB: Reflective thinking 1 Copyright © 2023 Pearson Education Ltd.

4) An unpaid worker in a family business is classified as A) not in the labor force. B) employed no matter how many hours the person worked in the previous week. C) unemployed no matter how many hours the person worked in the previous week. D) employed if the person worked at least 15 hours in the previous week. E) unemployed only if the person worked no hours in the previous week. Answer: D Topic: Current population survey, employed Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 5) After graduating from college, Yunis, age 22, started working for his parents' real estate business as an unpaid assistant. He works 25 hours a week helping manage rental units. In the Current Population Survey, Yunis is considered A) part of the labor force and unemployed. B) part of the labor force and employed. C) not part of the labor force. D) a discouraged worker. E) part of the labor force but not part of the working-age population. Answer: B Topic: Current population survey, employed Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 6) If KeKe, age 32, worked 12 hours as a paid employee the week before the Current Population Survey, KeKe is classified in the Current Population Survey as ________ when calculating the unemployment rate. A) unemployed B) employed C) a discouraged worker D) not in the labor force E) underemployed Answer: B Topic: Current population survey, employed Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

7) Suppose a 23-year old graduate student is looking for a full-time job, but has to take a parttime job instead. He or she will be categorized in the Current Population Survey as ________ when calculating the unemployment rate. A) unemployed B) employed C) not in the labor force D) a discouraged worker E) underemployed Answer: B Topic: Current population survey, employed Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 8) Which of the following people would be classified as employed in the Current Population Survey? A) Rich, who is working 20 hours a week but wants a full-time job B) Misty, who just quit her job to return full time to school C) April, who just graduated from college and is looking for work D) Jason, who was laid off from work less than 6 months ago but who has stopped looking for work E) Laura, who is unpaid but is working 10 hours a week in the family business she and her husband run Answer: A Topic: Current population survey, employed Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 9) In the Current Population Survey, a person is considered unemployed if the person A) is without a job. B) is working anything less than 40 hours per week. C) is working without pay. D) does not have a job and is actively looking for a job. E) is working less than 20 hours per week. Answer: D Topic: Current population survey, unemployed Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

10) To be considered unemployed, a worker must have had A) no employment during the week before the survey and be actively looking for a job. B) part-time employment while actively looking for a full-time job. C) no employment during the week before the survey and be actively looking for a job while a student. D) no employment during the day before the survey and be actively looking for a job. E) Both answers A and B are correct. Answer: A Topic: Current population survey, unemployed Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 11) If Brian, age 24, had no job but was available for work and had looked for a job the week before the survey, Brian is classified in the Current Population Survey as A) unemployed. B) employed. C) a discouraged worker. D) not in the labor force. E) not in the working-age population. Answer: A Topic: Current population survey, unemployed Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 12) Rob is considered unemployed in the Current Population Survey if he A) has looked for a job in the last four weeks but has not found a job. B) has worked at least 1 hour but not more than 15 hours as a paid employee during the last week. C) does not have a job and stopped looking for a job at least two months ago. D) has a part-time job but would like a full-time job. E) is in his last term of college before he graduates. Answer: A Topic: Current population survey, unemployed Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

13) Phillip is a 22-year old who has no job and is available for work, but has not actively looked for a job in the last month. The Current Population Survey identifies Phillip as ________, ________ the labor force, and ________ the working-age population. A) unemployed; part of; part of B) unemployed; part of; not part of C) not unemployed; not part of; part of D) not unemployed; not part of; not part of E) not unemployed; part of; part of Answer: C Topic: Current population survey, unemployed Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking The following are groups of individuals in the population: 1. Individuals who are under 16 2. Individuals in institutional care 3. Individual in the armed forces 4. Individuals working for pay at a fulltime job 5. Individuals who are employed 6. Individuals not employed but were available for work and were looking for work 7. Individuals not employed and looking for work 14) Using the table above, the Current Population Survey classifies the group of individuals who are left after subtracting from the total population groups 1, 2, and 3 as A) the working-age population. B) the labor force. C) employed. D) unemployed. E) discouraged workers. Answer: A Topic: Current population survey, working-age population Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

15) Using the table above, the Current Population Survey classifies the group of individuals who are left after subtracting from the total population groups 1, 2, 3, 4, 5, and 6 as A) not in the labor force. B) the labor force. C) employed. D) unemployed. E) discouraged workers. Answer: A Topic: Current population survey, labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 16) Using the table above, the Current Population Survey classifies the group of individuals obtained by adding groups 5 and 6 as A) the working age population. B) the labor force. C) employed. D) unemployed. E) discouraged workers. Answer: B Topic: Current population survey, labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 17) The working-age population consists of all the people in the population A) aged 16 and over. B) aged 16 to 65. C) aged 16 and over who are not in jail, hospital, or an institution or in the U.S. Armed Forces. D) aged 21 and over who are not in jail, hospital, or an institution or in the U.S. Armed Forces. E) who are employed plus the unemployed people. Answer: C Topic: Working-age population Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

18) If the working-age population does not change and the number of people in the labor force ________, then ________. A) increases; the labor force participation rate increases B) increases; the unemployment rate definitely increases C) decreases; the unemployment rate definitely decreases D) decreases; the labor force participation rate increases E) decreases, the unemployment rate does not change Answer: A Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Revised AACSB: Reflective thinking 19) The labor force is the A) number of employed people plus the number of unemployed people. B) total population divided by the number of employed people. C) number of employed people in the working-age population. D) working-age population minus the number of unemployed people. E) number of employed people minus the number of unemployed people. Answer: A Topic: Labor force Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 20) The labor force includes people who i. are less than 16 years of age. ii. are in institutions. iii. are actively seeking a job but do not have a job. A) i only B) i and iii C) i and ii D) iii only E) i, ii, and iii Answer: D Topic: Labor force Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

21) The labor force consists of A) the number of people who are employed. B) the number of people who unemployed and who are actively seeking work. C) the number of people in the working-age population who are employed or unemployed. D) all people in the population aged 16 and over who are not in jail, a hospital, or an institution or in the U.S. Armed Forces. E) the number of people who are employed minus the number of the people who are unemployed. Answer: C Topic: Labor force Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 22) The labor force is defined as the number of people who A) are employed plus the number of people who are unemployed. B) are available and looking for work but are unable to find employment. C) would like to have a job but have stopped seeking work. D) would like to have a full-time job but are working part time. E) are employed minus the number of people who are unemployed. Answer: A Topic: Labor force Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 23) Which of the following persons is NOT considered a part of the labor force? A) Mary, who has a part-time job as a day care specialist B) Lones, an unemployed mechanic looking for a new job C) Jameson, an accountant who has been temporarily laid off during the holiday season D) Desire, a wealthy hedge fund manager who just took early retirement E) Lucy, who works 20 hours a week in her father's restaurant for no pay Answer: D Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

24) Jane is a 25 year old, full-time student. She works part time in her school library and is paid $10 an hour. She is considered to be A) unemployed. B) not in labor force. C) in labor force but not working. D) employed. E) not in the working-age population because she is in college. Answer: D Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 25) People over the age 16 with full-time jobs are considered to be A) unemployed. B) not in the labor force. C) in the labor force and employed. D) in the labor force unemployed. E) in the working-age population only because they have full-time jobs. Answer: C Topic: Labor force Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 26) If Jose is 22-years old, is available to work but does not have a job and made no specific efforts to find a job for the previous month, Jose is classified in the Current Population Survey as A) unemployed. B) employed. C) not in the working-age population. D) not in the labor force. E) in the labor force but not in the working-age population. Answer: D Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

27) The size of the labor force is A) equal to the size of the population. B) less than the number of employed workers if the number of unemployed workers is small enough. C) less than the number of unemployed workers if the number of employed workers is small enough. D) greater than the number of employed workers as long as there are some unemployed workers. E) equal to the working-age population. Answer: D Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 28) The working-age population of people over the age of 16 can be divided into two groups, people A) in the labor force and people looking for work. B) in the labor force and people with a job. C) looking for work and those in the U.S. Armed Forces. D) in the labor force and people who are not in the labor force. E) with a job and people actively seeking a job. Answer: D Topic: Labor force Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 29) Assume the U.S. population is 300 million. If 200 million people are of working age, 125 million are employed, and 15 million are unemployed, what is the size of the labor force? A) 200 million B) 140 million C) 125 million D) 215 million E) 175 million Answer: B Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

30) The unemployment rate is the A) number of unemployed people. B) percentage of the population that does not have a job. C) percentage of the working-age population that does not have a job. D) percentage of the labor force that does not have a job. E) percentage of employed people that does not have a job. Answer: D Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 31) The unemployment rate measures the percentage of A) people who want full-time jobs, but can't find them. B) the working-age population who can't find a job. C) people in the labor force who can't find a job. D) the working-age population that can't find a full-time job. E) employed people who can't find a job. Answer: C Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 32) The unemployment rate equals 100 multiplied by the A) number of people unemployed divided by the labor force. B) number of people unemployed divided by the population. C) number of people unemployed divided by the number of people employed. D) labor force divided by the number of people unemployed. E) number of people unemployed divided by the working-age population. Answer: A Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

33) The unemployment rate equals A) (number of people employed ÷ working-age population) × 100. B) (number of people unemployed ÷ labor force) × 100. C) (labor force ÷ working-age population) × 100. D) (number of people employed ÷ number of people age 16 and over) × 100. E) (number of people unemployed ÷ number of people employed) × 100. Answer: B Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 34) The unemployment rate is equal to A) (labor force ÷ population) × 100. B) (number of employed people ÷ labor force) × 100. C) (number of unemployed people ÷ labor force) × 100. D) (number of unemployed people ÷ number of employed) × 100. E) (number of unemployed people ÷ working-age population) × 100. Answer: C Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 35) The unemployment rate is the number of people unemployed divided by the A) population, then multiplied by 100. B) labor force participation rate, then multiplied by the population. C) labor force, then multiplied by 100. D) number of people employed, then multiplied by 100. E) working-age population, then multiplied by 100. Answer: C Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

36) In calculating the unemployment rate, part-time workers over the age of 16 are counted as A) employed. B) unemployed. C) not in the labor force. D) employed if they are part-time workers for noneconomic reasons and unemployed if they are involuntary part-time workers. E) not in the working-age population. Answer: A Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 37) If a significant number of part-time workers successfully find full-time employment, then A) the unemployment rate will fall. B) the labor force participation rate will increase. C) the unemployment rate will remain unchanged. D) the unemployment rate will rise. E) Both answers A and B are correct. Answer: C Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 38) Suppose the population is 300 million people, the labor force is 200 million people, the number of people employed is 185 million, and the working-age population is 170 million people. What is the unemployment rate? A) 92.5 percent B) 7.5 percent C) 8.8 percent D) 5 percent E) 20 percent Answer: B Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

39) If 160 million people are employed, 15 million people are unemployed, and the population is 280 million people, the unemployment rate is A) 57 percent. B) 62.5 percent. C) 9.4 percent. D) 8.6 percent. E) not possible to calculate without data on the labor force. Answer: D Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 40) Suppose the population of Timmy Town is 1,000 people and the working-age population is 800. If 200 of these people are unemployed, the unemployment rate in Timmy Town is A) 2 percent. B) 1/5 × 100. C) 1/8 × 100. D) 1/4 × 100. E) There is not enough information provided to calculate the unemployment rate. Answer: E Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 41) Suppose the working-age population is 500 million, the labor force is 200 million, and the unemployment rate is 15 percent. The number of unemployed people is A) 30 million. B) 75 million. C) 45 million. D) 105 million. E) 15 million. Answer: A Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

42) In fall 2009, the population of the United States was 301 million, the working-age population was 235.7 million, the total number of people employed and unemployed was 154.9 million, and the total number of unemployed people was 14.7 million. What is the unemployment rate? A) 51 percent B) 6.2 percent C) 4.9 percent D) 9.5 percent E) 4.6 percent Answer: D Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

43) Using the table above, the working-age population is A) 155 million. B) 170 million. C) 195 million. D) 250 million. E) 220 million. Answer: C Topic: Working-age population Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

44) Using the table above, the number of people in the labor force is A) 145 million. B) 165 million. C) 175 million. D) 195 million. E) 185 million. Answer: C Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 45) Using the table above, the unemployment rate is A) 5.13 percent. B) 5.88 percent. C) 6.45 percent. D) 6.90 percent. E) 5.71 percent. Answer: E Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

46) Using the table above, the unemployment rate is A) 11.2 percent. B) 6.3 percent. C) 4.2 percent. D) 10 percent. E) 5.8 percent. Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 16 Copyright © 2023 Pearson Education Ltd.

47) Using the table above, the labor participation rate is A) 67 percent. B) 48 percent. C) 75 percent. D) 83 percent. E) 40 percent. Answer: C Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

48) In the table above, the number of unemployed people is A) 2,000. B) 1,000. C) 1,100. D) 11,000. E) 3,000. Answer: B Topic: Unemployment Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 49) In the table above, the unemployment rate is A) 12 percent. B) 10 percent. C) 8 percent. D) 6 percent. E) 11 percent. Answer: B Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

50) Using the table above, the labor force participation rate is A) 83.3 percent. B) 90.0 percent. C) 10.0 percent. D) 11.1 percent. E) 100 percent. Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

51) Based on the above table, the unemployment rate is A) 10 percent. B) 11.1 percent. C) 7.1 percent. D) 5.4 percent. E) 8.6 percent. Answer: A Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 52) Based on the above table, the labor force participation rate is A) 71.4 percent. B) 82 percent. C) 53.6 percent. D) 75 percent. E) 64.3 percent. Answer: A Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

53) In the table above, the size of the labor force is A) 80 million. B) 46 million. C) 42 million. D) 40 million. E) 34 million. Answer: C Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 54) In the table above, the unemployment rate is A) 50.0 percent. B) 15.0 percent. C) 10.0 percent. D) 4.8 percent. E) 5.0 percent. Answer: D Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

55) Using the data in the above table, the labor force is A) 140.0 million. B) 152.1 million. C) 154.2 million. D) 250.0 million. E) 127.9 million. Answer: B Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 56) Using the data in the above table, the unemployment rate is A) 9.3 percent. B) 8.6 percent. C) 8.0 percent. D) 4.8 percent. E) 4.6 percent. Answer: C Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 57) Using the data in the above table, the labor force participation rate is A) 60.8 percent. B) 56 percent. C) 4.8 percent. D) 61.6 percent. E) 64.4 percent. Answer: A Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

58) From the table above, which gives data about the U.S. labor market in 1933, the labor force is A) 48 million. B) 60 million. C) 65 million. D) 100 million. E) 12 million. Answer: B Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 59) From the table above, which gives data about the U.S. labor market in 1933, the labor force participation rate is A) 12 percent. B) 48 percent. C) 60 percent. D) 95 percent. E) 65 percent. Answer: C Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

60) From the table above, which gives data about the U.S. labor market in 1933, the unemployment rate is A) 2 percent. B) 18 percent. C) 20 percent. D) 25 percent. E) 35 percent. Answer: C Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 61) If the working age population ________ and the labor force does not change, the ________. A) increases; labor force participation rate will increase B) increases; labor force participation rate will decrease C) increases; unemployment rate will increase D) decreases; unemployment rate will increase E) decreases; labor force will increase Answer: B Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 62) The labor force participation rate is equal to A) (labor force ÷ population) × 100. B) (labor force ÷ working-age population) × 100. C) (number of employed workers ÷ labor force) × 100. D) (number of employed workers ÷ working-age population) × 100. E) (number of employed workers ÷ population) × 100. Answer: B Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

63) The labor force participation rate is the A) labor force divided by the working-age population, then multiplied by 100. B) number of people employed divided by the labor force, then multiplied by 100. C) labor force divided by the population, then multiplied by 100. D) discouraged workers divided by the labor force, then multiplied by 100. E) number of people employed divided by the population, then multiplied by 100. Answer: A Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 64) If the number of employed people is 150 million, the number of unemployed people is 50 million, and the working-age population equals 285 million people, the labor force participation rate is A) 70.2 percent. B) 81 percent. C) 17.5 percent. D) 25 percent. E) 52.6 percent. Answer: A Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 65) If the working-age population is 20 million and labor force is 13 million, the labor force participation rate is A) 65 percent. B) 35 percent. C) 153 percent. D) 60 percent. E) impossible to calculate because data on the number of employed workers is needed. Answer: A Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

66) Suppose the U.S. population is 275 million. If 210 million people are of working age, 135 million are employed, and 6 million are unemployed, what is the labor force participation rate? A) 67 percent B) 76 percent C) 49 percent D) 64 percent E) 51 percent Answer: A Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 67) In January of 2001, the population of the United States was 276.8 million, the working-age population was 210.2 million, the total number of people employed was 140 million, and the total number of people unemployed was 5.0 million. What was the labor force participation rate? A) 78 percent B) 56 percent C) 69 percent D) 90 percent E) 67 percent Answer: C Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 68) In August of 2013, the number of employed persons in the United States was 144.2 million, the number of unemployed persons was 11.3 million, and the number of persons not in the labor force was 90.5 million. What was the labor force in August of 2013? A) 53.7 million B) 144.2 million C) 155.5 million D) 132.9 million E) There is not enough information to answer this question. Answer: C Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

69) In August of 2013, the number of employed persons in the United States was 144.2 million, the number of unemployed persons was 11.3 million, and the number of persons not in the labor force was 90.5 million. What was the unemployment rate in August of 2013? A) 7.3% B) 7.8% C) 12.4% D) 8.5% E) There is not enough information to answer this question. Answer: A Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 70) In August of 2013, the number of employed persons in the United States was 144.2 million, the number of unemployed persons was 11.3 million, and the number of persons not in the labor force was 90.5 million. What was the working-age population in August of 2013? A) 155.5 million B) 234.7 million C) 246.0 million D) 101.8 million E) There is not enough information to answer this question. Answer: C Topic: Working-age population Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 71) In August of 2013, the number of employed persons in the United States was 144.2 million, the number of unemployed persons was 11.3 million, and the number of persons not in the labor force was 90.5 million. What was the labor force participation rate in August of 2013? A) 92.7% B) 63.2% C) 58.2% D) 58.6% E) There is not enough information to answer this question. Answer: B Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

72) If half of all unemployed individuals suddenly gave up looking for work, the unemployment rate would ________ and the labor force participation rate would ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) There is not enough information to answer this question. Answer: A Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 73) A weakness that could be noted about the unemployment rate is that it A) does not account for the underutilization of workers. B) considers marginally attached workers as unemployed. C) overestimates the number of part-time workers. D) does not count part-time workers. E) counts discouraged workers as employed. Answer: A Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 74) A marginally attached worker i. does not have a job and has not looked for one in the last month. ii. is available and willing to work. iii. must work at least 1 hour per week. A) iii only B) ii only C) ii and iii D) i and ii E) i only Answer: D Topic: Marginally attached worker Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

75) A marginally attached worker is A) a person who is not happy with his or her job. B) someone who works part-time more than 25 hours per week but wants full-time work. C) someone who does not have a job but is available and willing to work and has made specific but unsuccessful efforts to find a job during the past 4 weeks. D) someone who does not have a job but is available and willing to work but has not made specific efforts to find a job during the past 4 weeks. E) another name for an unemployed worker. Answer: D Topic: Marginally attached worker Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 76) A marginally attached worker is A) a worker who is unhappy at his or her job. B) a worker who is looking for a job but can't find one. C) a worker who does not have a job and is available and wants one but has not made any efforts to find a job within the previous four weeks. D) a person who only works part time but wants full-time work. E) counted as unemployed in the official labor market statistics. Answer: C Topic: Marginally attached worker Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 77) Which of the following would be considered a marginally attached worker? i. Amy, who is working 20 hours per week at her father's business ii. Carl, who isn't working and has not looked for work in 3 months because he has been turned down for work when he last looked iii. Keke, who quit her job to take care of her daughter A) ii only B) i and ii C) ii and iii D) i only E) i, ii, and iii Answer: A Topic: Marginally attached worker Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

78) Suppose that Mel (who is 27) is not working, but looked for a job as recently as 2 months ago. Mel would like a job and he is available for work. He is considered A) unemployed. B) a member of the labor force and unemployed. C) a member of the labor force, but not unemployed. D) a member of the working-age population. E) a marginally attached worker. Answer: E Topic: Marginally attached worker Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 79) Which of the following would be considered a marginally attached worker? i. Lou, who worked 15 hours unpaid at her mother's store last month ii. Sylvia, who is not working and hasn't looked for work in 3 months iii. Meredith, who is no longer working after taking early retirement from her employer A) i and iii B) i and ii C) i only D) ii only E) i, ii and iii Answer: D Topic: Marginally attached worker Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 80) Andrew is not working, but is available and willing to work after finishing a month-long mission trip for his church. While on his mission, Andrew did not look for work. Andrew is considered A) unemployed. B) part of the labor force. C) a marginally attached worker. D) a discouraged worker. E) Both answers A and B are correct. Answer: C Topic: Marginally attached worker Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

81) People who are willing and able to work but are not looking for work because they have been discouraged by their previous futile efforts are called A) unemployed workers. B) discouraged workers. C) unhappy workers. D) involuntarily unemployed. E) part-time lookers. Answer: B Topic: Discouraged workers Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 82) Discouraged workers who are over 16 years old are i. not counted as unemployed. ii. part of the working-age population. iii. part of the labor force. A) i only B) ii only C) i and ii D) ii and iii E) i, ii, and iii Answer: C Topic: Discouraged workers Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 83) Discouraged workers are included in the calculation of the i. unemployment rate. ii. labor force participation rate. iii. working-age population. A) i only B) ii only C) i and ii D) iii only E) ii and iii Answer: D Topic: Discouraged workers Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

84) Discouraged workers A) would decrease the unemployment rate if they were added to the number of unemployed workers. B) would increase unemployment rate if they were added to the number of unemployed workers. C) are counted as one-half of a worker in the unemployment statistics. D) are counted as unemployed workers when the unemployment rate is calculated. E) are not included in the calculation of the unemployment rate, the labor force, or the workingage population. Answer: B Topic: Discouraged workers Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 85) Rick lost his job as a logistics and distribution coordinator nearly three years ago. After a long and failed search, Rick finally gives up and stops looking for a new job. Rick's decision to suspend his job search causes the unemployment rate to ________ and the labor force participation rate to ________. A) increase; decrease B) decrease; decrease C) stay the same; decrease D) increase; stay the same E) increase; increase Answer: B Topic: Discouraged workers Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 86) In 2008 as the recession worsened, suppose discouraged workers were included as part of the unemployment rate. Which of the following would have occurred? A) The unemployment rate would have increased. B) The unemployment rate would have decreased. C) The labor force participation rate would not have changed. D) The unemployment rate would not have changed. E) The labor force participation rate would have decreased. Answer: A Topic: Discouraged workers Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

87) Part-time workers are defined as people who are working A) less than 20 hours per week. B) between 20 and 35 hours per week. C) less than 35 hours per week. D) more than 10 hours per week. E) fewer hours than they would want. Answer: C Topic: Part-time workers Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 88) A worker is considered part time if the worker A) usually works less than 40 hours per week. B) is not employed but is actively looking for work. C) is a full-time student without a job. D) usually works less than 35 hours per week. E) is not employed and is not actively looking for work. Answer: D Topic: Part-time workers Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 89) Harry works at the video rental store for 20 hours per week. He's asked his boss to allow him to work 40 hours per week, but has been told that business is too slow. Harry is considered A) a discouraged worker. B) an involuntary part-time worker. C) a marginally attached worker. D) not in the labor force. E) a job seeker. Answer: B Topic: Part-time workers Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

90) People who are working up to 34 hours per week but would like to work more are considered A) involuntary part-time workers. B) discouraged workers. C) job leavers. D) job seekers. E) unemployed. Answer: A Topic: Part-time workers Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 91) Involuntary part-time workers are NOT working more hours due to A) economic reasons. B) a lack of training and skills. C) an increase in the labor force. D) family reasons. E) educational commitments. Answer: A Topic: Part-time workers Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 92) Julie works part-time for economic reasons. She would be considered A) an involuntary part-time worker. B) a discouraged worker. C) a job seeker. D) not in the labor force. E) unemployed as calculated by the Bureau of Labor statistics. Answer: A Topic: Part-time workers Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

93) Involuntary part-time workers are workers who A) work less than 35 hours but would like to work full time. B) work more than 35 hours but would like to work less than 35 hours. C) work have lost their jobs within the last four weeks and are seeking another job. D) work less than 35 hours by choice. E) have withdrawn from the labor market. Answer: A Topic: Part-time workers Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 94) In measuring the unemployment rate, part-time workers are ________, and discouraged workers are ________. A) included as employed; included as unemployed B) excluded; included as unemployed C) included as employed; excluded D) excluded; excluded E) included as unemployed if they are involuntary part-time workers; excluded Answer: C Topic: Discouraged workers, part-time workers Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 95) In a country with a working-age population of 200 million, 140 million people are employed and 20 million are unemployed. The size of the labor force is A) 200 million. B) 160 million. C) 140 million. D) 20 million. E) 120 million. Answer: B Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

96) Assume the U.S. population is 300 million. If the working age population is 240 million, 150 million are employed, and 6 million are unemployed, what is the labor force? A) 300 million B) 240 million C) 156 million D) 150 million E) 144 million Answer: C Topic: Labor force Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 97) To be counted as employed by the BLS, in the week before the survey the person must have worked for pay A) at least 1 hour. B) at least 5 hours. C) more than 20 hours. D) 40 hours. E) None of the above is right because the BLS counts as employed anyone who works volunteer hours at a non-profit institution. Answer: A Topic: Current population survey, employed Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 98) Which of the following people would be considered unemployed? A) Sam, a part-time worker who wishes to work full time B) Pat, who gave up looking for a job because he was discouraged about his job prospects C) Victoria, who does not have a job and has been actively searching for work, but turned down a job paying less than she desired D) Shirley, who is working but expects to be laid off at the end of the month E) Bobby, a full-time student in his last term before he graduates and who has not yet started to look for a job Answer: C Topic: Current population survey, employed Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

99) Bo is available and willing to work but has not actively looked for work in the past month. Bo is ________ of the labor force and is ________. A) part; counted as unemployed B) part; not counted as unemployed C) not part; not counted as unemployed D) not part; counted as unemployed only if he has had a job within the last 12 months E) not part; counted as unemployed regardless of whether or not he has had a job within the last 12 months Answer: C Topic: Current population survey, unemployed Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 100) Which of the following statements about the United States is (are) correct? i. The labor force is larger than the number of employed people. ii. The labor force is larger than the number of unemployed people. iii. The number of unemployed people is larger than the number of employed people. A) ii only B) iii only C) ii and iii D) i and ii E) i, ii, and iii Answer: D Topic: Employment and unemployment Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 101) The unemployment rate equals A) (number of people without a job ÷ population)× 100. B) (number of people unemployed ÷ labor force) × 100. C) (number of people without a job ÷ working-age population) × 100. D) (number of people unemployed ÷ population) × 100. E) [(working-age population - number of people employed) ÷ labor force] × 100. Answer: B Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

102) If the working age population is 200 million, 150 million are employed, and 6 million are unemployed, the unemployment rate is A) 3.0 percent. B) 25.0 percent. C) 4.0 percent. D) 12.0 percent. E) 3.8 percent. Answer: E Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 103) Suppose the population is 250 million people, the labor force is 150 million people, the number of people employed is 130 million and the working-age population is 200 million people. What is the unemployment rate? A) 8.0 percent B) 10.0 percent C) 13.3 percent D) 20 million E) 15.4 percent Answer: C Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

104) The table above gives the number of people employed and the number of people unemployed in Canada, Japan, and the United States on the average during 1999. In 1999, the unemployment rate in ________ was the highest and the unemployment rate in ________ was the lowest. A) the United States; Japan B) Canada; the United States C) Japan; Canada D) Canada; Japan E) Japan; the United States Answer: B Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

105) The table above shows data reported by the Office for National Statistics for the United Kingdom. The unemployment rate is A) 5.5 percent. B) 1,619 thousand. C) 3.5 percent. D) 3.7 percent. E) 5.8 percent. Answer: A Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Revised AACSB: Analytic skills

106) The table above shows data reported by the Office for National Statistics for the United Kingdom. The labor force participation rate is A) 59.7 percent. B) 63.1 percent. C) 34.8 percent. D) 40.3 percent. E) 58.3 percent. Answer: B Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Revised AACSB: Analytic skills 107) Discouraged workers and marginally attached workers are A) counted as employed by the BLS but are not part of the labor force. B) counted as employed by the BLS and are part of the labor force. C) counted as unemployed by the BLS and are part of the labor force. D) not part of the labor force. E) counted as unemployed by the BLS but are not part of the labor force. Answer: D Topic: Discouraged workers Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking 108) While in school, Kiki spends 20 hours a week as a computer programmer for Microsoft and studies 30 hours a week. A) Kiki is classified as a full-time worker, working 50 hours a week. B) Kiki is classified as a part-time worker, working 30 hours a week. C) Kiki is classified as a part-time worker, working 20 hours a week. D) Because Kiki is a student, she is not classified as working. E) Because Kiki is a student, she is classified as a full-time worker, working 20 hours a week at a paid job. Answer: C Topic: Part-time workers Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

109) Part-time workers for noneconomic reasons are people who A) work less than 35 hours a week but would like to work more than 35 hours a week. B) work more than 35 hours a week but would like to work less than 35 hours a week. C) have lost their jobs within the last four weeks and are seeking another job. D) do not want to work full time. E) are discouraged workers. Answer: D Topic: Part-time workers Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Reflective thinking

110) The table shows data reported by Statistics Canada. The unemployment rate is A) 1.2 million. B) 5.0 percent. C) 7.6 percent. D) 7.9 percent. E) 6.1 percent. Answer: C Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.1 Status: Revised AACSB: Analytic skills 22.2 Labor Market Trends and Fluctuations 1) The average U.S. unemployment rate between 1948 to 2019 was about A) 10.7 percent. B) 19.7 percent. C) 5.7 percent. D) 2.7 percent. E) 15.7 percent. Answer: C Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Revised AACSB: Reflective thinking 39 Copyright © 2023 Pearson Education Ltd.

2) Unemployment rates in the United States between 1948 to 2019 A) remained between 4 and 6 percent. B) have risen and fallen in a range between approximately 10 and 25 percent. C) have risen and fallen in a range between approximately 4 and 12 percent. D) have fallen steadily from approximately 10 percent in 1948 to near 2 percent in 2019. E) have risen steadily and were near all-time highs in 2019. Answer: C Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Revised AACSB: Reflective thinking 3) A main reason for the low unemployment rate from 1995 through most of the 2000s was because of A) higher oil prices. B) the government's policy of tightening immigration policies. C) the rapid development of the Internet industry and other new technologies. D) government's more liberal social benefit programs. E) increased defense expenditures by the government. Answer: C Topic: Recent unemployment rates Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 4) During a recession, the unemployment rate A) is, by definition, above 25 percent. B) is, by definition, above 10 percent. C) usually increases but not necessarily to 10 percent or 25 percent. D) remains constant. E) usually decreases. Answer: C Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking

5) The unemployment rate generally ________ during recessions and generally ________ during expansions. A) increases; decreases B) decreases; increases C) increases; increases D) decreases; decreases E) increases; does not change Answer: A Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 6) During a recession the unemployment rate generally ________ and during an expansion the unemployment rate generally ________. A) rises; falls B) rises; rises C) falls; rises D) rises; does not change E) does not change; falls Answer: A Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 7) During an expansion, the unemployment rate generally A) rises. B) falls. C) is not affected. D) is, by definition, below 5 percent. E) is higher than during a recession. Answer: B Topic: Unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking

8) Which of the following describe the United States' unemployment rate? i. The unemployment rate has decreased each year since the Great Depression. ii. The unemployment rate averaged about 5.7 percent between 1948 to 2019. iii. Job creation due to defense spending and consumer spending in the 1960s drove the unemployment rate to one of its lowest level. A) i and ii only B) ii and iii only C) i, ii and iii D) i only E) i and iii Answer: B Topic: Unemployment rate since 1929 Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Revised AACSB: Reflective thinking 9) The highest unemployment rate in U.S. history was about A) 10.2 percent in 2009. B) 5.9 percent in 1972. C) 10 percent in 1982. D) 25 percent in 1933. E) 52 percent in 1939. Answer: D Topic: Unemployment rate since 1929 Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 10) During the Great Depression, the unemployment rate rose to a maximum of about A) 10 percent. B) 13 percent. C) 25 percent. D) 50 percent. E) 67 percent. Answer: C Topic: Unemployment rate since 1929 Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking

11) From 2009 to 2019, the unemployment rates in the Eurozone was A) constantly lower than the unemployment rate in the United States and not rising toward the U.S. unemployment rate. B) constantly lower than the unemployment rate in the United States but were rising toward the U.S. unemployment rate. C) more or less constant at 3 percent. D) generally higher than the U.S. unemployment rate. E) approximately equal to those in the United States, with some years the U.S. unemployment rate being slightly higher and in other years the U.S. unemployment rate being slightly lower. Answer: D Topic: Eye on the global economy, unemployment around the world Skill: Level 3: Using models Section: Checkpoint 22.2 Status: Revised AACSB: Reflective thinking 12) Over the past two decades from 1999 to 2019, the unemployment rates in A) the Eurozone have been generally less than U.S. unemployment rates. B) the Eurozone have been generally greater than U.S. unemployment rates. C) the United Kingdom have almost always been much greater than the U.S. unemployment rates. D) Canada are less than the U.S. unemployment rates. E) Japan are much larger than those in the United States. Answer: B Topic: Eye on the global economy, unemployment around the world Skill: Level 3: Using models Section: Checkpoint 22.2 Status: Revised AACSB: Reflective thinking 13) Across developed and newly industrialized economies, 1989 to 2019 the United States has generally had A) a higher unemployment rate than Japan and Hong Kong and a lower unemployment rate than the Eurozone countries. B) a lower unemployment rate than Japan and Hong Kong. C) a higher unemployment rate than the Eurozone countries. D) the same unemployment rate as Canada. E) a lower unemployment rate than Hong Kong and a higher unemployment rate than Japan and the Eurozone countries. Answer: A Topic: Eye on the global economy, unemployment rate around the world Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Revised AACSB: Reflective thinking

14) Countries with higher than average unemployment rates have ________ compared to the United States. A) less regulated labor markets B) lower levels of technology C) higher levels of technology D) more generous unemployment benefits and more regulated labor markets E) a higher labor force participation rate Answer: D Topic: Eye on the global economy, unemployment rate around the world Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 15) In the United States over the last 50 years A) the labor force participation rate for women has increased to match that for women in other developed countries. B) both women's and men's labor force participation rates have increased due to technology. C) the change in men's labor force participation rate explains the behavior of the unemployment rate. D) the labor force participation rate for women has increased to near 60 percent. E) women's earning power has remained fairly constant. Answer: D Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 16) In the United States, over the past 50 years the total labor force participation rate A) has increased. B) has decreased. C) has remained more or less constant. D) has fluctuated substantially. E) first decreased slightly and then increased significantly. Answer: A Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking

17) Since 1960, the labor force participation rate in the United States has A) increased for men and women. B) decreased for men and women. C) increased for men and decreased for women. D) increased for women and decreased for men. E) increased for women and not changed for men. Answer: D Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 18) Between 1960 and 2019, the labor force participation rate for women A) increased until about 1996. B) decreased in most years. C) did not change. D) first fell sharply and then, after 1996, rose equally sharply. E) did not change until 1992, after which it generally increased. Answer: A Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Revised AACSB: Reflective thinking 19) As technology advancements have led to more white collar jobs A) the unemployment rate has steadily fallen. B) the labor force participation rate for men and women have increased. C) a higher percentage of men of working age have entered the labor force. D) the labor force participation rate for women has increased over the last 50 years. E) the labor force participation rate for women has decreased since 1960. Answer: D Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking

20) Since 1960, the labor force participation rate in the United States A) has remained remarkably stable. B) has generally decrease. C) has generally increased. D) at first rose sharply and then gradually decreased. E) at first gradually decreased and in recent years has risen sharply. Answer: C Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 21) The upward trend in the U.S. labor force participation rate the past 50 years is explained by A) the increase in the population. B) the increase in the male labor force participation rate. C) the increase in the number of discouraged workers. D) the increase in the female labor force participation rate. E) Both answers B and D are correct. Answer: D Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 22) The total U.S. labor force participation rate increased over the past 50 years because A) the female labor force participation rate increased. B) more men are retiring early. C) fewer women are attending college. D) many blue-collar jobs with rigid work hours have been created in the last decade. E) the male labor force participation rate increased. Answer: A Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking

23) Which of the following statements are TRUE concerning the labor force participation rate? i. The labor force participation rate for women in the United States has increased since 1959. ii. The labor force participation rates for women across different countries have converged to about 50 percent. iii. The labor force participation rate for men in the United States has decreased since 1959. A) i and ii B) i, ii and iii C) i and iii D) iii only E) i only Answer: C Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 24) Over the last 50 years, in the United States the labor force participation rate for women ________, the labor force participation rate for men ________, and the over-all labor force participation rate ________. A) increased; decreased; increased B) increased; decreased; did not change C) did not change; increased; increased D) increased; did not change; increased E) decreased; increased; increased Answer: A Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 25) Over the last 50 years, the U.S. labor force participation rate of men has ________ by ________ the labor force participation of women has ________. As a result, the overall U.S. labor force participation has ________. A) decreased; less than; increased; increased B) decreased; more than; increased; decreased C) decreased; about the same rate as; increased; remained steady D) increased; less than; decreased; decreased E) increased; more than; decreased; increased Answer: A Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 47 Copyright © 2023 Pearson Education Ltd.

26) In part, the increase in the labor force participation rate in the United States over the last 50 years can be attributed to A) unsuccessful job seekers becoming discouraged workers. B) technological change in the home increasing the time available for paid employment. C) recessionary periods followed by longer expansionary periods. D) early retirement by men in the labor force. E) the large increase in the men's labor force participation rate overcoming the large decrease in the women's labor force participation rate. Answer: B Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 27) Which of the following help explain the increase in the U.S. labor force participation rate for women? i. There was a significant fall in the number of children women were choosing to have. ii. There was an increase in the educational level of women. iii. Technological change in the home increased the time available for work outside the home. A) i only B) ii only C) i and ii D) ii and iii E) i, ii, and iii Answer: D Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 28) In the United States, a reason for the increase of the labor force participation rate for women is that A) an increase in wealth allowed men to retire early. B) more women pursued a college education and received higher wages upon graduation. C) improved Social Security benefits are available for women if they work. D) there has been a decrease in jobs with flexible hours. E) fewer women married. Answer: B Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking

29) Over the past 50 years, the U.S. labor force participation rate has decreased for i. men. ii. women. iii. the over-all labor force. A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: A Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 30) Between 1960 and 2019, the labor force participation rate for men A) increased in most years. B) decreased in most years. C) did not change. D) fluctuated, first rising until about 1989 and after that, then falling. E) did not change until 1992, after which it generally increased. Answer: B Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Revised AACSB: Reflective thinking 31) Since 2000, the U.S. labor force participation rate for men has ________ and for women has ________. A) gone up; gone up B) gone down; gone up C) been flat; gone down D) been flat; been flat E) gone down; gone down Answer: E Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Revised AACSB: Reflective thinking

32) U-1 is a more ________ measure of unemployment rate than the conventional U-3 measure and U-1 only counts as unemployed workers who ________. A) narrow; have been unemployed for 15 weeks or more weeks B) narrow; have been laid off C) broad; have been laid off D) broad; who are discouraged workers E) broad; are marginally attached to the labor force Answer: A Topic: Unemployment rate, different measures Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Revised AACSB: Reflective thinking 33) Which is TRUE concerning U-2? i. It does not count marginally attached workers as unemployed. ii. It counts as unemployed workers who were laid off. iii. It is smaller than U-3. A) i only B) i and ii C) i and iii D) ii and iii E) i, ii and iii Answer: E Topic: Unemployment rate, different measures Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 34) U-4, U-5 and U-6 are A) all broader measures of the unemployment rate. B) all narrower measures of the unemployment rate. C) not used by the Bureau of Labor Statistics because they include too much variability. D) narrower measures of the labor force participation rate. E) broader measures of the labor force participation rate. Answer: A Topic: Unemployment rate, different measures Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking

35) During the recessions of 2001 and 2008-09 A) all measures of the unemployment rate (U-1 through U-6) increased. B) only the broader measures of the unemployment rate increased. C) only the narrower measures of the unemployment rate increased. D) the labor force participation rate for women increased. E) the labor force participation rate for men increased. Answer: A Topic: Unemployment rate, different measures Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 36) During the 2008 - 09 recession, the U-6 measure of the unemployment rate A) which counts marginally attached workers and discouraged workers as unemployed, reached 17 percent. B) which counts marginally attached workers and discouraged workers as employed, reached 10 percent. C) which counts marginally attached workers as unemployed but does not count discouraged workers as unemployed, reached 17 percent. D) which counts all part time workers as employed, reached 12 percent. E) which counts discouraged workers as unemployed but does not count marginally attached workers as unemployed, reached 17 percent. Answer: A Topic: Unemployment rate, different measures Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 37) In the United States, part-time workers are A) more numerous than full-time workers. B) less numerous than full-time workers. C) about as numerous as full-time workers. D) considered discouraged workers. E) counted as unemployed in all measures of the unemployment rate. Answer: B Topic: Part-time workers Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking

38) From 1990 to 2019, the unemployment rate in the United States A) was always lower than the unemployment rate in Japan. B) almost always equaled the unemployment rate in Canada. C) generally rose while the unemployment rate in the Eurozone fell. D) was generally lower than the unemployment rate in the Eurozone. E) was usually higher than the unemployment rate in Canada. Answer: D Topic: Eye on the global economy, unemployment rate around the world Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Revised AACSB: Reflective thinking 39) Since 1960, in the United States the labor force participation rate for men has ________ and for women has ________. A) increased; increased B) increased; decreased C) decreased; increased D) decreased; decreased E) not changed; increased Answer: C Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 40) The women's labor force participation rate is A) higher in Japan than in the United States. B) higher in the United States than in France. C) higher in Italy than in the United States. D) higher in Spain than in Iceland. E) higher in the United States than in Iceland or Norway. Answer: B Topic: Global labor force participation rates Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking

41) In a recession, which unemployment rate is the highest? A) the U-1 unemployment rate B) the U-6 unemployment rate C) the U-2 unemployment rate D) the U-3 unemployment rate E) None of the above answers is correct because the highest unemployment rate changes from one recession to the next. Answer: B Topic: Unemployment rate, different measures Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 42) National differences in women's labor force participation rates are explained by A) cultural differences. B) percentage of women with college degree. C) both A and B. D) geopolitical location. E) population size. Answer: C Topic: Global labor force participation rates Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: New AACSB: Reflective thinking 43) National differences in women's labor force participation rates are explained by A) family friendly labor market policies. B) percentage of women with college degree. C) cultural differences. D) all of the above. E) none of the above. Answer: D Topic: Global labor force participation rates Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: New AACSB: Reflective thinking

22.3 Unemployment and Full Employment 1) Frictional unemployment is the result of A) an economic recession. B) the economic decline of major industries. C) the normal process of jobs being created and destroyed. D) people not getting along (having friction) with their employers. E) changing weather throughout the year. Answer: C Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 2) As firms search for the best employee to fill an opening and the unemployed search for the job that best fits their skills, the economy experiences A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) changes in the business cycle. E) avoidable unemployment. Answer: B Topic: Types of unemployment, frictional Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 3) Frictional unemployment is the result of A) technological change or foreign competition. B) normal labor market turnover. C) a slowdown in the rate of economic expansion. D) the economy entering a strong expansion. E) changes in the weather. Answer: B Topic: Types of unemployment, frictional Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

4) ________ unemployment changes slowly and depends on ________. A) Frictional; the skills of the unemployed B) Seasonal; the rate at which people enter and exit the labor force C) Frictional; the rate at which people enter and exit the labor force D) Structural; the rate at which people enter the labor force E) Structural; the inflation rate Answer: C Topic: Types of unemployment, frictional Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 5) The ongoing normal creation and destruction of jobs creates A) frictional unemployment. B) structural unemployment. C) avoidable unemployment. D) cyclical unemployment. E) destructive unemployment. Answer: A Topic: Types of unemployment, frictional Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 6) Which type of unemployment is a permanent and healthy phenomenon in a dynamic economy? A) cyclical B) avoidable C) structural D) frictional E) unavoidable Answer: D Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

7) The amount of frictional unemployment depends on A) the phase of the business cycle. B) the time of the year. C) international competition. D) demographic factors and unemployment benefits. E) Both answers A and B are correct. Answer: D Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 8) A reduction in unemployment benefits will A) decrease the amount of frictional unemployment. B) increase the amount of frictional unemployment. C) not change the amount of frictional unemployment because unemployment benefits affects only cyclical unemployment. D) not change the amount of frictional unemployment because unemployment benefits affects only structural unemployment. E) increase the amount of cyclical unemployment. Answer: A Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 9) Bill just graduated with his degree in economics. Through Career Services he submitted his resume to several companies and he will visit them during the next two weeks. Bill is considered A) not in the labor force. B) frictionally unemployed. C) structurally unemployed. D) cyclically unemployed. E) employed because he is visiting firms. Answer: B Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

10) Jordan recently quit her job as a marketing consultant in Washington, D.C. and is looking for a better-paying job with an advertising agency in New York. Jordan is considered to be A) cyclically unemployed. B) structurally unemployed. C) not in the labor force. D) frictionally unemployed. E) a discouraged worker. Answer: D Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 11) Which of the following would be considered unemployed as part of normal labor market turnover? i. Juliet, who was fired when the company where she worked went bankrupt in a recession ii. Hannah, who quit her job to find one that better suited her skills iii. Charlotte, who started looking for a job upon graduation from high school A) ii and iii B) i and ii C) i, ii and iii D) i and iii E) iii only Answer: A Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 12) Rosina Gonzales quit her job in Pennsylvania and moved to California to be close to her family. She is currently looking for work, so she would be considered A) a discouraged worker. B) frictionally unemployed. C) cyclically unemployed. D) avoidably unemployed. E) not in the labor force because she moved more than 150 miles. Answer: B Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

13) Beth has just quit her job, moved to a new city, and is looking for a new job. Beth is A) frictionally unemployed. B) structurally unemployed. C) distance unemployed. D) cyclically unemployed. E) locationally unemployed. Answer: A Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 14) Mary has decided that the she does not like Iowa and has decided to quit her job as a medical technician and move to Arizona. Mary's unemployment as she searches for a new job is best classified as A) cyclical. B) distance. C) structural. D) frictional. E) traveling. Answer: D Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 15) Which of the following correctly describes "frictional unemployment"? A) Frictional unemployment includes only people who are job losers. B) Frictional unemployment includes only people who are job leavers. C) Frictional unemployment occurs mainly during recessions. D) Frictional unemployment is a normal occurrence in a growing economy. E) Frictional unemployment falls in recessions and rises in expansions. Answer: D Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

16) Higher ________ in Canada than in the United States help(s) explain why ________ unemployment is higher in Canada than in the United States. A) unemployment benefits; frictional B) unemployment benefits; structural C) prices; frictional D) prices; structural E) investment; structural Answer: A Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 17) Unemployment benefits in western Europe are more generous than in the United States. As a result, ________ in the United States. A) frictional unemployment is lower B) frictional unemployment is higher C) structural unemployment is higher D) avoidable unemployment is lower E) cyclical unemployment is higher Answer: A Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 18) Structural unemployment is the result of A) technological change or foreign competition. B) normal labor market turnover. C) a slowdown in the rate of economic expansion. D) irresponsible workers with poor work habits. E) changing weather patterns through the year. Answer: A Topic: Types of unemployment, structural Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

19) Structural unemployment is the result of A) voluntary job quitting by workers. B) changing labor needs by firms during the year. C) technology changes or foreign competition. D) changes in the family structure. E) downturns in the business cycle. Answer: C Topic: Types of unemployment, structural Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 20) Which type of unemployment arises when changes in technology or international competition change the skills needed to perform jobs or change the location of jobs? A) cyclical B) fluctuating C) structural D) frictional E) skill-set Answer: C Topic: Types of unemployment, structural Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 21) Structural unemployment includes people who become unemployed from A) changes in the seasons. B) normal changes in the labor force. C) technological changes. D) changes in the business cycle. E) going back to school. Answer: C Topic: Types of unemployment, structural Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

22) An employee who is fired from his or her job because he or she lacks the skills required to accomplish the task, is part of ________ unemployment. A) frictional B) cyclical C) unskilled D) structural E) withdrawal Answer: D Topic: Types of unemployment, structural Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 23) Structural unemployment usually lasts ________ period of time ________ unemployment A) a longer; than frictional B) a shorter; than frictional C) a shorter; than seasonal D) a shorter; than cyclical E) the same; as cyclical Answer: A Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 24) Which type of unemployment is most likely to lead unemployed workers to retrain or relocate? A) cyclical B) forced C) structural D) frictional E) search Answer: C Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

25) When the automobile replaced horse-drawn carriages as the principal means of transportation, firms producing horse-drawn carriages went bankrupt and permanently laid off all their workers, thereby increasing i. seasonal unemployment. ii. structural unemployment. iii. cyclical unemployment. A) i only B) ii only C) i and iii D) i and ii E) ii and iii Answer: B Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 26) During 2009, General Motors announced that it would close its Saturn facilities in the United States because of the foreign competition it faced. This corporate move A) increased structural unemployment. B) increased avoidable unemployment. C) increased cyclical unemployment. D) had no impact on unemployment. E) decreased frictional unemployment. Answer: A Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 27) After 15 years with Ford Motor Corporation, one summer Cameron loses his job. His boss explained that his position has been downsized after the technological advances in automobile production. Cameron is best considered A) not in the labor force. B) frictionally unemployed. C) structurally unemployed. D) cyclically unemployed. E) avoidably unemployed. Answer: C Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 62 Copyright © 2023 Pearson Education Ltd.

28) Juan recently lost his job as a travel agent, which he has had for 20 years, because the demand for his services has fallen over time as more and more people book their vacations online. Unfortunately, Juan has not been able to find a new job because he lacks the skills needed to get hired in other industries where job growth is occurring. Juan is considered to be A) structurally unemployed. B) frictionally unemployed. C) cyclically unemployed. D) a marginally attached worker. E) not in the labor force. Answer: A Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 29) For twenty years, Jim was a customer service representation at a call center in Minnesota. In order to save money, his firm moved the call center to India and laid off Jim two years ago. Jim has been unable to find a similar job anywhere. Jim's unemployment is best classified as A) cyclical. B) transported. C) structural. D) frictional. E) competitive. Answer: C Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 30) Joann has just lost her job because her company was faced with more foreign competition and decided to restructure, which reduced the number of jobs at the company. Joann is A) frictionally unemployed. B) structurally unemployed. C) transported unemployed. D) cyclically unemployed. E) internationally unemployed. Answer: B Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

31) Joe has been unable to find a job because he lacks the necessary computer skills. Joe is A) frictionally unemployed. B) structurally unemployed. C) educationally unemployed. D) cyclically unemployed. E) skill-set unemployed. Answer: B Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 32) Cyclical unemployment includes people who become unemployed from A) changes in the seasons. B) changes in international competition. C) technological changes. D) changes in the business cycle. E) normal labor market turnover. Answer: D Topic: Types of unemployment, cyclical Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 33) The type of unemployment that arises from a decrease in real GDP is called A) frictional unemployment. B) structural unemployment. C) non-expansion unemployment. D) cyclical unemployment. E) downturn unemployment. Answer: D Topic: Types of unemployment, cyclical Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

34) Which type of unemployment is the consequence of downturns in the business cycle? A) cyclical B) expansionary C) structural D) frictional E) natural Answer: A Topic: Types of unemployment, cyclical Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 35) The unemployment that fluctuates over the business cycle is called A) frictional unemployment. B) structural unemployment. C) full unemployment. D) cyclical unemployment. E) natural unemployment. Answer: D Topic: Types of unemployment, cyclical Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 36) Cyclical unemployment is A) the total of structural and frictional unemployment. B) always greater than the total of structural and frictional unemployment. C) created by a recession. D) higher when the economy is expanding. E) part of frictional unemployment. Answer: C Topic: Types of unemployment, cyclical Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

37) John has been laid off from his job because of a general downturn in the economy. John's unemployment is best classified as A) cyclical. B) full. C) structural. D) frictional. E) avoidable. Answer: A Topic: Types of unemployment, cyclical Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 38) Janae was fired from her job with Microsoft in the 2008-09 recession because Microsoft's sales dipped. Janae's unemployment would be best classified as A) frictional unemployment. B) structural unemployment. C) sales-related unemployment. D) cyclical unemployment. E) natural unemployment. Answer: D Topic: Types of unemployment, cyclical Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 39) In 2008, as the economy moved into a recession A) cyclical unemployment increased. B) structural unemployment decreased. C) natural unemployment decreased. D) frictional unemployment was not affected. E) the number of marginally attached workers decreased. Answer: A Topic: Types of unemployment, cyclical Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

40) During a recession, cyclical unemployment ________ and real GDP ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases E) does not change; decreases Answer: B Topic: Types of unemployment, cyclical Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 41) An economic recession produces A) an increase in cyclical unemployment. B) an increase in structural unemployment. C) an increase in natural unemployment. D) a decrease in cyclical unemployment. E) a decrease in natural unemployment. Answer: A Topic: Types of unemployment, cyclical Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 42) Cyclical unemployment A) is always a constant amount of unemployment. B) is higher during an expansion. C) decreases during a recession. D) fluctuates over the business cycle. E) fluctuates but not in response to the business cycle. Answer: D Topic: Types of unemployment, cyclical Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

Consider the following people: ∙ Chris quits his job as an automobile mechanic to pursue his college education full-time. ∙ Darrelo was laid off from her technical support job because of a strike by production workers and is currently looking for a new job. ∙ Rita graduated from college and is currently looking for a job. ∙ Armondo quit his old job and will begin his new job in four days. ∙ Thorton was fired from his job as a steel worker because of massive imports of steel and he is looking for a new job. ∙ Jung was laid off from his job as an appraiser because the firm's business declined because of a general downturn in the economy and he is currently looking for a new job as an appraiser. 43) According to the scenario above, in which of the following groups are ALL the people frictionally unemployed? A) Rita and Darrelo B) Chris, Rita, and Thorton C) Rita and Jung D) Darrelo and Jung E) Jung Answer: A Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 44) According to the scenario above, in which of the following groups are ALL the people cyclically unemployed? A) Jung B) Darrelo C) Jung and Rita D) Jung and Thorton E) Thorton Answer: A Topic: Types of unemployment, cyclical Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

45) According to the scenario above, in which of the following groups are ALL the people structurally unemployed? A) Thorton B) Jung C) Thorton and Darrelo D) Darrelo and Thorton E) Rita, Armondo, and Chris Answer: A Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 46) During a recession, the average duration of unemployment tends to A) increase. B) decrease. C) remain constant. D) be unpredictable. E) be about the same as during an expansion. Answer: A Topic: How long does it take to find a job? Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 47) During a recession, the duration of unemployment ________ and the unemployment rate is ________ the natural rate of unemployment. A) lengthens; greater than B) lengthens; less than C) shortens; greater than D) shortens; equal to E) does not change; equal to Answer: A Topic: How long does it take to find a job? Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

48) The average duration of unemployment A) decreases during recessions and increases during expansions. B) increases during recessions and decreases during expansions. C) does not vary with the business cycle. D) decreases all the time. E) increases all the time. Answer: B Topic: How long does it take to find a job? Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 49) Which is TRUE regarding cyclical unemployment? i) Cyclical unemployment is positive at business cycle peaks. ii) Cyclical unemployment is negative at business cycle troughs. iii) Cyclical unemployment is zero at full employment. A) iii only B) i, ii and iii C) i and iii D) i only E) i and ii Answer: A Topic: Types of unemployment, cyclical Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 50) At full employment there is no A) unemployment. B) cyclical unemployment. C) avoidable unemployment. D) frictional unemployment. E) structural unemployment. Answer: B Topic: Full employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

51) Full employment occurs when A) the unemployment rate is zero. B) the cyclical unemployment rate is zero. C) the frictional unemployment rate is zero. D) the sum of frictional and structural unemployment is zero. E) the structural unemployment rate is zero. Answer: B Topic: Full employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 52) Full employment occurs when A) structural unemployment is zero. B) cyclical unemployment is zero. C) frictional unemployment is zero. D) structural and frictional unemployment are zero. E) the unemployment rate equals zero. Answer: B Topic: Full employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 53) When the economy is at full employment A) 100 percent of the labor force is employed. B) there is no structural or cyclical unemployment. C) there is no cyclical unemployment. D) there is only frictional unemployment. E) the natural unemployment rate equals zero. Answer: C Topic: Full employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

54) Full employment means that A) the unemployment rate is below 6 percent. B) there is no cyclical unemployment. C) the unemployment rate is zero. D) the frictional unemployment rate is equal to the structural unemployment rate. E) there is no frictional unemployment. Answer: B Topic: Full employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 55) When the economy is at full employment, the A) natural unemployment rate is equal to 0 percent. B) natural unemployment rate equals the unemployment rate. C) natural unemployment rate is equal to 10 percent. D) unemployment rate is equal to 0 percent. E) frictional unemployment rate is equal to 0 percent. Answer: B Topic: Full employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 56) Full employment occurs when the A) unemployment rate equals the natural unemployment rate. B) structural unemployment rate equals the frictional unemployment rate. C) natural unemployment rate equals the frictional unemployment rate. D) cyclical unemployment rate equals the natural unemployment rate. E) structural unemployment rate equals zero. Answer: A Topic: Full employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

57) Full employment is the level of unemployment that occurs A) when everyone looking for a job has a job. B) when cyclical unemployment is zero. C) when frictional and structural unemployment are zero. D) when frictional, structural, and cyclical unemployment are zero. E) None of the above answers is correct. Answer: B Topic: Full employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 58) Full employment means that A) 100 percent of the labor force have jobs. B) only those who are willing, able and looking for work are unemployed. C) the cyclical unemployment rate is zero. D) the natural unemployment rate is zero. E) the frictional unemployment rate is zero. Answer: C Topic: Full employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 59) At full employment there still exists some unemployment because A) some portion of our population will always be too lazy to work. B) there are always people too old or young to be in the labor force. C) the U.S. economy is constantly creating and destroying jobs. D) it is unnatural to have all people work 40 hours per week. E) real GDP can never exceed potential GDP. Answer: C Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

60) In 2020, real GDP in the United States was below potential GDP. This fact definitely means that A) the unemployment rate was near 10 percent. B) the unemployment rate was above the natural unemployment rate. C) the economy was in an expansion. D) cyclical unemployment had been decreasing. E) frictional unemployment was negative. Answer: B Topic: Natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 22.3 Status: Revised AACSB: Reflective thinking 61) The natural unemployment rate is the unemployment rate that exists when there is no A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) cyclical or structural unemployment. E) unnecessary unemployment. Answer: C Topic: Natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 62) Natural unemployment equals the sum of A) cyclical and frictional unemployment. B) cyclical, business, and structural unemployment. C) frictional and structural unemployment. D) business and cyclical unemployment. E) cyclical and structural unemployment. Answer: C Topic: Natural unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

63) The natural unemployment rate A) includes only frictional and structural unemployment. B) is equal to zero when there are no economic fluctuations. C) is easy to measure. D) is very stable in value across time. E) includes some frictional, structural, and cyclical unemployment. Answer: A Topic: Natural unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 64) The natural unemployment rate is A) another name for the average annual rate of unemployment. B) another name for the cyclical unemployment rate. C) the sum of cyclical and frictional unemployment rates. D) the unemployment rate that is not associated with the business cycle. E) the sum of cyclical, structural, and frictional unemployment rates. Answer: D Topic: Natural unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 65) When cyclical unemployment is zero A) frictional unemployment is zero. B) cyclical and frictional unemployment are zero. C) structural unemployment is zero. D) the unemployment rate equals the natural unemployment rate. E) the natural unemployment rate is zero. Answer: D Topic: Natural unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

66) The natural unemployment rate occurs A) at the full employment level of unemployment. B) when the structural unemployment rate equals zero. C) when the frictional unemployment rate equals zero. D) when the sum of frictional and structural unemployment equals zero. E) when the unemployment rate equals zero. Answer: A Topic: Natural unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 67) If the unemployment rate is less than the natural unemployment rate, then A) there is no frictional unemployment. B) cyclical unemployment is greater than zero. C) real GDP is less than potential GDP. D) real GDP is greater than potential GDP. E) frictional unemployment is negative. Answer: D Topic: Natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 68) At the peak of a business cycle, the A) cyclical unemployment rate is positive. B) unemployment rate is above the natural unemployment rate. C) frictional unemployment rate is zero. D) unemployment rate is below the natural unemployment rate. E) natural unemployment rate is negative. Answer: D Topic: Natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

69) The natural unemployment rate is A) equal to the sum of frictional, cyclical, and seasonal unemployment. B) not known with certainty. C) equal to zero. D) the same for all industrialized countries. E) equal to the sum of frictional, structural, and cyclical unemployment. Answer: B Topic: Natural unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 70) Potential GDP is A) the value of the maximum amount of output that can be produced at any given time. B) the amount of real GDP that the economy would produce if it were at full employment of all resources. C) another name for real GDP. D) the amount of real GDP that the economy would produce if the unemployment rate was zero. E) the amount of real GDP that the economy would produce if all unemployment was cyclical unemployment. Answer: B Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 71) Potential GDP is the level of output produced when the unemployment rate is A) equal to the natural unemployment rate. B) greater than the natural unemployment rate. C) less than the natural unemployment rate. D) zero. E) made up of only cyclical unemployment. Answer: A Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

72) Potential GDP is reached when A) unemployment is zero. B) there is no cyclical unemployment. C) unemployment is above full employment. D) unemployment is below full employment. E) the natural unemployment rate equals zero. Answer: B Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 73) Which of the following is TRUE? A) Real GDP fluctuates around potential GDP. B) Potential GDP fluctuates around real GDP. C) Nominal GDP fluctuates around real GDP. D) Real GDP fluctuates around nominal GDP. E) When real GDP equals potential GDP, both equal nominal GDP. Answer: A Topic: Potential GDP and real GDP Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 74) During a recession A) real GDP is equal to potential GDP. B) real GDP is less than potential GDP. C) real GDP is greater than potential GDP. D) the relationship between real GDP and potential GDP no longer exists. E) the actual unemployment rate is less than the natural unemployment rate. Answer: B Topic: Potential GDP and real GDP Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

75) When the unemployment rate is greater than the natural unemployment rate, real GDP is A) greater than potential GDP. B) less than potential GDP. C) unrelated to potential GDP. D) equal to potential GDP. E) greater than full employment GDP. Answer: B Topic: Potential GDP and real GDP Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 76) As the unemployment rate increases A) potential GDP decreases. B) real GDP decreases. C) BOTH real GDP and potential GDP decrease. D) potential GDP increases. E) full employment GDP decreases. Answer: B Topic: Potential GDP and real GDP Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 77) When the unemployment rate is ________ the natural unemployment rate, real GDP is ________ potential GDP. A) below; above B) above; the same as C) the same as; below D) the same as; above E) above; above Answer: A Topic: Potential GDP and real GDP Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

78) Tommy graduates from college and starts to look for a job. Tommy is A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) unnecessarily unemployed. E) employed because he is looking for work. Answer: A Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 79) Which of the following people is frictionally unemployed? A) Cara, an executive who lost her job because her company could not compete with foreign competition and whose skills are not wanted by other companies B) Tran, a building construction supervisor who was fired because of a downturn in the building industry that is the result of a general downturn in the economy C) Eugene, a pharmaceutical drug salesman who was laid off when his company lost a large contract with an HMO D) Amanda, a sales associate at J.C. Penney who quit her job to attend school full time E) Samantha, who worked part-time in J.C. Penney to help with the Christmas rush but was laid off in January Answer: C Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 80) If an entire industry relocates to a foreign country, the relocation leads to a higher rate of ________ unemployment. A) frictional B) structural C) structural and frictional D) cyclical E) structural and cyclical Answer: B Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

81) An increase in unemployment benefits ________ and an increase in international competition that changes the location of jobs ________. A) increases structural unemployment; decreases frictional unemployment B) decreases structural unemployment; decreases cyclical unemployment C) decreases cyclical unemployment; decreases cyclical unemployment D) increases frictional unemployment; increases structural unemployment E) decreases cyclical unemployment; increases cyclical unemployment Answer: D Topic: Types of unemployment, frictional and structural unemployment Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 82) Who is cyclically unemployed? A) Casey, who lost his job because the technology changed so he was no longer needed B) Katrina, an assistant manager who quit her job to search for a better job closer to home C) Kathy, a steelworker who was laid off but has stopped looking for a new job because she can't find a new job D) David, a new car salesman who lost his job because the economy went into a recession E) Samantha, who quit her job to return to college to earn her MBA Answer: D Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 83) At full employment, there is no A) unemployment. B) frictional unemployment. C) structural and seasonal unemployment. D) cyclical unemployment. E) structural unemployment. Answer: D Topic: Full employment Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

84) When the economy is at full employment A) the natural unemployment rate equals zero. B) the amount of cyclical unemployment equals zero. C) the amount of structural unemployment equals zero. D) there is no unemployment. E) the amount of frictional unemployment equals zero. Answer: B Topic: Full employment Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 85) Which of the following lowers frictional unemployment? A) more young people in the economy B) decreasing unemployment benefits C) increasing the pace of technological change D) increasing the minimum wage E) None of the above answers are correct because all of the answers raise frictional unemployment. Answer: B Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 86) When the unemployment rate is less than the natural unemployment rate, real GDP is ________ potential GDP. A) greater than B) less than C) unrelated to D) equal to E) not comparable to Answer: A Topic: Potential GDP and real GDP Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

87) If real GDP exceeds potential GDP, then the unemployment rate ________ the natural unemployment rate. A) equals B) is greater than C) is less than D) The premise of the question is incorrect because the relationship between real GDP and potential GDP has nothing to do with the relationship between the unemployment rate and the natural unemployment rate. E) The premise of the question is incorrect because real GDP can NEVER exceed potential GDP. Answer: C Topic: Real GDP and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 88) When the unemployment rate is ________ the natural unemployment rate, real GDP is ________. A) above; increasing B) above; above potential GDP C) below; above potential GDP D) below; increasing E) equal to; either equal to potential GDP or above potential GDP Answer: C Topic: Real GDP and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 89) The actual unemployment rate was above the natural unemployment rate during A) 1981-1982 recession. B) 1990-1991 recession. C) 2001 recession. D) 2008-2009 recession. E) all of the time periods above. Answer: E Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

90) The unemployment rate tends to A) generally rises during recessions. B) generally falls during expansions. C) fluctuates independently of the business cycle. D) A and B E) none of the above Answer: D Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 22.3 Status: Old AACSB: Application of knowledge 91) Z-pop ratio is A) the percentage of the working age population that is fully utilized. B) the percentage of the working age population in the labor force. C) the percentage of the working age population which is unemployed. D) the percentage of the working age population that is underused. E) none of the above. Answer: A Topic: Eye on Full Employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 92) People counted as fully utilized for the computation of the Z-Pop ratio are A) working full time. B) working part-time for non-economic reasons. C) those who say they do not want a job. D) all of the above E) none of the above Answer: D Topic: Eye on Full Employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

93) During the 2008-2009 recession, Z-Pop ratio A) decreased. B) increased. C) stayed the same. D) all of the above E) none of the above Answer: A Topic: Eye on Full Employment Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 94) Based on the actual and natural unemployment rates in the first quarter of 2016, the US economy is ________. Based on the Z-Pop ratio in 2016, the US economy ________. A) back to full employment; has underused labor B) underutilized; is back to pre-recession level C) is above potential GDP; has underused labor D) is below potential GDP; is back to pre-recession level E) none of the above Answer: A Topic: Eye on Full Employment Skill: Level 3: Using models Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking 95) The duration of unemployment spells A) varies over the business cycle. B) has no relationship to the business cycle. C) is the longest at the business cycle peak. D) is constant over the business cycle. E) none of the above Answer: A Topic: Eye on the U.S. economy Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Reflective thinking

22.4 Integrative Questions Consider the following people: ∙ Chris quits his job as an automobile mechanic to pursue his college education full-time. ∙ Arrelo is temporarily laid off from her technical support job because of a strike by production workers. ∙ Schurita graduated from college in May and is currently looking for a job. ∙ Bo quit his job on September 1 and then, after looking for a new job, will begin his new job on October 1. ∙ Terri retired from his job on May 1. ∙ Vicki works part-time at Bainen Press to help pay her college tuition. 1) Bo's actions would A) have no impact on the September unemployment rate or the October unemployment rate. B) raise the September unemployment rate and lower the October unemployment rate. C) raise the September unemployment rate and not change the October unemployment rate. D) classify him as out of the labor force in September. E) raise the September unemployment rate and the October unemployment rate. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 2) Vicki would be classified as A) a voluntary part-time worker. B) unemployed. C) an involuntary part-time work. D) not in the labor force because she is a full-time student. E) a discouraged worker. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

3) When the unemployment rate equals the natural unemployment rate, most likely the economy is producing A) on the production possibilities frontier. B) within the production possibilities frontier. C) beyond the production possibilities frontier. D) either on or within the production possibilities frontier. E) either on or beyond the production possibilities frontier. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 4) Producing an amount of GDP equal to potential GDP is most consistent with the economy producing A) on the production possibilities frontier. B) within the production possibilities frontier. C) beyond the production possibilities frontier. D) either on or within the production possibilities frontier. E) either on or beyond the production possibilities frontier. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 5) After the passage of the North American Free Trade Agreement, which made it less expensive to import goods from Mexico, workers in some industries found their factories being relocated to Mexico to take advantage of lower labor costs. These workers experienced what type of unemployment? A) cyclical B) trade C) structural D) frictional E) foreign Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

6) If the Federal government expands its support of education and retraining of workers who have been unemployed for a relatively long length of time, which type of unemployment would the education and retraining most likely be targeted? A) cyclical B) government C) structural D) frictional E) discouraged Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 7) During the Great Depression of the 1930s when the unemployment rate was exceptionally high due to the Great Depression, the government had employment programs, such as the Civilian Conservation Corps, which built campsites and planted trees. These programs were aimed at reducing which type of unemployment? A) cyclical B) avoidable C) structural D) frictional E) discouraged Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 8) Suppose people decide to buy fewer GE stoves. If General Electric reduces the number of its employees to reduce its costs but no other stove company does so, which type of unemployment results? A) cyclical B) marginal C) structural D) frictional E) discouraged Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

22.5 Essay: Labor Market Indicators 1) How does the Current Population Survey determine if a person should be counted in the labor force? Answer: To be in the labor force, a person must either be employed or unemployed. To be counted as "employed," in the week prior to the survey the person must either have worked for pay for one hour or more or else worked without pay for fifteen hours or more in a family-owned business or else been temporarily absent from his or her job. To be counted as unemployed in the survey, the person must have had no job, been available for work, and either made specific efforts to find work within the previous four weeks or else be waiting to be recalled to a job from which they were laid off. Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Written and oral communication 2) What is the definition of the unemployment rate? How are part-time workers and discouraged workers treated when calculating the unemployment rate? Answer: The definition of the unemployment rate is (number of unemployed)/(labor force) × 100. In this calculation, the labor force equals the sum of employed plus unemployed people. Part-time workers are counted as employed. Thus part-time workers are counted in the labor force but are NOT counted as unemployed. Discouraged workers are people who have stopped looking for work and so are not in the labor force. Hence, when calculating the unemployment rate, discouraged workers are counted in neither the number of unemployed nor in the labor force. Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Written and oral communication 3) Define the unemployment rate and labor-force participation rate. Discuss the differences between these two rates. Answer: The unemployment rate is defined as × 100 and the labor force participation rate is defined as

× 100. The two measures

give different perspectives on the labor market. The labor force participation rate tells the percentage of the working-age population that is either working or is available for work. The unemployment rate tells the percentage of the people working or available for work (the labor force) who do not have jobs. Topic: Unemployment rate and labor force participation rate Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Written and oral communication 89 Copyright © 2023 Pearson Education Ltd.

4) What is a "marginally attached worker"? Answer: A marginally attached worker is a person without a job, who is available and willing to work, but who has not made specific efforts to find a job within the past four weeks. Essentially, a marginally attached worker is someone who wants a job but has a weak "attachment" to the job market and so he or she stops looking. Topic: Marginally attached worker Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Written and oral communication 5) What are the reasons some people choose to be part-time workers? Answer: Some people are part-time workers for economic reasons: They want full-time work but cannot find it. These people are called "involuntary part-time workers." Other people choose to be part time for non-economic reasons. These reasons include health problems, family or personal responsibilities, and/or educational commitments that limit availability for work. Topic: Part-time workers Skill: Level 1: Definition Section: Checkpoint 22.1 Status: Old AACSB: Written and oral communication 6) The unemployment rate is 6 percent. If the population is 300 million, and the number unemployed is 6 million and the number employed is 94 million, what is the size of the labor force? Answer: The labor force is the sum of the number of employed people plus the number of unemployed people. Hence the labor force equals 94 million + 6 million = 100 million. Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 7) Suppose the current unemployment rate is 5 percent, the labor force is 400 million people, the labor force participation rate is 80 percent and the working-age population is 500 million people. What number of people are unemployed? Answer: The number of unemployed people equals the labor force multiplied by the unemployment rate. Hence the number of unemployed people is (400 million) × (5 percent) = 20 million people. Topic: Unemployment Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

8) Suppose that the population is 275 million. Also assume that the labor force is 135 million and that 130 million people are employed. Calculate the unemployment rate. Answer: The unemployment rate is (5 million unemployed ÷ 135 million labor force) × 100 = 3.7 percent. Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 9) Suppose the population is 220 million people, the labor force is 150 million people, the number of people employed is 130 million and the working-age population is 175 million people. What is the unemployment rate? Answer: The unemployment rate is (20 million unemployed ÷ 150 million labor force) × 100 = 13.3 percent. Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 10) Suppose the working-age population is 150 million, the labor force is 125 million, and employment is 120 million. a. What is the unemployment rate? b. Now suppose that 2 million students graduate from college and begin to look for jobs. What is the new unemployment rate if none of the students have found jobs yet? c. Suppose that all 2 million students find jobs. What is the unemployment rate now? Answer: a. The unemployment rate is (5 million unemployed ÷ 125 million labor force) × 100 = 4.0 percent. b. The unemployment rate is (7 million unemployed ÷ 127 million labor force) × 100 = 5.5 percent. c. The unemployment rate is (5 million unemployed ÷ 127 million labor force) × 100 = 3.9 percent. Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

11) Suppose there are 180 million employed people and 20 million unemployed people. a. What is the unemployment rate? b. Suppose that 5 million unemployed people give up their search for jobs and become discouraged workers. What is the new unemployment rate? Answer: a. The unemployment rate is (20 million unemployed ÷ 200 million labor force) × 100 = 10.0 percent. b. The unemployment rate is (15 million unemployed ÷ 195 million labor force) × 100 = 7.7 percent. Topic: Unemployment rate, discouraged workers Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 12) Consider the following scenario. Initially the economy has 90 million people working, 10 million people unemployed, and 20 million people not in the labor force. Then prospects for the economy improve. Five million people who previously were not in the labor force now join the 10 million previously unemployed in looking for work. For now, the economy remains with 90 million workers. What happens to the unemployment rate? Answer: The unemployment rate rises from 10.0 percent, (10 million unemployed ÷ 100 million labor force) × 100, to 14.3 percent, (15 million unemployed ÷ 105 million labor force) × 100. Topic: Unemployment rate, discouraged workers Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

13) Based on the information in the above table, what is the unemployment rate? Answer: The unemployment rate equals (6 million unemployed ÷ 139 million labor force) × 100 = 4.3 percent. Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills

14) Based on the information in the above table, what is the labor force participation rate? Answer: The labor force participation rate equals (139 million labor force ÷ 207 million working-age population) × 100 = 67.1 percent. Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 22.1 Status: Old AACSB: Analytic skills 22.6 Essay: Labor Market Trends and Fluctuations 1) How does the unemployment rate change in a recession and in an expansion? Answer: During a recession, the unemployment increases. During an expansion, the unemployment rate decreases. Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 22.2 Status: Old AACSB: Reflective thinking 2) Over the last 50 years, how has a. the labor force participation rate changed? b. the men's and women's labor force participation rates changed? Answer: a. Over the past 50 years, the overall labor force participation rate increased. b. Over the past 50 years, the men's labor force participation rate decreased and the women's labor force participation rate increased. Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Written and oral communication

3) Over the last 50 years, how has the women's labor force participation rate changed? What are reasons for this change? Answer: Over the past 50 years, the women's labor force participation rate has increased. Four reasons can be advanced for the increase. First, more women are graduating from college. As college graduates, their salaries are higher and these higher salaries have attracted women to the labor force. Second, technological change has created a large number of white collar jobs with flexible hours, jobs women find attractive. Third, technological change in the home has decreased the amount of time necessary to do some tasks around the house and hence increased the amount of time some women can offer to the paid workplace. Finally, more families have felt the need to have two incomes in order to bolster tight budgets. Topic: Labor force participation rate Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Old AACSB: Written and oral communication 4) Explain how the labor force participation rate and the unemployment rate change in a recession. Answer: The labor force participation rate tends to decrease during a recession as more workers become discouraged. The unemployment rate increases during a recession because there are fewer jobs. Topic: Labor market in a recession Skill: Level 2: Using definitions Section: Checkpoint 22.2 Status: Revised AACSB: Written and oral communication 22.7 Essay: Unemployment and Full Employment 1) What are the three types of unemployment and how do they change over the business cycle? Answer: The three types of unemployment are frictional, structural, and cyclical. Of these three types, the first two—frictional and structural—have no strong relationship to the business cycle. The third type, cyclical unemployment, however is the result of the business cycle. When the economy is in a recession and people lose their jobs as a result of the recession, the unemployed workers are cyclically unemployed. Conversely, when the economy is in an expansion, cyclical unemployment decreases. Hence, cyclical unemployment increases during a recession and decreases during an expansion. Topic: Types of unemployment Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication

2) Define and give an example of how a spell of frictional unemployment can begin. Answer: Frictional unemployment is the unemployment resulting from normal turnover in the labor market. For instance, there are always people entering or reentering the labor force (entrants and reentrants) and while these people look for work, they are frictionally unemployed. Similarly, there are always some people who quit their jobs to look for something better, and these people are frictionally unemployed. And, there is always a normal ebb and flow among firms as some gain sales while others lose them. The firms that lose business might release workers and these people also are frictionally unemployed. Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication 3) Can frictional unemployment ever be totally eliminated? Explain your answer. Answer: Frictional unemployment arises from normal labor market turnover. Because this type of unemployment is associated with normal changes, it is impossible to be eliminated. Indeed, some frictional unemployment is purely voluntary, with these unemployed workers choosing to become unemployed because they expect to find a job that is more satisfying. Topic: Types of unemployment, frictional Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication 4) Explain the difference between frictional and structural unemployment. Answer: Frictional unemployment is more short term and is associated with people changing jobs and entering the labor force. Structural unemployment is more long term and is associated with changes in the structure of the economy that require people to learn new skills. Topic: Types of unemployment, frictional and structural unemployment Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication

5) Define and give an example of how a spell of structural unemployment can begin. Answer: Structural unemployment arises when changes in technology or international competition changes the skills necessary for jobs or change the location of jobs. For instance, technological change, such as the invention of the personal computer, can switch the skills needed for jobs, say from the ability to repair typewriters to the ability to repair computers. In this case, the people who lose their jobs and do not have the necessary skills to perform the new jobs are structurally unemployed. In addition, there are times when foreign competition causes large downscaling in sectors of the U.S. economy as U.S. firms find that they cannot compete with foreign firms. In this case, the U.S. workers who lose their jobs do not go overseas to take jobs in the expanding foreign companies, so the workers are structurally unemployed. Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication 6) Explain what type of unemployment changes with the business cycle and how it changes. Answer: Cyclical unemployment is the unemployment that changes with the business cycle. Cyclical unemployment rises when the economy is in the recession part of a business cycle and decreases when the economy is in the expansion part of the business cycle. Topic: Types of unemployment, structural Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication 7) Why is there unemployment even when the economy is at "full employment"? Answer: There is unemployment even at "full employment" because there always will be unemployment. Unemployment is a natural occurrence in any economy with changes, such as high school or college graduates entering the labor force, or technological advances in one sector, or consumer preferences changing to favor one product over another. Frictional and structural unemployment will always exist. Cyclical unemployment, however, is a different matter. Cyclical unemployment does not seem to have the same degree of inevitability and hence full employment is defined as occurring when cyclical unemployment equals zero. Topic: Full employment Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication

8) Explain the relationship(s) between full employment, cyclical unemployment, the natural unemployment rate, and potential GDP. Answer: The economy is at full employment when there is no cyclical unemployment. The unemployment rate at full employment is called the natural unemployment rate. Because there is no cyclical unemployment, the natural unemployment rate is comprised of only frictional and structural unemployment. The level of output that the economy would produce if it was at full employment is called potential GDP. Topic: Full employment, natural unemployment rate, potential GDP Skill: Level 1: Definition Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication 9) For the past decade, the unemployment rate in the Eurozone has been higher than the unemployment rate in the United States. Based on this fact, is the natural unemployment rate larger in the Eurozone or in the United States? Why might the natural rates differ between the two areas? Answer: The natural unemployment rate is probably higher in the Eurozone than in the United States. A major reason why this difference exists is that unemployment benefit payments in the Eurozone are higher than in the United States, so people stay frictionally unemployed longer in the Eurozone. Topic: Natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication 10) Consider the following statement: "Real GDP and potential GDP are always equal." Is this statement true or false? Explain your answer. Answer: Real GDP often differs from potential GDP. Real GDP equals potential GDP only when the economy is at full employment. However, the economy is not always at full employment. When employment is less than full employment, real GDP is less than potential GDP and the economy is in a recession. When employment exceeds full employment, real GDP exceeds potential GDP and the economy is in an expansion. Topic: Potential GDP and real GDP Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication

11) What is the relationship over the business cycle of potential GDP and real GDP? Answer: The level of output that the economy would produce if it was at full employment is called potential GDP. However, the economy is not always at full employment. In a recession, employment is less than full employment and so real GDP is less than potential GDP. And, in an expansion, employment can exceed full employment so that real GDP exceeds potential GDP. Topic: Potential GDP and real GDP Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication 12) Explain the relationship between real GDP and potential GDP and between the unemployment rate and the natural unemployment rate as the economy moves through a business cycle. Answer: Potential GDP is the level of GDP when the economy is at full employment. Real GDP is the level of GDP and can be above or below potential GDP depending on whether employment is above or below full employment. The natural unemployment rate is the unemployment rate when the economy is at full employment. The unemployment rate can be above or below the natural unemployment rate. In a recession, real GDP is less than potential GDP and unemployment exceeds the natural rate. In an expansion, real GDP is greater than potential GDP and unemployment is less than the natural rate. Topic: Potential GDP and real GDP Skill: Level 2: Using definitions Section: Checkpoint 22.3 Status: Old AACSB: Written and oral communication

Foundations of Economics, 9e (Bade), GE Chapter 7 The CPI and the Cost of Living 23.1 The Consumer Price Index 1) The CPI stands for A) Citizens Paying Index. B) Corporate Pricing Index. C) Consumer Paying Index. D) Consumer Price Index. E) Corporate/Consumer Payment Index. Answer: D Topic: CPI Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 2) The Consumer Price Index is calculated by the A) Bureau of Labor Statistics. B) Department of Labor. C) Department of Commerce. D) Federal Reserve Bank of New York. E) Society for Consumer Protection. Answer: A Topic: CPI Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 3) The CPI is a measure of the A) percentage change in the price level. B) average prices of all goods. C) average prices paid by consumers for a fixed basket of goods and services. D) average prices of all goods and services produced. E) average change in the output of the goods and services purchased by a typical urban consumer. Answer: C Topic: CPI Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

4) The Consumer Price Index (CPI) measures the changes of the A) prices paid by consumers for a fixed market basket of consumer goods and services. B) quantities of a fixed market basket of goods produced by businesses. C) lowest prices paid by consumers for a fixed market basket of consumer goods and services. D) prices paid by all businesses for a fixed market basket of production resources. E) prices paid by consumers and businesses for a fixed market basket of goods and services. Answer: A Topic: CPI Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 5) The Consumer Price Index measures the average prices paid by A) businesses for a fixed market basket of resources. B) businesses for the most frequently used basket of resources. C) urban consumers for a fixed market basket of goods and services. D) urban consumers for the goods and services that most frequently change in price. E) businesses and consumers for a market basket of goods and services. Answer: C Topic: CPI Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 6) For the CPI to provide an accurate measure of the prices paid by urban consumers, it is necessary to A) assign equal weights to all the goods and services included in the market basket surveyed so that nothing is over-weighted. B) have a market basket that is consistent and corresponds to what households actually purchase. C) have prices stated in dollars so consumers can compare what they spend. D) change the market basket each month to reflect the changes that consumers make. E) make certain that the incomes of the consumers surveyed do not change because such a change would affect the market basket of the goods and services they buy. Answer: B Topic: CPI Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

7) The CPI is calculated by the Bureau of Labor Statistics on a frequency of every A) week. B) month. C) quarter. D) year. E) decade, along with the Census. Answer: B Topic: CPI Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 8) Constructing the CPI involves which of the following stages? i. conducting the monthly price survey ii. converting the CPI to an international index iii. selecting CPI market basket A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: CPI, construction Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 9) The Consumer Expenditure Survey measures A) households' spending patterns. B) the wholesale price on what consumers buy so that a markup percentage can be found. C) the maximum price buyers will pay for a good or service. D) consumers' incomes. E) the jobs at which consumers work. Answer: A Topic: CPI construction Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

10) To measure the CPI, the BLS economic assistants check the prices of A) about 8,000 goods and services every year. B) about 8,000 goods and services every month. C) about 80,000 goods and services every month. D) about 80,000 goods and services every year. E) only the goods and services whose prices have changed every month. Answer: C Topic: CPI, construction Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 11) To measure the CPI, the BLS economic assistants check the prices of A) all the goods and services produced in a given year. B) some of the consumer goods but none of the services produced in a given year. C) about 80,000 goods and services each month. D) about 80,000 goods and services each quarter. E) only the prices of the goods and services whose prices have changed. Answer: C Topic: CPI, construction Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 12) The prices of the goods and services in the CPI market basket are collected A) monthly. B) yearly. C) quarterly. D) infrequently. E) only when the CPI market basket is determined by the Consumer Expenditure Survey. Answer: A Topic: CPI, construction Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

13) The price survey of the goods contained in the CPI market basket is conducted A) every ten years, along with the Census. B) infrequently, because of its high cost. C) every year. D) monthly. E) every quarter. Answer: D Topic: CPI, construction Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 14) The reference base period that the BLS uses to measure the CPI is A) 1982-1984. B) 1993-1995. C) 1998-2000. D) 1967-1969. E) 2005. Answer: A Topic: CPI, reference base period Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 15) The reference base period for the CPI is A) the previous year. B) whatever the political party that is in control of Congress decides. C) currently 1913. D) the period of time the CPI is defined to equal 100. E) currently 2005. Answer: D Topic: CPI, reference base period Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

16) The reference base period for the CPI has an index number of ________ and is currently ________. A) 100; 1982-1984 B) 100; 2010-2012 C) 0; 2006-2008 D) 1; 2014-2016 E) 100; 2014-2016 Answer: A Topic: CPI, base period Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 17) The value of the CPI for the reference base period is always A) 100. B) 0. C) 1. D) 50. E) None of the above, because the value of the CPI is not always the same for all reference base periods. Answer: A Topic: CPI, reference base period Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 18) The items included in the CPI are A) final goods produced in the United States. B) final goods and services produced in the United States. C) goods and services consumed by the typical urban household. D) only goods and services produced within the current year and consumed by the typical household. E) goods but not services consumed by the typical urban household. Answer: C Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

19) The Consumer Price Index market basket contains A) the minimal dietary requirements of an average urban household. B) the U.S.-produced goods and services purchased by an average urban household. C) the ideal calorie intake of each member of an average urban household. D) the goods and services purchased by an average urban household. E) the goods and services that the economists working for the BLS believes consumers should buy. Answer: D Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 20) The Consumer Price Index measures the average of the prices paid by urban consumers for a ________ of consumer goods and services. A) random selection B) changing selection C) fixed market basket D) subjective selection E) least-cost market basket Answer: C Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 21) The CPI market basket is determined by A) tax return data of households. B) supermarket purchases recorded by scanner technology. C) profit releases of the largest companies. D) a consumer survey. E) surveys asking large retail companies, such as Walmart, about their sales of consumer goods and services. Answer: D Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

22) For the CPI, the market basket of goods and services is modified A) each time the Consumer Expenditures Survey is conducted. B) about every 10 to 20 years. C) each month when the Price Survey is completed. D) each year to reflect changes in consumer purchasing habits. E) at the discretion of the President. Answer: A Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 23) According to the CPI basket, the largest item in the households' budgets is A) food. B) housing. C) transportation. D) education. E) apparel. Answer: B Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 24) Which item has the largest weight in the CPI basket? A) apparel B) food and beverages C) housing D) transportation E) recreation Answer: C Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

25) The CPI market basket A) contains one unit of each good purchased by the average consumer. B) weights the goods and services according to the budget of an average urban household. C) is comprised of a representative sample of the goods that the government guesses people buy. D) includes only goods and not services. E) includes only U.S.-produced goods and services. Answer: B Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 26) The CPI market basket A) weights the goods and services according to the budget of an average urban household. B) determines the best possible way of taxing the average urban household. C) determines how the spending patterns of the average urban household change from month to month. D) determines how spending patterns change from urban household to urban household. E) changes from one month to the next in order to calculate the CPI. Answer: A Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 27) When calculating the CPI, the Bureau of Labor Statistics A) weights the price of goods and services in the basket relative to the importance of the average urban household budget. B) sums the prices of the goods and services in the average urban household consumption basket. C) weights the price of all goods and services produced in a year within a country's borders. D) multiplies by 100 the average price of goods and services in the average urban consumer's basket. E) makes certain to weight the goods and services equally so that no one product is overweighted. Answer: A Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

28) The more money an average household spends on one specific type of good or service per month, the A) smaller the relative importance of that item in the CPI market basket. B) larger the relative importance of that item in the CPI market basket. C) costlier it will be to conduct the Consumer Expenditure Survey. D) less significant an increase in the price of that good or service will be for the household. E) more frequently its price is checked when calculating the CPI. Answer: B Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 29) Which of the following changes would have the largest impact on the CPI? A) a one percent increase in the cost of housing B) a one percent increase in the cost of transportation C) a one percent increase in the cost of medical care D) a one percent increase in the cost of education E) a one percent increase in the cost of apparel Answer: A Topic: CPI, basket Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 30) In 2013, the reference base period for the CPI for the nation of Wobet, a typical consumer spent $30 on potatoes and $150 on steak. Which of the following is TRUE? A) The quantity of steak in the basket is larger than the quantity of potatoes. B) The quantity of potatoes in the basket is larger than the quantity of steak. C) The quantity of the two goods in the basket is the same. D) We cannot say exactly how many of each good are in the basket. E) None of the above answers is correct. Answer: D Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

31) In 2013, the reference base period for the CPI for the nation of Webot, a typical consumer spent $30 on potatoes and $150 on steak. If the price of steak is $15 and the price of potatoes is $1 then there are ________ units of steak and ________ units of potatoes in the CPI market basket. A) 30; 150 B) 10; 30 C) 150; 30 D) 5; 30 E) None of the above answers is correct. Answer: B Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 32) Consumers in Beachland consume only two goods, sodas and pizzas. If they spend $10 on sodas and $90 on pizzas a month, how many sodas and pizzas are in their CPI market basket if the price of a soda is $1 and the price of a pizza is $9? A) 9 sodas and 1 pizza B) 1 soda and 9 pizzas C) 10 sodas and 9 pizzas D) 10 sodas and 10 pizzas E) It is impossible to determine the market basket without information on the quantity of at least one of the two goods consumed. Answer: D Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 33) When the price of, say, a package of rice changes, what must the BLS do next? A) immediately incorporate the new price into the CPI B) determine if the new price is consistent with other price changes for the period C) determine if the size, quality, weight, or packing of the rice has changed and adjust the price accordingly D) ignore the price change E) immediately incorporate the new price into the CPI only if the price has fallen Answer: C Topic: CPI, basket Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

34) The formula for the CPI is A) (Cost of CPI market basket at current period prices ÷ Cost of CPI market basket at next year's prices) × 100. B) (Cost of CPI market basket at current period prices ÷ Cost of CPI market basket at base period prices) × 100. C) (Cost of CPI market basket at base period prices ÷ Cost of CPI market basket at current period prices) × 100. D) (Cost of CPI market basket this year × Cost of CPI market basket at base period prices) ÷ 100. E) (Cost of CPI market basket this year × Cost of CPI market basket at base period prices) × 100. Answer: B Topic: CPI formula Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 35) Each month the CPI is calculated by A) recording the new prices and making no other calculation. B) multiplying the current cost of the CPI market basket by the base period cost and then dividing by 100. C) subtracting the base period cost of the CPI market basket from the current cost and then dividing by 100. D) dividing the current cost of the CPI market basket by the base period cost and then multiplying by 100. E) subtracting the current period cost of the CPI market basket from the base period cost and then multiplying by 100. Answer: D Topic: CPI formula Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

36) The table above gives the CPI for a nation. Based on the table, we can determine that the reference base period is A) 2004. B) 2006. C) 2008-2010. D) 2012. E) More information about when the Consumer Expenditure Survey was undertaken is needed to answer the question. Answer: C Topic: CPI formula Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 37) If the cost of the CPI market basket at current period prices is $1,000 and the cost of the CPI market basket at base period prices is $250, the CPI is A) 4.0. B) 400. C) 250. D) 100. E) 2.50. Answer: B Topic: CPI, base period Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 38) To find the cost of the CPI market basket in the base period prices we have to multiply the A) quantities in the CPI market basket by the base period prices. B) quantities in the CPI market basket by the current period prices. C) current period quantities in the CPI market basket by the base period prices. D) current period quantities in the CPI market basket by the current period prices. E) quantities in the CPI market basket by the base period prices and then multiply by 100. Answer: A Topic: Measuring the CPI Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 13 Copyright © 2023 Pearson Education Ltd.

39) To find the cost of the CPI market basket in the current period we have to multiply the A) quantities in the CPI market basket by the base period prices. B) quantities in the CPI market basket by the current period prices. C) current period quantities in the CPI market basket by the base period prices. D) current period quantities in the CPI market basket by the current period prices. E) quantities in the CPI market basket by the base period prices and then multiply by 100. Answer: B Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 40) When the cost of the CPI market basket increases from one year to the next, we know that A) on the average, current prices are less than past year prices. B) the quantities of the goods and services contained in the CPI market basket have increased on the average. C) the prices of the goods and services contained in the CPI market basket have increased on the average. D) on the average, current prices are below base year prices. E) either the quantities of the goods and services contained in the CPI market basket have increased on the average and/or the prices of the goods and services contained in the CPI market basket have increased on the average. Answer: C Topic: Measuring the CPI Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 41) If the prices of the goods and services contained in the CPI market basket increase from the base period to the next year, we know that A) the inflation rate is falling. B) the next year's CPI will be above 100. C) the next year's CPI will be below 100. D) the cost of the CPI market basket at next year's prices is lower than the cost of the CPI market basket at base period prices. E) the market basket used by the BLS must be changed next year to reflect consumers' new expenditures. Answer: B Topic: Measuring the CPI Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 14 Copyright © 2023 Pearson Education Ltd.

42) If the cost of the CPI market basket at current period prices is $275 and the cost of the CPI market basket at base period prices is $350, the CPI is A) 79. B) 100. C) 127. D) 350. E) 275. Answer: A Topic: CPI and inflation rate Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 43) Suppose the CPI for this year is 133.7. This number means that A) on average, goods cost $133.70 each this year. B) prices rose 33.7 percent over the last year. C) prices rose 133.7 percent over the base year. D) prices rose 33.7 percent over the base year. E) prices rose 133.7 percent over the last year. Answer: D Topic: Inflation rate Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 44) Suppose that the cost of the CPI basket of goods and services rises from $137 in 2010, which is the base year, to $159 in 2011. The CPI in 2011 is ________ and the inflation rate from 2010 to 2011 is ________. A) 86; 14 percent B) 86; 22 percent C) 116; 22 percent D) 116; 16 percent E) There is not enough information to answer this question. Answer: C Topic: CPI and inflation rate Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

45) Suppose that last year, the price of strawberries was $2 and the price of milk was $1. This year, the price of milk is $2 and the price of strawberries is $1. Which of the following statements is TRUE? A) The CPI does not change because the change in the two prices is the same. B) The CPI increases because milk is more expensive. C) The CPI decreases because strawberries are cheaper. D) The CPI might increase or decrease depending on the quantities in the CPI market basket. E) The change in the CPI depends how the market basket changed between the two years. Answer: D Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 46) Suppose that the CPI basket contains only 40 heads of cauliflower and 60 bunches of broccoli. If the price of cauliflower goes down by $1 per head and the price of broccoli goes up by $1 per bunch, then A) the CPI does not change. B) the CPI increases. C) the CPI decreases. D) the CPI might increase or decrease depending how the quantities are affected by the price changes. E) There is not enough information to answer this question. Answer: B Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

47) The data in the table above shows the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2018. The cost of the CPI market basket in 2018 is A) $64.00. B) $3.50. C) $52.00. D) $5.00. E) 100. Answer: C Topic: CPI, basket Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 48) The data in the table above shows the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2018. The cost of the CPI market basket in 2019 is A) $5.00. B) $64.00. C) $8.50. D) $52.00. E) unable to be calculated because information is needed about the quantities purchased in 2019. Answer: B Topic: CPI, basket Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills

49) The data in the table above shows the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2018. The CPI in 2018 is A) 100. B) 94.2. C) 106.2. D) 124. E) 140.5. Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 50) The data in the table above shows the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2018. The CPI in 2019 is A) 100. B) 118.8. C) 123.1. D) 23.1. E) 18.8. Answer: C Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 51) The data in the table above shows the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2018. The inflation rate between 2018 and 2019 is A) 52.5 percent. B) 123.1 percent. C) 23.1 percent. D) 18.8 percent. E) 118.8 percent. Answer: C Topic: Inflation Skill: Level 4: Applying models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills

52) Consumers in a country buy only two goods, pens and CDs. The prices and quantities purchased by urban households are in the table above. If 2018 is the reference base year, the cost of the CPI market basket in the base year is A) $3,400. B) $3,408. C) $3,580. D) $3,508. E) $3,500. Answer: A Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 53) Consumers in a country buy only two goods, pens and CDs. The prices and quantities purchased by urban households are in the table above. The reference base year is 2018. The cost of the CPI market basket in 2019 is A) $3,400. B) $3,588. C) $3,580. D) $3,508. E) $3,500. Answer: B Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills

54) Consumers in a country buy only two goods, sneakers and manicures. The prices and quantities purchased by urban households are in the table above. The reference base year is 2018. For these data, the CPI for 2019 is A) 145. B) 100. C) 160. D) 10. E) 110. Answer: E Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 55) Consumers in a country buy only two goods, sneakers and manicures. The prices and quantities purchased by urban households are in the table above. The reference base year is 2018. For these data, the CPI for 2018 is A) 3. B) 100. C) 160. D) 110. E) 145. Answer: B Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills

56) Consumers in a country buy only two goods, sneakers and manicures. The prices and quantities purchased by urban households are in the table above. The reference base year is 2018. The inflation rate between 2018 and 2019 is A) $15. B) 15.0 percent. C) $10. D) 10.3 percent. E) 9.0 percent. Answer: D Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills

Item Magazines Movie tickets Pizzas

Quantity (2018) 400 50 100

Price (2018) $5.00 $6.00 $10.00

Quantity (2019) 450 200 120

Price (2019) $4.50 $8.00 $10.50

The data in the table above shows the consumption by families in an economy. The year 2018 is the reference base period. 57) Based on the table above, the cost of the base period market basket in the base period is A) $3,300. B) $21.00. C) $3,250. D) $4,650. E) $4,885. Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills

58) The information in the above table gives the 2010 base period market basket and prices used to construct the CPI for a small nation. The table also has 2020 prices. What is the value of the CPI for the base period 2010? A) 140 B) 133 C) 100 D) 75 E) 30 Answer: C Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 59) The information in the above table gives the 2010 base period market basket and prices used to construct the CPI for a small nation. The table also has 2020 prices. What is the value of the CPI for 2020? A) 140 B) 133 C) 100 D) 71.4 E) 142 Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills

Item Magazines Movie tickets Pizzas

Quantity (2018) 400 50 100

Price (2018) $5.00 $6.00 $10.00

Quantity (2019) 450 200 120

Price (2019) $4.50 $8.00 $10.50

The data in the table above shows the consumption by families in an economy. The year 2018 is the reference base period. 60) Based on the table above, the cost of the base period market basket in 2018 is A) $3,300. B) $4,885. C) $4,650. D) $3,885. E) None of the above answers is correct. Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 61) Based on the table above, the CPI for 2018 is A) 100. B) 98.5. C) 102.5. D) 5.0%. E) 105.1. Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills

62) Based on the table above, the CPI for 2019 is A) 98.5. B) 105.1. C) 102.5. D) 5.0 percent. E) 100. Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 63) Based on the table above, between 2018 and 2019, the inflation rate in this country was A) -1.5 percent. B) 105.1 percent. C) 2.5 percent. D) 98.5 percent. E) -2.5 percent. Answer: A Topic: Inflation rate Skill: Level 4: Applying models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 64) A country reports the total expenditures on the fixed CPI basket for three past years. The cost of the CPI basket in 2017 was $23,000, the cost of the CPI basket for the reference base period, 2018, was $23,805, and the cost of the CPI basket in 2019 was $24,500. The CPI for 2017 is A) 96.6. B) 100.0. C) 103.5. D) 106.5. E) 23.0. Answer: A Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills

65) A country reports the total expenditures on the fixed CPI basket for three past years. The cost of the CPI basket in 2017 was $23,000, the cost of the CPI basket for the reference base period, 2018, was $23,805, and the cost of the CPI basket in 2019 was $24,500. The CPI for 2019 is A) 93.9. B) 97.2. C) 102.9. D) 106.5. E) 245.0. Answer: C Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 66) When the CPI rises ________, the inflation rate is ________. A) steadily; zero B) rapidly; high C) slowly; high D) rapidly; low E) rapidly; either high, low, or zero depending on whether production of output is increasing, decreasing, or not changing. Answer: B Topic: CPI and inflation rate Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 67) The inflation rate is the A) percentage change in the composition of the CPI market basket from the base year to the next year. B) percentage change in the CPI from one year to the next year. C) difference between the current period CPI and the base period CPI. D) difference between the base period CPI and the current period CPI. E) difference in the price level from one year to the next multiplied by 100. Answer: B Topic: Inflation Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

68) The inflation rate measures the A) average price of the goods and services consumed by urban consumers. B) percentage change in the CPI from one year to the next year. C) cost of the CPI market basket at current period prices divided by the cost of the CPI market basket at base period prices. D) percentage change in the quantity of goods and services consumed by urban consumers. E) cost of the CPI market basket at base period prices divided by the cost of the CPI market basket at current period prices. Answer: B Topic: Inflation Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 69) Which of the following formulas is used to calculate the inflation rate? A) inflation rate = 100 × B) inflation rate = 100 × C) Inflation rate = 100 × D) Inflation rate = 100 × E) inflation rate = 100 × Answer: C Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

70) If the CPI is 231.4 in one year and is 241.2 in the next year, then the inflation rate equals A) (241.2 - 231.4) × 100. B) × 100. C)

× 100.

Answer: B Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 71) If the CPI decreases from one year to the next, then the inflation rate is A) positive. B) above 100. C) below 100. D) negative. E) 0. Answer: D Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 72) Suppose in year 1 the CPI is 90, in year 2 the CPI is 100, and in year 3 the CPI is 110. Then, inflation is A) 100 percent in year 1. B) 11 percent between years 1 and 2. C) 11 percent between years 2 and 3. D) 10 percent between years 2 and 3. E) Both answers B and D are correct. Answer: B Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

73) A country's CPI was 84.5 last year and 100.0 this year. The inflation rate was A) 84.5 percent. B) 18.3 percent. C) 15.5 percent. D) 7.29 percent. E) -18 percent. Answer: B Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 74) If the CPI this year is 240 and the CPI in the previous year was 200, what is the annual inflation rate? A) 40.0 percent B) 20.0 percent C) 50 percent D) 16.7 percent E) -16.7 percent Answer: B Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 75) The CPI was 170 last year and is 190 this year. What is the inflation rate between these two years? A) 10.5 percent B) 20 percent C) 11.8 percent D) 18 percent E) 15.0 percent Answer: C Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

76) In the current year, the CPI is 122 and during the previous year the CPI was 115. The inflation rate between these years is A) 5.7 percent. B) 6.1 percent. C) -5.7 percent. D) -6.1 percent. E) 1.61 percent. Answer: B Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 77) In the current year, the CPI is 160 and during the previous year the CPI was 181. The inflation rate between these years is A) 11.6 percent. B) 13.1 percent. C) -11.6 percent. D) -13.1 percent. E) -013.1 percent. Answer: C Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 78) The inflation rate between last year and this year was 14 percent. The CPI was 118 this year. What was the CPI last year? A) 104.0 B) 103.5 C) 104.5 D) 105.0 E) 103.0 Answer: B Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

79) If the price index last year was 100 and today it is 167, what is the inflation rate over this period? A) -67 percent B) -6.7 percent C) 33 percent D) 67 percent E) 167 percent Answer: D Topic: Inflation Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 80) If the current period has a CPI of 143, then the amount of inflation since the base period is A) 143 percent. B) 43 percent. C) 57 percent. D) 157 percent. E) unknown without knowing the base period's CPI. Answer: B Topic: Inflation and the price level Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 81) Suppose a report from the Bureau of Labor Statistics states that the CPI for the year 2012 was 152. What is the percentage point increase in the prices of the goods and services since the reference base period? A) 152 percent B) 52 percent C) 100 percent D) 48 percent E) 252 percent Answer: B Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

82) If in Switzerland in January, 2009 the CPI was 187.4 and in January, 2010 it was 191.1, then the inflation rate in 2010 was A) 1.9 percent. B) 3.7 percent. C) -1.9 percent. D) unknown without the base period index number. E) unknown without the real prices. Answer: A Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 83) The CPI for 2018 was 121, and for 2019 it was 132. What was the inflation rate between 2018 and 2019? A) 9.09 percent B) 11 percent C) 10 percent D) 8.3 percent E) 121.0 percent Answer: A Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Revised AACSB: Analytic skills 84) Looking at the annual inflation rates in the United States from 2000 to 2019, we see that they A) were above 10 percent throughout the period. B) were at or below 5 percent throughout the period and was negative for a year. C) started low, but increased to over 9 percent by the end of the period. D) started out above 10 percent but fell to 5 percent by the end of the period. E) were negative for most of the years during this period. Answer: B Topic: Recent inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Revised AACSB: Reflective thinking

85) In the United States between 1976 and 2019, the inflation rate A) increased every year. B) only decreased during the late 1990s. C) only increased during the late 1970s and 1980. D) peaked during the late 1970s and 1980 and was at its generally lowest in the 1990s and 2000s. E) has been relatively constant at approximately 4 percent to 6 percent per year. Answer: D Topic: Recent inflation Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Revised AACSB: Reflective thinking 86) Looking at the historical values for annual inflation in the United States as measured by the Consumer Price Index, it is clear that inflation was A) higher on average during the 1990s than during the 1970s. B) higher on average during the 2000s than during the 1970s. C) never less than 0 percent at any time during the last 50 years. D) higher on average during the 1970s than during the 1980s. E) was never greater than 10 percent at any time during the last 50 years. Answer: D Topic: Recent inflation Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 87) Since 1305, of the following centuries the inflation rate has been the highest during the A) 17th century. B) 16th century. C) 20th century. D) 14th century. E) 15th century. Answer: C Topic: Eye on the past, 700 years of inflation and deflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

88) If we look back at inflation data since 1300, we see that A) during the 20th century we have finally solved the problem of high inflation. B) the Industrial Revolution caused the highest inflation rates. C) the discovery of America caused prices to fall drastically. D) inflation has been highest in the 20th and 21st centuries. E) the most rapid inflation occurred prior to 1600. Answer: D Topic: Eye on the past, 700 years of inflation and deflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 89) According to the historical record of inflation since the 1300s, the inflation rate A) became highest in the twentieth century. B) was at its lowest after Columbus arrived to America. C) was at its highest during the Industrial Revolution. D) has always been consistently high. E) was higher in the 1300s than in the 1900s. Answer: A Topic: Eye on the past, 700 years of inflation and deflation Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 90) Since 1300, the inflation rate has been greater than 2 percent per year and reaching its highest peaks A) primarily before 1400. B) primarily between 1400 and 1500. C) primarily between 1500 and 1700. D) primarily between 1700 and 1900. E) primarily after 1900. Answer: E Topic: Eye on the past, 700 years of inflation and deflation Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

91) If a country had a CPI of 105.0 last year and a CPI of 102.0 this year, then A) the average prices of goods and services increased between last year and this year. B) the average prices of goods and services decreased between last year and this year. C) the average quality of goods and services decreased between last year and this year. D) there was an error when calculating the CPI this year. E) the quantity of consumer goods and services produced decreased between last year and this year. Answer: B Topic: CPI Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 92) The period for which the Consumer Price Index is defined to equal 100 is called the A) reference base period. B) base period. C) starting point. D) zero period. E) beginning period. Answer: A Topic: CPI, base period Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 93) Suppose the market basket of consumer goods and services costs $180 using the base period prices, and the same basket of goods and services costs $300 using the current period prices. The CPI for the current year period equals A) 166.7. B) 66.7. C) 160.0. D) 60.0. E) 300.0. Answer: A Topic: CPI formula Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

94) Suppose the CPI last year was 82.3 and this year is 90.9. Based on this information, we can calculate that the inflation rate in 1981 was A) 10.4 percent. B) 8.6 percent. C) 90.9 percent. D) 82.3 percent. E) 9.09 percent. Answer: A Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 95) In the United States, the inflation rate since 1999 generally was A) higher than between 1979 to 1981. B) higher than in the 1980s. C) lower than between 1979 to 1981. D) much higher than between 1985 to 1995. E) negative. Answer: C Topic: Recent inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 96) If we look back at inflation data since 1300, we see that ________ saw a temporary burst in inflation followed by a period of deflation. A) discovery of America in 1492 B) World War II C) 16th century D) Industrial Revolution E) global financial crisis of 2008-2009 Answer: D Topic: Eye on the past, 700 years of inflation and deflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking

97) Deflation is a situation in which A) the CPI is falling. B) the output growth rate is negative. C) inflation is accompanied by unemployment. D) all of the above E) none of the above Answer: A Topic: Inflation Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 98) Deflation is a situation in which A) inflation rate is negative. B) the output growth rate is negative. C) unemployment is rising along with inflation. D) all of the above E) none of the above Answer: A Topic: Inflation Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 23.2 The CPI and Other Price Level Measures 1) If we compare the CPI to a perfect cost of living index, we find that they are A) the same thing. B) different because the cost of living has nothing to do with prices. C) different because the CPI does not measure prices. D) different because the CPI uses a fixed basket and has some measurement difficulties. E) not the same because the CPI has a fixed reference base period. Answer: D Topic: CPI versus cost of living index Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

2) Economists agree that the CPI A) is a near perfect measure of the cost of living. B) has no relation to the cost of living. C) is a possibly biased measure of the cost of living. D) almost always shows the cost of living rising less rapidly than is the case in reality. E) overstates inflation by about 4.1 percentage points a year. Answer: C Topic: CPI versus cost of living index Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 3) When economists speak of the CPI bias, they are referring to A) the tendency for the CPI to overstate price changes. B) the tendency for the CPI to understate price changes. C) the tendency for the CPI to understate inflation. D) errors in measuring the prices used in the CPI. E) the tendency for government officials to impose their values on the data. Answer: A Topic: CPI bias Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 4) Which of the following is NOT a source of bias in the CPI? i. quality change bias ii. new goods bias iii. quantity change bias A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: C Topic: CPI bias Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

5) Which of the following makes the Consumer Price Index a less accurate measure of the cost of living? i. The monthly price survey conducted to collect information about prices is very unreliable. ii. The existence of a new goods bias in the calculation of the CPI iii. The existence of a quality change bias in the calculation of the CPI A) i only B) ii only C) ii and iii D) i and ii E) i, ii, and iii Answer: C Topic: CPI bias Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 6) Which of the following is a bias in the CPI? i. new goods bias ii. index change bias iii. commodity substitution bias A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: CPI bias Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 7) The CPI is biased because it A) takes into account the changes in product quality. B) takes into account the changes in technology. C) does not always take into account the changes in product quality. D) accurately measures the cost of living but not the cost of producing. E) does not include services. Answer: C Topic: CPI bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

8) If the CPI is used as a cost of living index, incomes that are adjusted to reflect the changes in the CPI will A) increase by more than the actual change in the cost of living. B) decrease by more than the actual change in the cost of living. C) increase by more than the actual change in quantities. D) decrease by more than the actual change in quantities. E) generally rise by about 2 percent a year because the standard of living generally rises by about 2 percent a year. Answer: A Topic: CPI bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 9) The presence of new goods that are of higher quality than the old goods leads the BLS to A) update the market basket every time a new good is available. B) do nothing because at least some people still buy the old goods. C) try to separate price differences from improvements in quality. D) actually understate the cost of living when calculating the CPI. E) immediately update the reference base period used in calculating the CPI. Answer: C Topic: CPI bias, new goods Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 10) When a good gets better from one year to the next, the CPI has a what is called A) new goods bias. B) quality change bias. C) commodity substitution bias. D) outlet substitution bias. E) magnitude of change bias. Answer: B Topic: CPI bias, quality change Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

11) An example of the quality change bias, and not a new goods bias, in the calculation of the CPI is a price increase in A) Coke versus Pepsi. B) DVDs purchased on Craigslist, an online classified website. C) a 2020 smartphone versus a 2013 smartphone. D) etexts versus used books. E) pants purchased by a first-time shopper at Aeropostale. Answer: C Topic: CPI bias, quality change Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Revised AACSB: Reflective thinking 12) The quality change bias is most likely to put ________ into the CPI and so ________ the inflation rate. A) a downward bias; understate B) an upward bias; understate C) an upward bias; overstate D) a downward bias; overstate E) a random bias; randomly overstate or understate Answer: C Topic: CPI bias, quality change Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 13) When discussing the CPI, the term "commodity substitution bias" refers to changes in A) prices that lead business to change the items they buy. B) quantities that lead households to change the items they buy. C) prices that lead households to change the items they buy. D) income that lead households to change the items they buy. E) stores so that consumers switch from one store to another. Answer: C Topic: CPI bias, commodity substitution bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

14) The commodity substitution bias is most likely to put ________ into the CPI and so ________ the inflation rate. A) a downward bias; understate B) an upward bias; understate C) an upward bias; overstate D) a downward bias; overstate E) a random bias; randomly overstate or understate Answer: C Topic: CPI bias, commodity substitution bias Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 15) The CPI overstates inflation because the average consumer buys A) the same basket of goods every week. B) more of those goods whose relative price has risen. C) less of those goods whose relative price has risen. D) lower quality goods if they have a choice. E) a generally random assortment of goods and services each week because what is purchased depends on what the consumer needs. Answer: C Topic: CPI bias, commodity substitution bias Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 16) In constructing the CPI, the BLS has to deal with commodity substitution bias, which is defined as A) consumers' substitution of discount stores for full service stores to avoid the higher prices in the full service stores. B) consumers' substitution of cheaper goods for goods whose prices increase. C) the bias from quality changes in existing products that cause prices to increase. D) the bias from new goods being introduced that are more expensive than older goods. E) the bias that arises because the BLS changes the CPI market basket each month. Answer: B Topic: CPI bias, commodity substitution bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

17) The fact the consumers substitute one good for another when prices change is A) taken into account by the fixed market basket used in calculating the CPI. B) not taken into account by the fixed market basket used in calculating the CPI. C) not important to economists. D) a reason why the CPI is used to calculate inflation rates. E) a reason why the CPI understates the actual change in the cost of living. Answer: B Topic: CPI bias, commodity substitution bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 18) When the price of broccoli increase relative to cauliflower, people who buy fresh vegetables respond by buying more cauliflower and fewer broccoli. As a result, the CPI has A) a new goods bias. B) a quality change bias. C) a commodity substitution bias. D) an outlet substitution bias. E) a new price bias. Answer: C Topic: CPI bias, commodity substitution bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 19) Suppose the Bureau of Labor Statistics uses Ballpark Franks as the hot dogs used when calculating the consumer price index. During 2019, Oscar Mayer aggressively reduces prices. Consumers respond by purchasing more Oscar Mayer and less Ballpark Franks. The 2019 CPI is likely to A) overstate the average prices paid by consumers. B) overstate the average prices paid by businesses. C) understate the average prices paid by consumers. D) understate the average prices paid by businesses. E) neither understate nor overstate the average prices because some consumers will still buy Ballpark Franks. Answer: A Topic: CPI bias, commodity substitution bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

20) An example of the commodity substitution bias in the calculation of the CPI is a price increase in A) turkey when the price of chicken doesn't rise. B) a 2020 smartphone versus a 2013 smartphone. C) a 2020 Toyota Camry versus a 2015 Honda Civic. D) etexts versus used books bought through Craigslist. E) new homes because people's incomes have increased. Answer: A Topic: CPI bias, commodity substitution bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Revised AACSB: Reflective thinking 21) Suppose higher prices lead consumers to switch from shopping at Abercrombie & Fitch to shopping at Walmart. If the CPI does not reflect this change, it is referred to as A) a new goods bias. B) a quality change bias. C) an outlet substitution bias. D) a new price bias. E) store bias. Answer: C Topic: CPI bias, outlet substitution bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 22) If higher prices cause buyers to shop at discount stores, the CPI has A) a new goods bias. B) a quality change bias. C) a commodity substitution bias. D) an outlet substitution bias. E) a discounted bias. Answer: D Topic: CPI bias, outlet substitution bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

23) The outlet substitution bias is most likely to put ________ and so ________ the inflation rate. A) a downward bias into the CPI; understate B) an upward bias into the CPI; understate C) an upward bias into the CPI; overstate D) a downward bias into the CPI; overstate E) no bias into the CPI because it is such a small effect; have no effect on Answer: C Topic: CPI bias, outlet substitution bias Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 24) An example of the outlet substitution bias in the calculation of the CPI is a price increase in A) a 2020 smartphone versus a 2013 smartphone. B) olive oil versus vegetable oil. C) a 2020 Honda Civic relative to a 2015 Honda SUV. D) textbooks bought through the campus bookstore relative to textbooks via Craigslist. E) a trip to Mexico for a couple that had previously taken vacations in Europe. Answer: D Topic: CPI bias, outlet substitution bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Revised AACSB: Reflective thinking 25) Which of the following statements about the CPI is (are) correct? i The only significant bias in the CPI is the commodity substitution bias. ii. The CPI probably overstates inflation by 1.1 percentage points a year. iii. As far as the bias in the CPI is concerned, the new goods bias and the outlet substitution biases are irrelevant. A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: B Topic: CPI bias, magnitude Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

26) The bias in the CPI distorts private contracts because A) a future payment that is linked to the CPI is likely to be raised above the true increase in the price level. B) a worker that links her salary to the CPI is likely to be worse off than a worker that doesn't link her salary to the CPI. C) a lender that links the interest payments on the loan to the CPI is likely to be worse off than a lender that does not link the interest payments on the loan to the CPI. D) a future increase in a payment that is linked to the CPI is likely to be less than the true increase in the price level. E) the CPI cannot properly account for what goods and services a typical urban consumer buys. Answer: A Topic: CPI bias, private contracts Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 27) If a private wage contract is agreed upon with a cost of living adjustment such that wage hikes are equal to increases in the CPI A) the employer benefits because wages will rise less than the change in actual prices. B) workers exactly keep pace with changes in the cost of living. C) workers benefit because the CPI increases more rapidly than does the cost of living. D) the CPI bias means that workers benefit if the price level rises and the employer benefits if the price level falls. E) the CPI bias means that workers benefit if the price level falls and the employer benefits if the price level rises. Answer: C Topic: CPI bias, private contracts Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

28) Mark has a two-year wage contract with his employer. Mark's wage contract specifies a $50,000 salary for the first year, and specifies a salary increase equal to the percentage increase in the CPI during the second year. The percentage increase in the CPI during the year was 4.0 percentage points. If the CPI overstates inflation by 1.0 percentage point, at the end of the first year Mark's salary increased by ________ more than it would have without the upward bias. A) $50 B) $3,000 C) $500 D) $1,500 E) $2,000 Answer: C Topic: CPI bias, private contracts Skill: Level 3: Using models Section: Checkpoint 23.2 Status: Old AACSB: Analytic skills 29) Because a third of government outlays are linked directly to the CPI, as time passes, the CPI bias means that the government's outlays are A) larger than needed to keep pace with the cost of living. B) smaller than needed to keep pace with the cost of living. C) exactly equal to the changes in the cost of living. D) larger than needed to keep pace with the cost of living if the CPI is falling from one year to the next, otherwise the outlays are smaller than needed to keep pace with the cost of living. E) smaller than needed to keep pace with the cost of living if the CPI is falling from one year to the next, otherwise the outlays are larger than needed to keep pace with the cost of living. Answer: A Topic: CPI bias, government outlays Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 30) The bias in the CPI affects government outlays because the overstatement of inflation A) increases fiscal pressure. B) increases government outlays by more than what is justified. C) decreases social welfare benefits. D) decreases government outlays by more than what is justified. E) means that tax receipts are less than what is needed to cover government outlays. Answer: B Topic: CPI bias, government outlays Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

31) Because the CPI overstates inflation A) when wages are linked to the CPI, workers' wages become too low as time passes. B) as time passes, government payments are increasingly lower than intended. C) as time passes, government outlays are increased by more than necessary to compensate for inflation. D) workers do not receive adequate compensation for price changes. E) most contracts use the GDP deflator to measure inflation. Answer: C Topic: CPI bias, government outlays Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 32) When comparing the annual inflation rate in the United States based on the CPI with the annual inflation rate based on the PCEPI, the data show that the two inflation rates A) move in opposite directions. B) remained constant over the 16 year period after 2000. C) steadily increased over the 16 year period after 2000. D) move up and down in similar but not identical ways. E) both fluctuate, but the fluctuations have little relationship to each other. Answer: D Topic: PCEPI and the CPI Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 33) If we compare the last 16 years of inflation as recorded by the CPI and the PCEPI, we find that the A) two measures fluctuate together. B) CPI inflation rate has consistently been at least 5 percentage points above the PCEPI inflation rate. C) PCEPI inflation rate has consistently been at least 5 percentage points above the CPI inflation rate. D) two measures give very different inflation rates for most years. E) the CPI inflation rate was always positive, but the PCEPI inflation rate was frequently negative. Answer: A Topic: PCEPI and the CPI Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

34) When we compare the records of the CPI and the PCEPI over time, the A) two are very different in magnitude. B) PCEPI tends to exceed the CPI. C) CPI tends to exceed the PCEPI. D) two measures are identical. E) CPI tends to exceed the PCEPI when inflation is high, and the PCEPI tends to exceed the CPI when inflation is low. Answer: C Topic: PCEPI and the CPI Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 35) When comparing the annual inflation rate in the United States based on the CPI with the annual inflation rate based on the PCEPI, the data show that the A) CPI measure tends to exceed the PCEPI measure. B) PCEPI measure tends to exceed the CPI measure. C) CPI measure and the PCEPI measure are equal. D) CPI measure and PCEPI measure move in opposite directions. E) CPI deflator and PCEPI cannot be compared because they measure prices of different baskets of goods and services. Answer: A Topic: PCEPI and the CPI Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 36) All of the following can create a bias in the CPI EXCEPT the A) new goods bias. B) outlet substitution bias. C) commodity substitution bias. D) GDP price index bias. E) quality change bias. Answer: D Topic: CPI bias Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

37) An example of the new goods bias in the calculation of the CPI is a price increase in A) butter relative to margarine. B) a one-pot cooker relative to a pressure cooker. C) a 2020 Honda Civic Si Coupe relative to a 2020 Honda Civic Si Sedan. D) textbooks bought through the campus bookstore relative to textbooks bought through Amazon.com. E) a Caribbean cruise for a couple who has never been on a cruise before. Answer: B Topic: CPI bias, new goods Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Revised AACSB: Reflective thinking 38) The price of dishwashers has remained relatively constant while the quality of dishwashers has improved. The CPI A) is adjusted monthly to reflect the improvement in quality. B) is increased monthly to reflect the increased quality of dishwashers. C) has an upward bias if it is not adjusted to take account of the higher quality. D) has an upward bias because it does not reflect the increased production of dishwashers. E) should not take account of any quality changes because it is a price index not a quality index. Answer: C Topic: CPI bias, quality change Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 39) Joe buys chicken and beef. If the price of beef rises and the price of chicken does not change, Joe will buy ________ for the CPI. A) more beef and create a new goods bias B) more chicken and create a commodity substitution bias C) the same quantity of beef and chicken and create a commodity substitution bias D) less chicken and beef and create a quality change bias E) more chicken and eliminate the commodity substitution bias Answer: B Topic: CPI bias, commodity substitution bias Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

40) The CPI bias was estimated by the Congressional Advisory Commission on the Consumer Price Index as A) understating the actual inflation rate by about 5 percentage points a year. B) understating the actual inflation rate by more than 5 percentage points a year. C) overstating the actual inflation rate by about 1 percentage point a year. D) overstating the actual inflation rate by more than 5 percentage points a year. E) understating the actual inflation rate by about 1 percentage point a year. Answer: C Topic: CPI bias, magnitude Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 41) A consequence of the CPI bias is that it A) decreases government outlays. B) increases international trade. C) reduces outlet substitution bias. D) distorts private contracts. E) means that it is impossible to measure the inflation rate. Answer: D Topic: CPI bias, private contracts Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 42) The fact that the CPI is a biased measure of the inflation rate means government outlays will A) increase at a faster rate than the actual inflation rate. B) increase at the same rate as the actual inflation rate. C) increase at a slower rate than the actual inflation rate. D) sometimes increase faster and sometimes increase slower than the actual inflation rate depending on whether the actual inflation rate exceeds 1.1 percent per year or is less than 1.1 percent per year. E) None of the above because the bias in inflation measured using the CPI has nothing to do with government outlays. Answer: A Topic: CPI bias, government outlays Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

43) The Boskin Congressional Advisory Commission reported that the CPI overstated inflation by A) 1.1 percentage points a year. B) 1.1 percentage points a month. C) 11 percentage points a year. D) 1.1 percentage points a quarter. E) none of the above. Answer: A Topic: CPI bias, government outlays Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking 44) When we compare the data on the CPI, PCEPI, C-CPI, and core inflation over time A) C-CPI rises the slowest. B) PCEPI tends to exceed the CPI. C) CPI tends to exceed the PCEPI. D) Core inflation rises the fastest. E) CPI tends to exceed the PCEPI when inflation is high, and the PCEPI tends to exceed the CPI when inflation is low. Answer: C Topic: PCEPI and the CPI Skill: Level 3: Using models Section: Checkpoint 23.2 Status: Old AACSB: Analytic skills 45) Core inflation A) includes current prices of goods and services from the consumption expenditure component of GDP. B) is equal to a chained-CPI. C) excludes prices of food and energy. D) is equal to PCEPI. E) two of the above answers are true Answer: C Topic: Core inflation Skill: Level 1: Definition Section: Checkpoint 23.2 Status: Old AACSB: Reflective thinking

46) Using the CPI to calculate the inflation rate ________ the underlying inflation rate and using the core inflation ________ it. A) overstates; also overstates B) understates; also understates C) overstates; understates D) understates; overstates E) none of the above Answer: C Topic: Core inflation Skill: Level 3: Using models Section: Checkpoint 23.2 Status: Old AACSB: Analytic skills 23.3 Nominal and Real Values 1) The difference between nominal and real is A) nominal is measured in current dollars and real is measured in dollars of a given year. B) real is measured in current dollars and nominal is measured in dollars of a given year. C) nominal is a number stated in dollars and real is stated with an index number. D) real is a number stated in dollars and nominal is stated with an index number. E) both nominal and real are measured with index numbers, only the nominal index is greater than 100 and the real index is less than 100. Answer: A Topic: Nominal versus real values Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 2) When the nominal price of a good increases over time, the real cost of buying the good A) must increase. B) decreases because income also increases over time. C) does not change because income also increases over time. D) might increase, decrease, or stay the same depending on how much the CPI changed. E) might increase, decrease, or stay the same depending on how much income changed. Answer: D Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking

3) To compare the price of a loaf of bread produced in 1993 with the price of a loaf produced in this year, you should compare the value of the bread in A) real prices. B) nominal prices. C) real quantity. D) nominal quantity. E) CPI quantity. Answer: A Topic: Money values at different dates Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 4) To compare the real price of gas in 1975 to the real price in 2020, we need to know A) just the two nominal prices in both years. B) the two prices in both years and the inflation rate in 2020. C) the two prices in both years and the CPI in both years. D) the two prices in both years and the two interest rates in both years. E) the two prices in both years and the two inflation rates in both years. Answer: C Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Revised AACSB: Reflective thinking 5) Suppose the CPI in 1983 is 100 and the CPI this year is 172. These values for the CPI mean that A) inflation between the two years was 172 percent. B) typically, a good whose price was $100 in 1983 had a price of $172 this year. C) typically, a good whose price was $172 in 1983 had a price of $100 this year. D) typically, a good whose price was $100 in 1983 had a price of $139 this year. E) typically, a good whose price was $100 in 1983 had a price of $58 this year. Answer: B Topic: Money values at different dates Skill: Level 4: Applying models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

6) February 2010, the price of gasoline in the Florida was $2.629 per gallon and the CPI was 202.4 with a base period of 1982 to 1984. What was the real price of gasoline per gallon in base period dollars? A) $2.629 per gallon B) $1.00 per gallon C) $1.29 per gallon D) $5.32 per gallon E) $1.809 per gallon Answer: C Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 7) If the price of a soda was 15 cents in 1970, when the CPI was 50, and 50 cents in 2007 when the CPI was 172, then the real price of A) a soda has risen 567 percent. B) a soda has risen 350 percent. C) the 1970 soda in 2007 dollars is 52 cents. D) the 2007 soda in 1970 dollars is $3.44. E) the soda was 15 cents in 1970 and 50 cents in 2007. Answer: C Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 8) If average annual tuition at public 4-year colleges was $1,908 in 1990, when the CPI was 130.7, and $8,655 in 2012 when the CPI was 229.6, then the real cost of annual tuition A) rose by 158 percent during that period. B) rose by 354 percent during that period. C) rose by 75.7 percent during that period. D) fell by 158 percent during that period. E) fell by 354 percent during that period. Answer: A Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

9) If the price of a soda was 15 cents in 1970, when the CPI was 50, and 50 cents in 2007, when the CPI was 172, then A) prices on average have increased 567 percent. B) prices on average have increased 244 percent. C) the price of the soda was greater in real value in 1970 than in 2007. D) the price of a soda has increased a greater percentage than the CPI. E) the real price of a soda is the same in 1970 and 2007. Answer: C Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 10) In June 1960, the price of gasoline in the Midwest was $0.169 per gallon and the CPI was 29.6 with a base period of 1982 to 1984. What was the real price of gasoline per gallon in base period dollars? A) $0.05 per gallon B) $0.057 per gallon C) $0.169 per gallon D) $0.571 per gallon E) $0.296 per gallon Answer: D Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 11) In 2010, Pablo earned $200 per week at his job. In 2020, Pablo earned $240 per week. If the CPI in 2010 was 100 and the CPI in 2020 was 152, then A) Pablo was better off in 2020 because his weekly wage was higher. B) the 2010 wage measured in 2020 dollars is $157.89. C) the 2020 wage measured in 2010 dollars is $157.89. D) the 2010 wage measured in 2020 dollars is $131.58. E) the 2010 wage measured in 2020 dollars is $100. Answer: C Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Revised AACSB: Analytic skills

12) During 1990, a Hershey candy bar cost $.85. By 2007, the same Hershey candy bar cost $1.25. If the CPI was 130.7 in 1990 and 180.5 in 2007, the price of the 1990 Hershey candy bar in 2007 prices is A) greater than the price of the 2007 Hershey candy bar. B) less than the price of the 2007 Hershey candy bar. C) equivalent to the price of the 2007 Hershey candy bar. D) perhaps greater than, perhaps less, or perhaps the same depending on whether the CPI in 2007 has been adjusted to reflect 2007 prices. E) not able to be determined given the information in the question. Answer: B Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 13) A ham and cheese sandwich at the local deli costs $4.99 in 2015. If the CPI in 2015 was 90.0 and the CPI today is 121.0, the equivalent price for the ham and cheese sandwich today is A) $4.99. B) $5.54. C) $5.29. D) $6.71. E) $6.04. Answer: D Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 14) If prices have increased since the base period, then A) real GDP is smaller than nominal GDP. B) real GDP is larger than nominal GDP. C) real GDP is equal to nominal GDP. D) there is no way to adjust nominal GDP so that it equals real GDP. E) real GDP can no longer be compared to nominal GDP. Answer: A Topic: Real GDP and nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking

15) If prices have decreased since the base period, then A) real GDP is smaller than nominal GDP. B) real GDP is larger than nominal GDP. C) real GDP is equal to nominal GDP. D) there is no way to adjust nominal GDP so that it equals real GDP. E) real GDP can no longer be compared to nominal GDP. Answer: B Topic: Real GDP and nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 16) During this year, nominal GDP in Syldavia was $720 billion and real GDP was $720 billion. The GDP price index in Syldavia in this year was A) 0, because nominal GDP equaled real GDP. B) 100. C) 720. D) -1. E) 720 billion. Answer: B Topic: Real GDP and nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 17) Real GDP is $1,400 billion and nominal GDP is $1,800. The GDP price index equals A) 100.0. B) 77.0. C) 128.6. D) 2.86. E) 222.2. Answer: C Topic: Real GDP and nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

18) The GDP price index can be interpreted as A) (nominal GDP ÷ real GDP) × 100. B) (real GDP ÷ nominal GDP) × 100. C) (nominal GDP + real GDP) ÷ 100. D) (nominal GDP - real GDP) ÷ 100. E) (real GDP - nominal GDP) ÷ 100. Answer: A Topic: Real GDP and nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 19) If for a given year nominal GDP is $2,000 billion and real GDP is $1,500 billion, then the GDP price index is A) 133. B) 1.33. C) 100. D) 0.75. E) 750. Answer: A Topic: Real GDP and nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 20) If nominal GDP is $2,000 billion and the GDP price index is 120, then real GDP is ________ billion. A) $2,000 B) $1667 C) $16.67 D) $240 E) $6 Answer: B Topic: Real GDP and nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

21) If the GDP price index is 125 and nominal GDP is $130 billion, then real GDP equals ________ billion. A) $104.00 B) $162.50 C) $96 D) $1.04 E) $9.6 Answer: A Topic: Real GDP and nominal GDP Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 22) Suppose that in 2020, real GDP is larger than nominal GDP. The GDP price index in 2020 is definitely A) negative. B) larger than the GDP price index in 2019. C) less than the GDP price index in 2019. D) greater than 100. E) less than 100. Answer: E Topic: Real GDP and nominal GDP Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Revised AACSB: Analytic skills 23) The ________ is the average hourly wage rate measured in current dollars, while the ________ is the average hourly rate measured in the dollars of a given reference base year. A) real interest rate; nominal interest rate B) nominal wage rate; real wage rate C) real wage rate; nominal wage rate D) nominal interest rate; real interest rate E) inflation rate; real wage rate Answer: B Topic: Nominal and real wage rates Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking

24) In order to determine if the quantity of goods and services that an hour's work can buy has increased or decreased between 2010 and 2020, one should compare the A) 2010 nominal wage with the 2020 nominal wage. B) 2010 real wage with the 2020 nominal wage. C) 2010 real wage with the 2020 real wage. D) 2010 nominal wage with the 2020 real wage. E) 2010 nominal wage with the 2020 nominal wage AND the 2010 real wage with the 2020 real wage because both are important factors determining if workers can buy more or fewer goods with an hour's work. Answer: C Topic: Real wage rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Revised AACSB: Analytic skills 25) A change in the real wage rate measures the change in the A) price of goods and services that an hour's work can buy. B) nominal wage of an hour's work. C) quantity of goods and services that an hour's work can buy. D) inflation rate affecting the labor market. E) CPI. Answer: C Topic: Real wage rate Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 26) Suppose that residents of France have seen their real wage rate increase over time. This means that A) French workers' inflation rate has increased over time. B) French workers have increased their average hours of labor over time. C) French workers have received increases in their nominal wage rate over time. D) French workers have increased buying power. E) the CPI must have decreased over time. Answer: D Topic: Real wage rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking

27) The change in the quantity of goods and services that an hour's work can buy is measured by the A) nominal wage. B) real wage. C) CPI. D) real interest rate. E) inflation rate. Answer: B Topic: Real wage rate Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 28) When firms decide how much labor to hire, one of the factors that influences them is the A) nominal wage rate plus the inflation rate. B) nominal wage rate divided by the price level and then multiplied by 100. C) nominal wage rate minus the inflation rate. D) real wage rate plus the inflation rate. E) nominal wage rate divided by the inflation rate and then multiplied by 100. Answer: B Topic: Real wage rate Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 29) Which of the following formulas would you use to calculate the NOMINAL wage rate? A) nominal wage rate = real wage rate ÷ CPI B) nominal wage rate = real wage rate × CPI C) nominal wage rate = (real wage rate × CPI) ÷ 100 D) nominal wage rate = (real wage rate × CPI) × 100 E) nominal wage rate = (real wage rate ÷ CPI) × 100 Answer: C Topic: Nominal and real wage rates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking

30) Nominal and real wage rates A) must always change by the same amount. B) must always change in opposite directions by the same amount. C) must always change in the same direction but could change by different amounts. D) could change in opposite directions. E) must always change in the same direction, and the nominal wage rate must change more rapidly than the real wage rate. Answer: D Topic: Nominal and real wage rates Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 31) In the United States between 1981 and 2018, the A) nominal wage rate increased more than the real wage rate. B) real wage rate increased more than the nominal wage rate. C) nominal and real wage rates increased the same amount. D) real and the nominal wage rates decreased the same amount. E) nominal wage rate decreased and the real wage rate increased. Answer: A Topic: Nominal and real wage rates Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Revised AACSB: Reflective thinking 32) If there is inflation and we compare the changes in a nominal variable over time versus its real counterpart, such as the nominal wage rate versus the real wage rate, we find that the A) two increase at about the same rate because of inflation. B) real wage rate increases faster because of inflation. C) nominal wage rate increases faster because of inflation. D) two decrease at about the same rate because of inflation. E) two change at a rate that does not depend on the inflation rate. Answer: C Topic: Nominal and real wage rates Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking

33) Which of the following statements about the nominal and the real wage rates is correct? A) The nominal wage rate equals the real wage rate divided by the CPI and then multiplied by 100. B) The nominal wage rate is measured in the dollars of a base year. C) The real wage rate is measured in current year dollars. D) The real wage rate indicates how many goods and services can be purchased with an hour's labor. E) The real wage rate equals the nominal wage rate multiplied by the CPI then divided by 100. Answer: D Topic: Nominal and real wage rates Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 34) If the nominal wage is $30 in 2011 and the CPI is 202 in 2011, then the real wage in 19821984 dollars A) is $30. B) is $14.85. C) is $1.48. D) is $29.00. E) cannot be calculated without the past year wage rate. Answer: B Topic: Real wage rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 35) When Cameron began his career with SBC, his starting salary was $32,000. Four years later his salary increased to $35,000. If the CPI was 100.0 when he started and four years later is 107.5, Cameron's real income after four years is A) $32,000. B) $32,558. C) $34,400. D) $37,625. E) $35,000. Answer: B Topic: Real wage rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Revised AACSB: Analytic skills

36) Your starting salary is $35,000 per year. After one year, you are given a raise that increases your nominal salary. Which of the following salaries would you prefer the most? A) a $36,000 salary with a CPI of 103.0 B) a $38,000 salary with a CPI of 104.0 C) a $39,000 salary with a CPI of 109.0 D) a $39,000 salary with a CPI of 110.0 E) a $37,000 salary with a CPI of 106.0 Answer: B Topic: Real wage rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 37) If you are earning $20,000 this year and the CPI is 165, your real income in base year prices is A) $121.21. B) $12,121.21. C) $20,000. D) $16,500. E) $33,000. Answer: B Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 38) If your real income in base year prices is $50,000, then if the CPI is 170, what is your nominal income? A) $29,411.76 B) $50,000.00 C) $85,000.00 D) $71,428.57 E) $70,000.00 Answer: C Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

39) If your nominal income is $75,000 and your real income in base year prices is $60,000, what is the CPI? A) 100 B) 125 C) 80 D) 250 E) 200 Answer: B Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 40) If your nominal income is $80,000 and your real income in base year prices is $71,500, what is the CPI? A) 89 B) 100 C) 112 D) 106 E) 150 Answer: C Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 41) Sharisse brags to her mother that her starting salary as a management trainee is $36,000, much higher than her mother's starting salary of $21,000 as a management trainee several years ago. If the CPI the year Sharisse begins work is 181.2 and the CPI the year her mother started work was 109.1, Sharisse is A) wrong. Adjusting for price changes, her salary is less than her mother's salary. B) wrong. Adjusting for quantity changes, her salary is less than her mother's salary. C) correct. Adjusting for price changes, her salary is more than her mother's salary. D) correct. Adjusting for quantity changes, her salary is more than her mother's salary. E) maybe wrong and maybe right. Adjusting for quantity changes, her salary is less than her mother's salary but with the information given we are unable to further adjust for price changes. Answer: C Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

42) In 2008, the nominal minimum wage rate was $7.25 an hour and the CPI was 200. The real minimum wage rate in 2008 was A) $3.63 an hour. B) $14.50 an hour. C) $1450 an hour. D) $26.32 an hour. E) $7.25 an hour. Answer: A Topic: Real wage rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 43) In 2012, the nominal wage rate for unionized carpenters was $37.50 and the CPI was 204. Calculate the real wage rate for this group of workers. A) $37.50 B) $47.09 C) $5.44 D) $18.38 E) $1.84 Answer: D Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 44) Suppose Mack's wage was $7.00 an hour in 2001 and was $12.00 per hour in 2012. The CPI was 94 in 2001 and 201 in 2012. The 2001 wage in terms of 2012 dollars is A) $14.97. B) $14.07. C) $3.48. D) $13.16. E) $7.00. Answer: A Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

45) Your wage this year is $15 per hour and the CPI is 178. Next year you get a raise to $17 and the CPI rises to 185. What has happened? A) Your real wage has increased but by a smaller percentage than your nominal wage. B) Your nominal wage has increased but your real wage has declined. C) Your real wage rate has increased by a larger percentage than your nominal wage. D) Your real and nominal wages have each increased by the same percentage. E) Your nominal wage has increased but your real wage has not changed. Answer: A Topic: Real wage rate Skill: Level 4: Applying models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 46) If your real income falls during a period of inflation, then your nominal income might have A) increased more rapidly than the price level. B) increased at the same rate as the price level. C) increased more slowly than the price level. D) decreased more slowly than the price level. E) More information is needed to determine if your nominal income increased more slowly, more rapidly, or at the same rate as the price level. Answer: C Topic: Nominal and real variables Skill: Level 4: Applying models Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 47) If you get an 8 percent increase in your nominal income, your real income A) definitely increases. B) increases only if the inflation rate is more than 8 percent. C) increases only if the inflation rate is equal to 8 percent. D) increases only if the inflation rate is less than 8 percent. E) increases if the inflation rate is more than or equal to 8 percent. Answer: D Topic: Nominal and real variables Skill: Level 4: Applying models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

48) If we look at the nominal versus real wage rates paid to Presidents over time, we find that A) George Washington was paid a higher real wage rate than Bill Clinton. B) George W. Bush is the highest paid according to real wage rates. C) the real wage rate has steadily increased to $400,000 per year. D) the nominal wage has increased and decreased at different times because of inflation. E) George W. Bush's nominal wage is about equal to the average nominal wage paid all presidents. Answer: A Topic: Eye on the past, real wage rates of U.S. Presidents Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Written and oral communication 49) The percentage return on a loan expressed in terms of goods and services is the A) nominal wage rate. B) real interest rate. C) real wage rate. D) nominal interest rate. E) CPI interest rate. Answer: B Topic: Real interest rate Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 50) The real interest rate equals the A) nominal interest rate - inflation rate. B) nominal interest rate + inflation rate. C) (nominal interest rate ÷ inflation rate). D) inflation rate - nominal interest rate. E) (nominal interest rate + inflation rate) × 100. Answer: A Topic: Real interest rate Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking

51) To convert the nominal interest rate to the real interest rate, we A) divide the nominal interest rate by the inflation rate. B) multiply the nominal interest rate by the inflation rate. C) subtract the inflation rate from the nominal interest rate. D) add the inflation rate to the nominal interest rate. E) subtract the nominal interest rate from the inflation rate and then multiply by 100. Answer: C Topic: Real interest rate Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 52) The real interest rate equals the A) nominal interest rate multiplied by 100. B) nominal interest rate divided by 100. C) nominal interest rate minus the inflation rate. D) inflation rate minus the nominal interest rate. E) nominal interest rate divided by the inflation rate and then multiplied by 100. Answer: C Topic: Real interest rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 53) If the inflation rate is greater than the nominal interest rate, then the A) real interest rate will be negative. B) real interest rate will be positive. C) inflation rate will increase. D) inflation rate will decrease. E) nominal interest rate will be negative. Answer: A Topic: Real interest rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking

54) If the nominal interest rate is greater than the real interest rate A) it is an indication of economic growth. B) inflation must be occurring. C) lenders must lose because they can only make loans using the real interest rate. D) the real interest rate must be negative. E) None of the above answers is correct because it is not possible for the nominal interest rate to exceed the real interest rate. Answer: B Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 55) The real interest rate is negative if the inflation rate A) exceeds the nominal interest rate. B) exceeds the real interest rate. C) is equal to the nominal interest rate. D) is less than the nominal interest rate. E) equals zero. Answer: A Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 56) Which of the following is TRUE? A) The real interest rate is always positive. B) The nominal interest rate is usually negative. C) The real interest rate can be negative. D) The real interest rate can never be zero. E) The nominal interest rate is usually less than the real interest rate. Answer: C Topic: Real interest rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking

57) If the CPI is 170 at the beginning of the year and 181 at the end, and a bank is paying a nominal interest rate of 6 percent, we see that A) the real interest rate is negative. B) the interest nominal rate is negative. C) the real interest rate is positive and is less than 1 percent. D) the real interest rate is positive and is larger than 1 percent. E) the real interest rate is equal to zero. Answer: C Topic: Real interest rate Skill: Level 4: Applying models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 58) If the bank returns $1,060 on the $1,000 deposited for a year during which inflation was 4 percent, the real interest rate is A) 6 percent. B) 10 percent. C) -2 percent. D) 2 percent. E) 16 percent. Answer: D Topic: Real interest rate Skill: Level 4: Applying models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 59) Citicorp charges an 11 percent interest rate on all new car loans. If the inflation rate is 6 percent, Citicorp receives a real interest rate of A) 11 percent. B) 6 percent. C) 1.83 percent. D) 5 percent. E) 0.54 percent. Answer: D Topic: Real interest rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

60) Chloe has a $15,000 personal loan at a nominal interest rate of 8 percent. If the inflation rate is 3 percent, what is the real interest rate paid on the loan? A) 8 percent B) 5 percent C) 11 percent D) 3 percent E) 2.67 percent Answer: B Topic: Real interest rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 61) Caroline has saved $100,000 for her retirement. She earned 4 percent interest on that money during the year 2013. If the inflation rate was 1 percent in 2013, what was Caroline's real interest rate? A) $4,000 B) 4 percent C) 3 percent D) 1 percent E) 5 percent Answer: C Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 62) If the real interest rate is 5 percent when the inflation rate is 4 percent, the nominal interest rate is A) 1 percent. B) 9 percent. C) 20 percent. D) .80 percent. E) 1.25 percent. Answer: B Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

63) If the real interest rate is 7 percent when the nominal interest is 12 rate is percent, the inflation rate is A) -5 percent. B) 5 percent. C) 19 percent. D) 1.7 percent. E) 7 percent. Answer: B Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 64) If you have a mortgage on your house at 6 percent and the inflation rate when the mortgage was acquired was 3 percent but has since increased and is now 8 percent per year; the CURRENT real interest rate is A) 14 percent per year. B) 6 percent per year. C) 0 percent per year. D) -2 percent per year. E) 8 percent per year. Answer: D Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

65) The table above has information about the CPI, nominal wage rate, and nominal interest rate for the country of Syldavia for the years 2010 to 2012. The reference base year is 2010. The inflation rate in Syldavia from 2010 to 2011 was A) -5.0 percent. B) 5.0 percent. C) 9.5 percent. D) 3.0 percent. E) -9.5 percent. Answer: A Topic: Inflation rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 66) The table above has information about the CPI, nominal wage rate, and nominal interest rate for the country of Syldavia for the years 2010 to 2012. The reference base year is 2011. The inflation rate in Syldavia from 2011 to 2012 was A) 8.0 percent. B) 8.4 percent. C) 3.0 percent. D) 4.0 percent. E) 10.3 percent. Answer: B Topic: Inflation rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

67) The table above has information about the CPI, nominal wage rate, and nominal interest rate for the country of Syldavia for the years 2010 to 2012. The reference base year is 2010. The real wage rate in Syldavia during 2011 was A) $14.00. B) $15.00. C) $15.79. D) $14.22. E) $14.25. Answer: C Topic: Real wage rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 68) The table above has information about the CPI, nominal wage rate, and nominal interest rate for the country of Syldavia for the years 2010 to 2012. The reference base year is 2010. The real interest rate in Syldavia during 2012 was A) 2.8 percent. B) 5.2 percent. C) 9.0 percent. D) 0.6 percent. E) 8.4 percent. Answer: D Topic: Real interest rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 69) The CPI was 225 in 2008 and 232.2 in 2009. The nominal interest rate during this period was 1.4 percent. What was the real interest rate during this period? A) 3.2 percent B) 1.8 percent C) 4.6 percent D) -3.2 percent E) -1.8 percent Answer: E Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

70) If we look at real and nominal interest rates in the United States since 1976, we see that A) the nominal interest rate has always been less than the real interest rate because of inflation. B) the real interest rate has almost always been less than the nominal interest rate because of inflation. C) at times the nominal interest rate has been greater than the real interest rate and at times has been less than it. D) the difference between the nominal and real interest rates has widened during the 1990s because of inflation. E) both the nominal and real interest rates were negative in the highly inflationary 1970s. Answer: B Topic: Nominal and real interest rates Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Written and oral communication 71) Looking at real and nominal interest rates in the United States since 1976, we see that the A) nominal interest rate has at times been negative. B) real interest rate has been greater than 10 percent for most years. C) real interest rate has at times been negative. D) real interest rate was above 5 percent during the low inflation of the 1970s. E) real interest is generally greater than the nominal interest rate. Answer: C Topic: Nominal and real interest rates Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Written and oral communication 72) In 2011, apples cost $1.49 a pound. Suppose the CPI was 120 in 2011 and 140 in 2012. If there is no change in the real price of an apple in 2012, what is the price of a pound of apples in 2012? A) $2.74 B) $1.69 C) $1.66 D) $1.74 E) $1.28 Answer: D Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

73) In 1970 the CPI was 39, and in 2000 it was 172. A local phone call cost $0.10 in 1970. What is the price of this phone call in 2000 dollars? A) $1.42 B) $0.39 C) $1.72 D) $0.44 E) $0.23 Answer: D Topic: Money values at different dates Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 74) Nominal GDP is $12.1 trillion and real GDP is $11.0 trillion. The GDP price index is A) 90.1. B) 121. C) 1.10. D) 91.0. E) 110. Answer: E Topic: GDP price index Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 75) If real GDP is greater than nominal GDP then the GDP price index A) is greater than 100. B) is less than 100. C) is equal to 100. D) is either equal to or greater than 100. E) None of the above answers is correct because we need to choose a new base year. Answer: B Topic: GDP price index Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

76) Nominal GDP was $12.1 trillion and real GDP is $11 trillion. The GDP price index is A) 90.1. B) 121.0. C) 1.10. D) 91.0. E) 110.0. Answer: E Topic: GDP price index Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 77) The nominal wage rate is the A) minimum hourly wage that a company can legally pay a worker. B) average hourly wage rate measured in the dollars of a given reference base year. C) minimum hourly wage rate measured in the dollars of a given reference base year. D) average hourly wage rate measured in current dollars. E) wage rate after inflation has been adjusted out of it. Answer: D Topic: Nominal wage Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 78) The average starting salary for a history major is $29,500. If the CPI was 147.5, the real salary is A) $200.00 an hour. B) $20,000. C) $35,000. D) $43,513. E) $14,750. Answer: B Topic: Real wage rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

79) Since 1981, the A) real wage rate increased steadily. B) nominal wage rate increased and the real wage rate did not change by very much. C) real wage rate increased more than the nominal wage rate. D) nominal wage rate increased at an uneven pace whereas the increase in the real wage rate was steady and constant. E) nominal wage rate and real wage rate both decreased. Answer: B Topic: Nominal and real wage rates Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 80) The real interest rate is equal to the A) nominal interest rate plus the inflation rate. B) nominal interest rate minus the inflation rate. C) nominal interest rate times the inflation rate. D) nominal interest rate divided by the inflation rate. E) inflation rate minus the nominal interest rate. Answer: B Topic: Real interest rate Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 81) You borrow at a nominal interest rate of 10 percent. If the inflation rate is 4 percent, then the real interest rate is A) the $10 in interest you have to pay. B) 16 percent. C) 2.5 percent. D) 6 percent. E) 14 percent. Answer: D Topic: Real interest rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

82) In the United States since 1976, the nominal interest rate A) and the real interest rate both decreased in almost every year. B) and the real interest rate were both constant in almost every year. C) was constant in most years and the real interest rate fluctuated. D) exceeded the real interest rate in virtually all the years. E) exceeded the real interest rate in about one half of the years and the real interest rate was greater than the nominal interest rate in the other half of the years. Answer: D Topic: Nominal and real interest rates Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Revised AACSB: Written and oral communication 83) Between the base period and the next period, prices stay constant. The GDP price index in the next period A) cannot be calculated without knowing how much the quantity changed. B) will equal 0 because there is no change. C) is equal to 100 because there is no change. D) is equal to 1 because there is no change. E) is equal to 50 because there is no change. Answer: C Topic: Real GDP and nominal GDP Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 84) The GDP deflator is A) a measure of the level of production. B) always greater than 100. C) the price level during the base year. D) a measure of the price level. E) equal to nominal GDP during the base year. Answer: D Topic: GDP price index Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking

85) The GDP deflator measures A) the price level. B) the quantity level. C) real GDP. D) nominal GDP. E) the quality of the goods and services in GDP. Answer: A Topic: GDP price index Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 86) If the GDP price index is 137, this value means that prices have increased A) 137 percent in the last year. B) 37 percent in the last year. C) 37 percent since the base year. D) 137 percent since the base year. E) 63 percent since the base year. Answer: C Topic: GDP price index Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 87) For the purpose of measuring the cost of living for consumers, one reason the GDP price index is NOT a good substitute for the CPI is because the GDP price index A) compares a current year basket of goods with a base year basket of goods. B) compares current year's prices with base year's prices. C) includes the prices of exported goods, which are not consumed in the United States. D) and the CPI move in the same direction over time. E) has a larger bias than does the CPI. Answer: C Topic: GDP price index and the CPI Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking

88) If Caterpillar Inc. raises the price of earth-moving equipment that it manufactures in Illinois, then the CPI will ________ and the GDP deflator will ________. A) increase; increase B) increase; not change C) not change; increase D) not change; not change E) increase; increase by less than the CPI Answer: C Topic: GDP price index and the CPI Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 89) If the price of used cars rises, then the CPI will ________ and the GDP deflator will ________. A) increase; increase B) increase; not change C) not change; increase D) not change; not change E) increase; increase by more than the CPI Answer: B Topic: GDP price index and the CPI Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 90) If the price of rocket fuel imported from Russia and used by NASA suddenly increases, then the U.S. CPI will ________ and the U.S. GDP deflator will ________. A) increase; increase B) increase; not change C) not change; increase D) not change; not change E) increase; increase by more than the CPI Answer: D Topic: GDP price index and the CPI Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

91) The GDP deflator is a measure of A) taxes and subsidies. B) changes in quantities. C) prices. D) depreciation. E) changes in nominal GDP. Answer: C Topic: GDP price index Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 23.4 Chapter Figures

1) The trends displayed in the table can best be explained by A) the nominal wage rate has increased at a rate about equal to the inflation rate. B) the real wage rate has increased at a rate about equal to the inflation rate. C) service industries have increased as a proportion of the economy and they tend to have higher nominal wage rates. D) the inflation rate has been rising over the time period. E) None of the above can explain the trends in the figure. Answer: A Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 83 Copyright © 2023 Pearson Education Ltd.

23.5 Integrative Questions 1) In the 1970s, a period of a high rate of inflation, a news magazine article listed people who were losing from inflation because their real purchasing power was falling. Those who lost the most were university professors. Which of the following explains this? A) The marginal benefit of their work was falling. B) Their wage rates did not increase as much as the CPI. C) Their wage rates increased more rapidly than the CPI. D) The professors suffered from the CPI bias. E) The professors' market basket was different than the market basket used to calculate the CPI. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 23.6 Essay: The Consumer Price Index 1) What are the three stages of constructing the CPI? Answer: The first stage is to select the CPI market basket. The market basket is determined by surveying the spending habits of consumers by conducting a Consumer Expenditure Survey. The second stage is to check the prices of about 80,000 goods and services in 30 metropolitan areas. This checking is done on a monthly basis. The third stage is to calculate the CPI itself. To calculate the CPI, a period of time is selected as the base reference period and the cost of the CPI market basket using the prices from that period is computed. Then the CPI in any other month equals 100 times the quotient of the cost of the market basket using current-period prices divided by the cost of the market basket in the reference base period. Topic: CPI Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 2) "The market basket used to calculate the CPI is revised monthly to more accurately depict consumers' choices. The price data for the CPI are collected every month." Are the previous sentences true or false? Answer: The first sentence is false and the second is true. The point of the CPI is to determine how the prices of a fixed basket of goods and services change over time, so the CPI basket is revised only infrequently. However, the prices for the goods and services in the market basket are collected monthly so that the CPI can be computed monthly. Topic: CPI, construction Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 84 Copyright © 2023 Pearson Education Ltd.

3) If you have the cost of the CPI market basket at current prices and the cost of the CPI market basket at base period prices, how do you calculate the CPI? Answer: CPI = × 100. Topic: CPI, construction Skill: Level 1: Definition Section: Checkpoint 23.1 Status: Old AACSB: Reflective thinking 4) What is inflation and how is it measured using the Consumer Price Index? Answer: The inflation rate is the percentage change in the price level from one year to the next. In other words, it is the growth rate of the price level. The CPI is a measure of the price level and hence can be used to calculate the inflation rate. The inflation rate is equal to: Inflation rate =

× 100.

Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 5) Assume that after you graduate, you move to a simple economy in which only three goods are produced and consumed: fish, fruit, and meat. Suppose that on January 1, fish sold for $2.50 per pound, meat was $3.00 per pound, and fruit was $1.50 per pound. At the end of the year, you discover that the catch was low and that fish prices had increased to $5.00 per pound, but fruit prices stayed at $1.50 per pound, and meat prices had actually fallen to $2.00. Can you say what happened to the overall CPI, in terms of whether it increased, decreased, or stayed the same? Do you have enough information to calculate the inflation rate? Note, this problem requires no calculation; just state and explain your answers. Answer: You cannot say what happened to the CPI because you do not know the quantities in the market basket. You also do not have enough information to determine the inflation rate because you need the CPI at the beginning and the end of the year to compute the inflation rate. Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

6) If the base year CPI market basket costs $250 and next year the CPI market basket costs $275, what is next year's CPI? Answer: The CPI equals 100 × ($275/$250) = 110. Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

7) The table above gives the purchases of an average consumer in a small economy. (These consumers purchase only loaves of bread and jugs of soda.) Suppose 2015 is the reference base period. a. What quantities are in the CPI market basket? b. What is the cost of the CPI market basket using 2015 prices? c. What is the cost of the CPI market basket using 2016 prices? d. What is the CPI in 2016? Answer: a. The quantities in the CPI market basket are the 2015 quantities because 2015 is the reference base period. So, the quantities are 20 loaves of bread and 20 jugs of soda. b. The cost of the CPI basket using 2015 prices is (20 loaves × $3) + (20 jugs × $2) = $100. c. The cost of the CPI basket using 2016 prices is (20 loaves × $4) + (20 jugs × $1.50) = $110. Note that the quantities used in this calculation are the quantities in the CPI market basket. d. The CPI in 2016 equals 100 multiplied by the cost of the CPI market basket at 2016 prices divided by the cost of the CPI basket at 2015 (base period) prices. The CPI equals 100 × ($110)/($100) = 110. Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

8) The table above gives the purchases of a typical consumer in a country comprised of one large city. These consumers purchase only restaurant meals and parking. The year 2015 is the reference base period. a. Find the total cost of the CPI market basket for 2015 and 2016. b. What is the CPI in 2015 and in 2016? c. What is the inflation rate between 2015 and 2016? Answer: a. The total cost of the CPI market basket in 2015 equals (100 meals × $10) + (50 parking × $100) = $6,000. The total cost of the CPI market basket in 2016 equals (100 meals × $12) + (50 parking × $97.50) = $6,075. The quantities are the same in 2015 and 2016. If the quantities differed, the 2015 quantities would be used because 2015 is the base year. b. The CPI in 2015 is 100 because 2015 is the base period. (Alternatively, the CPI in 2015 equals ($6,000)/$6,000) × 100 = 100.) The CPI in 2016 equals ($6075)/($6,000) × 100 = 101.25. c. The inflation rate between 2015 and 2016 equals (101.25 - 100)/(100) × 100 = 1.25 percent. Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

9) The table above gives the CPI market basket for 2015 and 2016. Suppose that 2015 is the reference base period. a. What is the cost of the CPI market basket in 2015? b. What is the cost of the CPI market basket in 2016? c. What is the CPI for 2015? d. What is the CPI for 2016? Answer: a. The cost of the CPI market basket in 2015 is $1,520.00. b. The cost of the CPI market basket in 2016 is $1,712.50. c. The CPI for 2015 is 100 because 2015 is the base period. d. The CPI for 2016 equals ($1,712.50)/($1,520.00) × 100 = 112.66. Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 10) If the CPI this year is 175.2 and next year the CPI is 176.1, what was the inflation rate over the year? Answer: The inflation rate equals 100 × (176.1 - 175.2)/(175.2) = 0.5 percent. Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 11) Last year the CPI was 177.1 and this year the CPI was 180.9. What is the inflation rate between these two years? Answer: The inflation rate equals 100 × (180.9 - 177.1)/(177.1) = 2.1 percent. Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills

12) The table above gives the U.S. CPI for six years. Calculate the inflation rates between 1997 to 1998, 1998 to 1999, 1999 to 2000, 2000 to 2001, and 2001 to 2002. Answer: Between 1997 to 1998, the inflation rate was 3.0 percent. Between 1998 to 1999, the inflation rate was 2.3 percent. Between 1999 to 2000, the inflation rate was 1.6 percent. Between 2000 to 2001, the inflation rate was 2.2 percent. And between 2001 to 2002, the inflation rate was 3.4 percent. Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 23.1 Status: Old AACSB: Analytic skills 23.7 Essay: The CPI and Other Price Level Measures 1) Is the CPI a biased measure of the inflation rate? Explain your answer. Answer: There are four sources of bias in the CPI measure. The first bias is the new goods bias, which refers to the fact that new goods are continuously replacing old ones. Because the new goods are often both higher quality and higher priced, their introduction complicates measuring the CPI. The new goods bias biases the CPI upwards. Second, the CPI is not always adjusted for improvements in the quality of the products, which is the quality change bias. A price hike that reflects a quality increase often is mistakenly recorded as only a price hike, with no recognition given to the higher quality. Third, consumers substitute relatively lower priced goods for goods that increase in price, which is called commodity substitution. However, the CPI doesn't take this substitution into account, thereby giving rise to the commodity substitution bias. Fourth, when faced with price hikes, consumers switch away from buying at full service stores to buying from discount stores because the prices in the discount stores are lower. Once again, the CPI does not take account of this outlet substitution and so the CPI suffers from the outlet substitution bias. Topic: CPI bias, sources Skill: Level 3: Using models Section: Checkpoint 23.2 Status: Old AACSB: Written and oral communication

2) "The new goods bias puts a downward bias into the CPI and its measure of the inflation rate." Is the previous sentence correct or not? Explain your answer. Answer: The sentence is false because the new goods bias puts an upward bias into the CPI and its measure of the inflation rate. The new goods bias occurs when new, higher quality and more expensive goods replace older, lower quality and less expensive goods. Part of the expense of the new goods is to pay for the higher quality of the new goods. But, if the price is not adjusted (downward) to take account of the higher quality, incorporating the new good into the CPI leads to an upward bias in the prices that go to make up the CPI and hence also an upward bias in the inflation rate. Topic: CPI bias, commodity substitution bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Written and oral communication 3) What is the commodity substitution bias? What effect does it have on the CPI? Answer: The commodity substitution bias refers to the fact that people switch (substitute) away from goods and services that have risen in price and buy more goods and services that have not risen as much in price. Thus if the price of Coke rises 20 percent while Pepsi's price does not change, many people will substitute Pepsi for Coke. The commodity substitution bias in the CPI occurs because the CPI uses a fixed market basket of goods and services. So, if the market basket contains, say, 10 bottles of Coke and 8 bottles of Pepsi, the market basket will not change even though people change their buying patterns in favor of Pepsi and away from Coke. The change in people's buying patterns offsets, at least to a degree, the effect of higher prices. In the Coke/Pepsi case, by purchasing more Pepsi and less Coke, people have insulated themselves from part of the effect of the higher price of Coke. However the CPI does not take this change into account and so the CPI reflects the full effect of the higher price of Coke, thereby overstating the actual inflation that people experience. Topic: CPI bias, commodity substitution bias Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Written and oral communication

4) Explain the CPI bias and how it can distort private contracts and increase government outlays. Answer: The CPI bias is the point that the CPI overstates the true inflation rate. The amount of the bias has been estimated at 1.1 percentage points per year. Thus when workers sign a contract that links their wages to the CPI in order to adjust the wages to offset inflation, the adjustment is too large. Wages rise by more than is necessary to keep pace with inflation. Thus a contract that might have been designed to keep workers "even" with inflation is distorted so that workers actually gain. Similarly, many government outlays, such as social security, are linked to the CPI. Thus the adjustment in these expenditures exceeds the amount necessary for inflation, and hence the amount of the government's outlays increases by more than is appropriate for inflation. Topic: CPI bias, distortions Skill: Level 3: Using models Section: Checkpoint 23.2 Status: Old AACSB: Written and oral communication 5) "The bias in the CPI distorts private contracts because a future payment that is linked to the CPI will be raised above the true increase in the price level." Is the previous sentence true or false? Answer: The sentence is correct. The fact that the payments increase by more than the true increase in the price level means that one party to the contract benefits more, the higher the inflation rate. Topic: CPI bias, distortion of private contracts Skill: Level 3: Using models Section: Checkpoint 23.2 Status: Old AACSB: Written and oral communication 6) What, if any, is the impact of the CPI bias on government spending and taxes? Answer: About one third of government outlays, such as Social Security, are linked to the CPI so that these sources of government spending increase when the CPI increases. Because the CPI overstates the actual inflation rate, government spending increases by more than is warranted by inflation. Hence the CPI bias increases the amount of government outlays. Additionally, taxes revenue is linked to the CPI because the CPI is used to adjust the income levels at which higher tax rates apply. Because the CPI overstates the actual inflation rate, the income levels are adjusted so they are higher than is appropriate. As a result, the government's tax revenue is lower than otherwise. Topic: CPI bias, government outlays Skill: Level 2: Using definitions Section: Checkpoint 23.2 Status: Old AACSB: Written and oral communication

23.8 Essay: Nominal and Real Values 1) Explain the difference between a nominal value and a real value. Answer: A nominal value is the actual price that is paid or the actual wage received. If today you pay $1 for a can of Pepsi, this amount is a nominal value. A real value is adjusted for changes in the price level. To compare prices or wages across years, the nominal values need to be converted to real values. In other words, you need to compare values in the same dollars. This conversion is necessary because a dollar today is not worth the same as a dollar 20 years ago. Topic: Nominal and real values Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Written and oral communication 2) When the nominal price of a good increases over time, must its real price also increase? Answer: No, even though the nominal price of a good increases, its real price might decrease. For instance, the nominal price of motorcycles has increased between 1980 and 2015, but their real price has decreased because the CPI increased even more rapidly. Topic: Nominal and real values Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Written and oral communication 3) What is the difference between nominal variables and real variables? Discuss the calculations undertaken to determine the real wage rate and the real interest rate. Explain why the real wage rate and real interest rate are real variables. Answer: Nominal variables are measured using current dollars; real variables are measured using dollars of a given base year. More generally, nominal variables are in terms of current dollars whereas real variables are in terms of the quantity of goods and services that can be purchased. The real wage rate equals the nominal wage rate divided by the CPI. The real interest rate equals the nominal interest rate minus the inflation rate. The real wage rate is a real variable because it provides the purchasing power of an hour's labor. The real interest rate is a real variable because it provides the purchasing power gained as interest on a loan. Topic: Nominal and real values Skill: Level 5: Critical thinking Section: Checkpoint 23.3 Status: Old AACSB: Written and oral communication

4) In 2000, the CPI was 152.5 and the price of an economics textbook was $70.00 and a music CD was $16.00. If the CPI was 172.3 in 2016, what were the prices of the economics textbook and the music CD in 2011 dollars? Answer: To adjust the two prices, the ratio of the CPI in 2016 to the CPI in 2000 is needed. This ratio is (172.3)/(152.5) = 1.13. Then multiply the 2000 prices by this ratio to convert the prices to 2016 dollars. This yields a 2016 dollar price for the textbook of ($70.00 × 1.13) = $79.10 and a 2016 dollar price for the CD of ($16.00 × 1.13) = $18.08. Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 5) In 1979, the price of gasoline was $1.389 per gallon and the CPI was 72.6. In 2003, the price of gasoline was $1.589 per gallon and the CPI was 182.9. Find the real price of gasoline in 1979 and 2003 in terms of base period dollars. Answer: To adjust the price in 1979, the ratio of the CPI in the base period to the CPI in 1979 is needed. The base period CPI is 100, so this ratio is (100)/(72.6) = 1.38. Then multiply the 1979 price by this ratio to convert the price to base period dollars, which yields a base period price for the gallon of gasoline of ($1.389 per gallon × 1.38) = $1.92 per gallon. To adjust the price in 2003, a similar procedure is followed. The ratio of the CPI in the base period to the CPI in 2003 is (100)/(182.9) = 0.55. Then multiply the 2003 price by this ratio to covert the price to base period dollars, which yields a base period price for the gallon of gasoline of ($1.589 per gallon × 0.55) = $0.87 per gallon. Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

6) Scott worked in a large foreign country. He retired in 2013 and his pension income is fixed at $1,500 per month. The table above gives the CPI in this country. What is the real monthly value of his pension in the years between 20138 and 2016? Answer: To calculate the real value of the pension, divide the $1,500 pension by the CPI and then multiply by 100. This calculation gives the real values as: 2013, $1,500.00; 2014, $1,463.41; 2015, $1,415.09; 2016: $1,351.52. Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 93 Copyright © 2023 Pearson Education Ltd.

7) For each of the following values of nominal GDP and real GDP, calculate the GDP price index. a. Nominal GDP = $600; real GDP = $800. b. Nominal GDP = $900; real GDP = $900. c. Nominal GDP = $1,200; real GDP = $1,000. Answer: a. The GDP price index equals ($600 ÷ $800) × 100, which is 75. b. The GDP price index equals ($900 ÷ $900) × 100, which is 100. c. The GDP price index equals ($1,200 ÷ $1,000) × 100, which is 120. Topic: Real GDP and nominal GDP Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 8) If nominal GDP is $230 for a period and real GDP is $200 for the same period, what is the GDP price index for this period? Answer: The GDP price index equals 115, or (100) × ($230 ÷ $200). Topic: Real GDP and nominal GDP Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

9) The table above has real and nominal GDP for two years for a foreign country. a. What does the GDP price index equal in 2015? What does the value of the GDP price index tell you about 2015? b. What does the GDP price index equal in 2016? Answer: a. The GDP price index equals (100) × (nominal GDP ÷ real GDP). In 2015, the GDP price index equals (100) × ($3,300 trillion ÷ $3,300 trillion) = 100. Because the GDP price index equals 100, we can determine that 2015 is a base year. b. In 2016, the GDP price index equals (100) × ($4,200 ÷ $3,600) = 116.67. Topic: Real GDP and nominal GDP Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

10) Explain how the nominal wage rate is converted into the real wage rate. Explain why this process of conversion changes the nominal wage rate into the real wage rate. Answer: The real wage rate equals the nominal wage rate divided by the CPI. The nominal wage rate equals the dollars that are paid for an hour's labor. The CPI is a measure of the prices of the goods and services that the typical consumer purchases. Hence dividing the number of dollars for an hour's labor by the prices for the goods and services purchased gives, as its result, the number of goods and services that can be purchased by the hour's labor. Topic: Nominal and real wage rates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Written and oral communication 11) Define the nominal wage rate and the real wage rate. Can the nominal wage rate increase faster than the real wage rate? Answer: The nominal wage rate is the wage rate measured in current dollars and the real wage rate is the wage rate measured in constant dollars. More generally, the nominal wage rate is the number of dollars received for an hour's work and the real wage rate is the number of goods and services that can be purchased with an hour's work. The nominal wage rate increases faster than the real wage rate when prices are increasing, that is, when inflation occurs. Topic: Nominal and real wage rates Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Written and oral communication 12) Suppose the base reference period is 1982-1984. If your nominal wage rate is $8.00 per hour when the CPI is 180, what is your real wage rate in 1982-1984 dollars? Answer: The real wage rate equals 100 times the nominal wage rate divided by the CPI. Hence the real wage rate equals 100 × ($8.00)/(180) = $4.44. Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

13) Define the nominal interest rate and the real interest rate. Discuss the relationship between the nominal interest rate and the real interest rate. Answer: The nominal interest rate is the percentage return on a loan expressed in dollars. The real interest rate is the percentage return on a loan expressed in purchasing power. In other words, the nominal interest rate is the number of dollars received in interest for a loan and the real interest rate is the goods and services the interest can buy. The real interest rate equals the nominal interest rate minus the inflation rate. Topic: Nominal and real interest rates Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Written and oral communication 14) During periods when the inflation rate is positive, how does the real interest rate compare to the nominal interest rate? Answer: The real interest rate equals the nominal interest rate minus the inflation rate or, by rearranging, the nominal interest rate equals the real interest rate plus the inflation rate. This latter specification shows that when the inflation rate is positive, the nominal interest rate is greater than the real interest rate. Topic: Nominal and real interest rates Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Written and oral communication 15) "The real interest rate is found by dividing the nominal interest rate by the CPI." Is this statement true or false? Answer: The statement is false. The real interest rate equals the nominal interest rate minus the inflation rate, not divided by it. Topic: Nominal and real interest rates Skill: Level 1: Definition Section: Checkpoint 23.3 Status: Old AACSB: Reflective thinking 16) Explain how the real interest rate could be negative and how this situation would benefit the borrower. Answer: When people borrow money, they pay a nominal interest rate to the lender. Inflation decreases the real buying power of the payments made to repay the loan. If the inflation rate is greater than the nominal interest rate, then the real interest rate is negative. In this case, the lender actually loses by lending money to the borrower because the quantity of goods and services the lender can buy with the proceeds of the loan has actually decreased. Topic: Real interest rate Skill: Level 2: Using definitions Section: Checkpoint 23.3 Status: Old AACSB: Written and oral communication 96 Copyright © 2023 Pearson Education Ltd.

17) In the late 1970s, the inflation rate was over 10 percent per year. Many home mortgage lending institutions had mortgages outstanding that had been made in the 1960s at nominal interest rates of around 5 percent per year. Many of these lending institutions failed. What can explain the high failure rate of lenders in the late 1970s? Answer: The real interest rate the lenders were earning was 5 percent per year minus 10 percent per year inflation, making the real interest rate significantly negative, -5 percent per year. With the negative real interest rate, these financial institutions were incurring losses and eventually many were forced into bankruptcy. Topic: Real interest rate Skill: Level 4: Applying models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills 18) If the nominal interest rate equals 10 percent and the inflation rate equals 6 percent, what does the real interest rate equal? Answer: The real interest rate equals the nominal interest rate minus the inflation rate, or in this case, 10 percent minus 6 percent, which equals 4 percent. Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 23.3 Status: Old AACSB: Analytic skills

Foundations of Economics, 9e (Bade), GE Chapter 8 Potential GDP and the Natural Unemployment Rate 24.1 Potential GDP 1) The Classical macroeconomic model proposes that A) government intervention is required to help the economy reach its potential. B) real GDP equals potential GDP as long as inflation equals zero. C) changes in the quantity of money are critical in driving economic growth. D) markets work efficiently to produce the best macroeconomic outcomes. E) socialism produces the most efficient economic outcomes for a society. Answer: D Topic: Macroeconomic models Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 2) The Keynesian macroeconomic model states that A) the economy is inherently unstable and government intervention is required to maintain continued economic growth. B) markets work efficiently to produce the best macroeconomic outcomes. C) fluctuations in the quantity of money are responsible for most economic recessions. D) changes in technology generate business cycles. E) the economy is fairly stable. Answer: A Topic: Macroeconomic models Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 3) According the Keynesian macroeconomic model, which of the following was responsible for starting the Great Depression? A) too little private spending B) too little government spending C) high taxes D) decreases in the quantity of money E) decreases in technology Answer: A Topic: Macroeconomic models Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

4) Which of the following ideas reflect the Monetarist macroeconomic model? i) The Monetarist model supports the Classical model, in general. ii) Decreases in the growth rate of the quantity of money trigger recessions. iii) Government intervention is an appropriate tool to steady the economy. A) i and ii B) i only C) i, ii and iii D) ii and iii E) i and iii Answer: A Topic: Macroeconomic models Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 5) The Monetarist model expands the Keynesian model by proposing that A) decreases in the quantity of money lead to higher interest rates. B) the government should lower taxes promote economic growth. C) decreases in tax rates generate higher consumption. D) decreases in the growth rate of the quantity of money trigger expansions by controlling inflation. E) markets should be left alone to determine the optimal outcome. Answer: A Topic: Macroeconomic models Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 6) The Lucas Wedge shows A) the negative impact a slowdown in real GDP growth has on potential GDP. B) the increased impact of government spending on real GDP. C) the negative impact inflation has on consumer spending. D) the positive impact lower taxes have on real GDP. E) whether a country needs to slow its real GDP growth rate. Answer: A Topic: Eye on the U.S. economy Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

7) The Lucas Wedge is estimated to A) total over $630,000 per person as a result of the slowdown in the growth rate of real GDP. B) have reached about $13,000 per person in the last year. C) be about 2 percent of real GDP per year. D) be negative due to the severe recession in 2008-2009. E) be positive in some years and negative in others. Answer: A Topic: Eye on the U.S. economy Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Revised AACSB: Reflective thinking 8) Which of the following would have the biggest payoff? A) restoring real GDP growth to its 1960s growth rate B) eliminating the Okun Gap C) increasing the Okun Gap D) making the Okun Gap equal the Lucas Wedge E) increasing the Lucas Wedge Answer: A Topic: Eye on the U.S. economy Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 9) The level of real GDP the economy produces at full employment is called A) sustainable GDP. B) nominal GDP. C) potential GDP. D) maximum GDP. E) Lucas GDP. Answer: C Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

10) The level of real GDP the economy produces at full employment is A) nominal GDP. B) potential GDP. C) never reached in reality. D) called the Lucas level. E) real GDP. Answer: B Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 11) Suppose that Australia has fully employed all of its resources. This situation means that Australia A) is operating at its potential GDP. B) is growing at a faster rate than the United States. C) has a negative Okun Gap. D) has a positive Lucas Wedge. E) is experiencing zero unemployment. Answer: A Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 12) If the economy is fully employed, which of the following is TRUE? A) The price level equals 100. B) Real and nominal GDP are equal. C) Real and potential GDP are equal. D) The unemployment rate is zero. E) Real GDP cannot increase. Answer: C Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

13) Potential GDP is the level of A) real GDP that the economy would produce if it was at full employment. B) nominal GDP that the economy would produce if it was at full employment. C) real GDP that the economy would produce if there was no inflation. D) nominal GDP that the economy would produce if there was no inflation. E) real GDP that the economy would produce if there was no unemployment. Answer: A Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 14) Potential GDP is A) equal to the maximum amount of goods and services that can be produced at any given time. B) another name for real GDP. C) the level of output produced when the economy is fully employed. D) a measure of the short term fluctuations in real GDP. E) another name for nominal GDP. Answer: C Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 15) Potential GDP A) is the same as real GDP. B) is the same as nominal GDP. C) is another name for the Lucas Wedge. D) is the level of output produced when the economy is fully employed. E) shows that the Okun Gap vastly exceeds the Lucas Wedge. Answer: D Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

16) If New Zealand is operating at potential GDP, which of the following is TRUE? i) New Zealand only has frictional and structural unemployment. ii) There is no inflation in New Zealand. iii) New Zealand has positive net exports. A) i, ii and iii B) i only C) i and ii D) i and iii E) ii only Answer: B Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 17) The idea that potential GDP is the sustainable upper limit of production means that A) real GDP may be temporarily larger than potential GDP, but not permanently. B) the economy is operating environmentally efficiently. C) real GDP may be temporarily less than potential GDP. D) inflation must always occur in a growing economy. E) unemployment can only temporarily be zero in a healthy economy. Answer: A Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 18) Suppose an economist stated that Brazil had achieved its potential GDP 2018. This would imply that at this level of real GDP, Brazil experienced A) peak in its business cycle in 2018. B) unemployment equal to zero. C) inflation equal to zero. D) full employment. E) a negative Okun Gap. Answer: D Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

19) Suppose Germany's economy is experiencing full employment. This means that, in Germany A) the unemployment rate is equal to zero. B) real GDP is equal to potential GDP. C) real GDP is greater than potential GDP. D) potential GDP is greater than real GDP. E) real GDP equals nominal GDP. Answer: B Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 20) At full employment, actual ________ equals ________. A) nominal GDP; potential GDP B) real GDP; potential GDP C) real GDP; nominal GDP D) potential GDP; nominal GDP E) unemployment; zero Answer: B Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 21) Which of the following is TRUE? A) Real GDP fluctuates around potential GDP. B) Potential GDP fluctuates around nominal GDP. C) Nominal GDP fluctuates around real GDP. D) Real GDP never equals potential GDP. E) The Okun Gaps are much larger than the Lucas Wedge. Answer: A Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

22) Over the business cycle, real GDP fluctuates around A) the business cycle trough. B) the business cycle peak. C) nominal GDP. D) potential GDP. E) the Lucas Wedge. Answer: D Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 23) Which of the following statement or statements are correct about potential GDP? i) Actual real GDP equals potential GDP when the economy is at full employment. ii) Real GDP can be less than potential GDP. iii) When real GDP equals potential GDP, it also equals nominal GDP. A) i only B) ii only C) ii and iii D) i and ii E) i, ii, and iii Answer: D Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 24) Choose which statement is most correct. A) Real GDP can never exceed potential GDP. B) Real GDP must always equal potential GDP. C) At times, real GDP can exceed potential GDP. D) Nominal GDP can never exceed potential GDP. E) Nominal GDP must always equal potential GDP. Answer: C Topic: Above full-employment equilibrium Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

25) The amount of real GDP produced at any one time depends on i) a fixed amount of capital. ii) a fixed level of technology. iii) decisions people make about leisure versus working. A) ii only B) ii and iii C) i and ii D) i only E) i, ii and iii Answer: E Topic: Production function Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 26) The sustainable upper limit of real GDP is a level of GDP that is A) greater than potential GDP, but by how much greater is unknown and controversial. B) less than potential GDP, but by how much less is unknown and controversial. C) potential GDP. D) determined only by what is the full employment equilibrium in the labor market. E) None of the above answers is correct because there is NO sustainable upper limit to real GDP because real GDP can always be increased. Answer: C Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 27) As an economic expansion approaches its peak, it is very likely that real GDP will A) exceed nominal GDP. B) exceed potential GDP. C) equal nominal GDP but not potential GDP. D) be less than potential GDP. E) equal nominal GDP and equal potential GDP. Answer: B Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

28) During a business cycle recession, it is very likely that real GDP will A) exceed nominal GDP. B) be less than potential GDP. C) equal nominal GDP but not equal potential GDP. D) equal nominal GDP and equal potential GDP. E) be greater than potential GDP. Answer: B Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 29) A country reports that its actual real GDP is greater than its potential GDP. It must be that A) an error was made when calculating actual real GDP. B) the price level is increasing. C) more workers decided to quit work in order to enjoy leisure time. D) the excess by which real GDP exceeds potential GDP is only temporary, and eventually real GDP will decrease to be equal to potential GDP. E) None of the above answers is correct because it is impossible for a country's real GDP to exceed its potential GDP. Answer: D Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 30) A country's potential GDP is determined, in part, by A) the equilibrium price level. B) demand and supply in the labor market. C) the Lucas Wedge. D) actual real GDP. E) the Okun Gap. Answer: B Topic: Production function and labor market basics Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

31) To determine GDP from the production function, we need to know A) the quantity of labor employed. B) the quantity of labor available for work. C) the unemployment rate. D) the quantity of labor supplied by firms. E) the real wage rate. Answer: A Topic: Production function and labor market basics Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 32) At any given time, which factor of production is NOT fixed? A) labor B) technology C) entrepreneurship D) land E) money Answer: A Topic: Production function Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 33) The production function is a relationship between the amount of labor employed and A) the maximum quantity of real GDP that can be produced. B) the maximum quantity of nominal GDP that can be produced. C) the wage rate paid to the workers. D) all other resources at different levels of employment. E) the amount of labor workers supply. Answer: A Topic: Production function Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

34) The production function describes the relationship between A) the real wage and the quantity of labor supplied. B) real GDP and the quantity of labor employed. C) real and potential GDP. D) real and nominal GDP. E) potential GDP and the real wage rate. Answer: B Topic: Production function Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 35) The ________ describes the relationship between the amount of labor employed and real GDP. A) production function B) production possibilities frontier C) Lucas Wedge D) inflation rate E) Okun Gap Answer: A Topic: Production function Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 36) The production function shows that potential GDP increases when the A) price level rises. B) price level falls. C) inflation rate falls. D) quantity of labor employed increases. E) wage rate falls. Answer: D Topic: Production function Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

37) The production function displays A) increasing returns. B) real returns. C) diminishing returns. D) average returns. E) normal returns. Answer: C Topic: Diminishing returns Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 38) Diminishing returns means that A) each additional unit of labor produces successively less real GDP. B) hiring more labor results in less real GDP. C) each extra unit of real GDP produced requires less labor. D) each additional unit of labor produces successively more real GDP. E) hiring more labor must lower the real wage rate. Answer: A Topic: Diminishing returns Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 39) The idea of "diminishing returns" means that real GDP ________ as the quantity of labor increases. A) increases at a slower rate B) decreases at a slower rate C) increases at a faster rate D) decreases at a faster rate E) does not change Answer: A Topic: Diminishing returns Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

40) According to the production function, as the quantity of labor employed increases, real GDP increases A) at an increasing rate. B) at a decreasing rate. C) at a constant rate. D) and then eventually decreases. E) until it reaches potential GDP, and then it no longer changes. Answer: B Topic: Diminishing returns Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 41) As additional units of labor hours are employed, holding all other factors constant, along the production function A) real GDP increases at an increasing rate. B) nominal GDP decreases at an increasing rate. C) real GDP increases at a decreasing rate. D) real GDP increase at a constant rate. E) real GDP initially decreases and then starts to increase. Answer: C Topic: Diminishing returns Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 42) The idea that the production function exhibits _______implies that ________. A) diminishing returns; the Lucas Wedge increases at output increases B) diminishing returns; each additional unit of labor employed generates an ever-decreasing amount of real GDP C) increasing returns; potential GDP is always increasing D) increasing returns; output should increase steadily as technology grows E) constant returns; each additional unit of labor employed generates an increasing amount of real GDP Answer: B Topic: Diminishing returns Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

43) As the quantity of labor employed increases, the production functions exhibits a A) positive, linear relationship. B) positive relationship, with each additional unit of labor producing less additional real GDP. C) positive relationship, with each additional unit of labor producing more additional real GDP. D) negative, linear relationship. E) U-shaped curve. Answer: B Topic: Diminishing returns Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills 44) Diminishing returns along a production function means that each additional hour of labor employed A) produces a successively smaller additional amount of real GDP. B) produces a successively larger additional amount of real GDP. C) produces a constant additional amount of real GDP. D) does not produce any additional real GDP. E) forces the real wage rate to rise. Answer: A Topic: Diminishing returns Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 45) The production function shows that as employment increases, real GDP A) increases at an increasing rate. B) increases at a decreasing rate. C) increases at a constant rate. D) decreases at a decreasing rate. E) increases until it reaches potential GDP and then it starts to decrease. Answer: B Topic: Diminishing returns Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

46) Diminishing returns, so that each additional hour of labor employed produces successively smaller additional amounts of real GDP, exist because A) labor is not very productive. B) extra labor produces more output. C) all other factors are held fixed. D) the price level rises as more workers are employed. E) additional workers are paid higher wage rates. Answer: C Topic: Diminishing returns Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 47) As more labor is hired, moving along the production function, diminishing returns occur because A) workers are overworked and so their productivity decreases. B) the wage rate paid is too low and so workers decrease their work effort. C) there are fixed quantities of other resources. D) the real wage rate must increase in order to hire additional workers. E) real GDP increases more rapidly the more workers are hired. Answer: C Topic: Diminishing returns Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 48) A reason a nation faces diminishing returns along a production function is because A) unemployment always exists. B) potential GDP is fixed. C) the quantity of physical capital is fixed. D) full employment is not possible. E) the wage rate is fixed while moving along the production function. Answer: C Topic: Diminishing returns Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

49) ________ in the United States ________ in most European countries. A) Real GDP per hour; is greater than real GDP per hour B) Average weekly hours; are greater than average weekly hours C) The Okun Gap; is equal to the Okun Gap D) The Lucas Wedge; is greater than the Lucas Wedge E) Both A and B are true. Answer: E Topic: Eye on the global economy, why do Americans earn more Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Written and oral communication 50) The gap in real GDP per hour between the United States and Europe can be explained by the fact that A) U.S. labor is more productive than European labor. B) prices are higher in the United States. C) the Okun Gap is larger in the United States. D) income taxes are higher in the United States. E) equilibrium employment is higher in Europe. Answer: A Topic: Eye on the global economy, why do Americans earn more Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Written and oral communication 51) Employing an additional 1 billion hours of labor increases real GDP by $12 billion. Employing another 1 billion hours beyond the first 1 billion increases real GDP by $11 billion. Hence we can conclude from this information that as employment increases, real GDP A) increases at an increasing rate. B) decreases at an increasing rate. C) decreases at a decreasing rate. D) increases at a decreasing rate. E) falls from $12 billion to $11 billion as more workers are hired. Answer: D Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

52) If adding an initial 100 billion labor hours per year increases real GDP by $3 trillion, diminishing returns informs us that an additional 100 billion labor hours per year will increase real GDP by A) exactly $3 trillion. B) less than $3 trillion. C) more than $3 trillion. D) either exactly $3 trillion or by less than $3 trillion, depending on whether the real wage rate remains constant or rises. E) some amount but there is not enough information to tell by how much. Answer: B Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

53) The table above gives a nation's production function. Which of the following is NOT an attainable combination of real GDP and labor? A) real GDP of $4.0 trillion and labor of 90 billion hours per year B) real GDP of $4.7 trillion and labor of 110 billion hours per year C) real GDP of $4.0 trillion and labor of 70 billion hours per year D) real GDP of $5.2 trillion and labor of 90 billion hours per year E) real GDP of $5.5 trillion and labor of 150 billion hours per year Answer: D Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

54) In 2018, real GDP in the United States was $76 per hour worked. In major European economies, real GDP averaged on $70 per hour worked. This difference is explained by the points that ________ and ________. A) Americans work more hours than Europeans; Americans produce more per hour than Europeans B) Americans are equally as productive as Europeans; Americans work more hours on average C) Americans work the same number of hours per week as Europeans on average; Americans are less productive due to technology differences D) Americans take more vacations than Europeans; Americans take more sick days than Europeans E) Americans work less hours than Europeans; Americans take less sick days than Europeans Answer: A Topic: Real GDP Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Application of knowledge

55) The above figure shows a nation's production function. Point A is A) attainable if the economy is inefficient. B) unattainable given the state of the economy. C) attainable if the nation uses resources efficiently. D) the maximum amount of real GDP the nation can produce. E) the labor market equilibrium quantity of employment and real GDP. Answer: B Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills 19 Copyright © 2023 Pearson Education Ltd.

56) The above figure shows a nation's production function. Point B is A) unattainable. B) attainable if the nation uses resources inefficiently. C) attainable if the nation uses resources efficiently. D) the maximum amount of real GDP the nation can ever produce. E) Both answers C and D are correct. Answer: C Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills 57) The above figure shows a nation's production function. Point B is ________ and ________ because ________. A) attainable; efficient; the nation is using resources efficiently B) attainable; inefficient; the nation is using resources inefficiently C) unattainable; inefficient; the nation is using resources inefficiently D) unattainable; inefficient; the nation is using resources efficiently but they could be more efficient E) unattainable; efficient; the nation would be using resources efficiently if they could attain this level of production Answer: A Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

58) The above figure that most accurately shows a production function is A) Figure A. B) Figure B. C) Figure C. D) Figure D. E) Both Figure A and Figure B; Figure A for an economy with an excess of labor and Figure B for an economy with a shortage of labor. Answer: B Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

59) Based on the production function in the above figure, which of the following is an attainable combination of labor and real GDP? i. 300 billion hours of labor and real GDP of $20 trillion ii. 300 billion hours of labor and real GDP of $8 trillion iii. 100 billion hours of labor and real GDP of $12 trillion A) i only B) ii only C) iii only D) ii and iii E) i and ii Answer: B Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills 60) Suppose that the Australian economy initially uses 50 billion hours of labor to produce $5 trillion of real GDP. If 50 billion more hours are employed and Australia's real GDP increases by $4 trillion more A) Australia's production function exhibits diminishing returns. B) Australia's production function exhibits increasing returns. C) Australia has an Okun Wedge of $1 trillion. D) Australia has positive Lucas Wedge. E) Australia's production possibility frontier has a positive slope. Answer: A Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

61) The real wage rate is the ________ divided by the ________. A) quantity of labor demanded; quantity of labor supplied B) nominal wage rate; price level C) quantity of labor supplied; quantity of labor demanded D) nominal wage rate; inflation rate E) equilibrium quantity of employment; potential GDP Answer: B Topic: Real wage rate Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 62) Suppose the price of a product is $4 and the nominal wage that the firm must pay is $20. Then the firm's real wage is A) $20. B) $80. C) $5. D) $0.20. E) $4. Answer: C Topic: Real wage rate Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills 63) The benefit to the firm of hiring another worker is A) the nominal wage. B) the price level. C) the real wage. D) the extra output produced by the worker. E) measured as the height of the production function. Answer: D Topic: Demand for labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

64) The quantity of labor demanded is the labor hours all A) firms plan to hire at a given real wage rate. B) firms plan to hire at a given nominal wage rate. C) employees plan to work at a given real wage rate. D) employees plan to work at a given nominal wage rate. E) Both answers A and C are correct. Answer: A Topic: Demand for labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 65) The total labor hours that all the firms in the economy plan to hire during a given time period at one particular real wage rate is the A) demand for labor. B) quantity of labor demanded. C) supply of labor. D) quantity of labor supplied. E) quantity of jobs supplied. Answer: B Topic: Demand for labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 66) If the real wage rate decreases from $14.00 per hour to $13.00 per hour, the A) quantity demanded of labor increases. B) demand for labor increases. C) quantity supplied of labor increases. D) supply of labor increases. E) equilibrium quantity of employment must decrease. Answer: A Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

67) When all other influences on firms' hiring plans remain the same, the A) lower the real wage rate, the greater is the quantity of labor supplied B) higher the real wage rate, the greater is the quantity of labor demanded. C) lower the real wage rate, the smaller is the quantity of labor demanded. D) lower the real wage rate, the greater is the quantity of labor demanded. E) None of the above answers is correct because firms' hiring decisions depend on how profitable hiring a worker is, which depends on how much added profit the worker can create. Answer: D Topic: Demand for labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 68) The lower the real wage rate, the A) fewer workers firms can profitably hire. B) more workers firms can profitably hire. C) more workers will supply labor. D) higher the nominal wage rate. E) larger the quantity of labor supplied. Answer: B Topic: Demand for labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 69) The demand for labor reflects the point that the A) lower the real wage rate, the greater the quantity of labor demanded. B) higher the real wage rate, the greater the quantity of labor demanded. C) real wage rate does not affect the quantity demanded of labor. D) nominal wage rate and not the real wage rate determines the quantity of labor demanded. E) demand for labor depends on the supply of labor. Answer: A Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

70) An increase in the real wage rate ________ the quantity of labor demanded and ________ the quantity of labor supplied. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: C Topic: Demand for labor, supply of labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 71) The demand for labor curve is A) a vertical line because firms have to hire labor. B) upward sloping, showing that as the real wage rate increases, more workers are hired. C) a horizontal line because we assume that the real wage rate is fixed. D) downward sloping, showing that the quantity of labor demanded increases when the real wage falls. E) U-shaped. Answer: D Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 72) A firm's demand for labor depends on the A) nominal wage rate because it pays workers in dollars. B) real wage rate, which equals the nominal wage divided by the price level. C) real wage rate, which equals the nominal wage divided by the hours worked. D) nominal wage rate, which equals the real wage divided by the price level. E) supply of labor. Answer: B Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

73) The quantity of labor demanded by a firm depends upon A) the nominal wage rate not the real wage rate. B) the real wage rate not the nominal wage rate. C) both the real wage rate and the nominal wage rate. D) neither the real wage rate nor the nominal wage rate. E) either the real wage rate or the nominal wage rate, depending whether the price level is increasing or decreasing. Answer: B Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 74) A firm hires labor up to the point where the A) real wage rate equals the nominal wage rate. B) additional hour of labor produces extra output that equals the real wage rate. C) additional hour of labor produces extra output that equals the nominal wage rate. D) firm can sell the extra output. E) real wage rate exceeds the nominal wage rate. Answer: B Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 75) Firms hire more labor as long as A) the real wage rate is less than the additional output the labor produces. B) the real wage rate is greater than the additional output the labor produces. C) extra labor will produce more output. D) the nominal wage rate exceeds the real wage rate. E) the nominal wage rate is less than the real wage rate. Answer: A Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

76) As long as an additional worker hired by a firm produces A) more output than the real wage rate, the firm will hire that worker. B) more output than the real wage rate, the firm will not hire that worker. C) less output than the real wage rate, the firm will hire that worker. D) some output, the firm will hire that worker. E) more output than the nominal wage rate, the firm will hire that worker. Answer: A Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 77) Hershey Chocolate Factory pays a money wage rate equal to $30 per hour and sells its candy bars for $1.50 each. Hershey Chocolate Factory should hire labor until an additional unit of labor produces ________ candy bars an hour. A) 45 B) 1.5 C) 20 D) 30 E) 10 Answer: C Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills 78) The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she produces 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. Based on this information, the Bubby Gum company should A) keep Joanne because she creates a profit for the firm. B) fire Joanne because she creates a loss for the firm. C) decrease Joanne's wage rate because she is paid too much. D) increase its demand for labor. E) None of the above answers is correct because more information about Joanne's real wage is needed to decide what to do. Answer: E Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

79) The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she produces 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. If a packet of bubble gum sells for $1.00, then A) Joanne is creating a $2.00 per hour loss for the firm. B) Joanne is creating a $2.00 per hour profit for the firm. C) the Bubby Gum company should decrease the price of the bubble gum so it sells more and makes a larger profit. D) the Bubby Gum company should pay Joanne more. E) None of the above answers is correct because more information about Joanne's real wage is needed to decide what to do. Answer: A Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 80) The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she produces 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. If a packet of bubble gum sells for $1.00, then Joanne ________ because ________. A) is creating a $2.00 per hour loss for the firm; her real wage rate is more than her output per hour B) is creating a $2.00 per hour profit for the firm; her real wage rate is more than her output per hour C) should recommend that the Bubby Gum company should decrease the price of the bubble gum; it would sell more and bring a larger profit D) should ask for a raise in pay; then her real wage would be less than her output per hour E) is the last person the Bubby Gump company will employ; an additional hire would produce equal the amount of additional labor to real wage per hour Answer: A Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

81) To maximize profits, firms hire labor as long as A) each additional hour hired produces more additional output than the real wage rate. B) the total hours hired produces more additional output than the real wage rate. C) each additional hour hired produces more additional output than the nominal wage rate. D) the quantity of labor supplied increases as the real wage rate increases. E) workers continue to supply labor to the firm. Answer: A Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 82) For a household, the opportunity cost of not working is the A) nominal wage rate. B) real wage rate. C) cost of living. D) price level. E) demand for labor. Answer: B Topic: Supply of labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 83) Which of the following statements is (are) TRUE? i. As the real wage rate increases, the household's income decreases, which influences people to work more hours. ii. As the real wage rate increases, the quantity of labor demanded increases. iii. As the real wage rate increases, the opportunity cost of not working increases. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: C Topic: Supply of labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

84) As demonstrated by the labor supply schedule, the quantity of labor supplied depends on A) the nominal wage. B) the amount of labor that firms want to hire. C) the real wage. D) the value of the dollar. E) workers' productivity. Answer: C Topic: Supply of labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 85) The supply of labor is defined as the relationship between the real wage rate and the A) quantity of labor supplied by firms. B) amount of jobs supplied by firms. C) quantity of labor supplied by households. D) amount of jobs supplied by households. E) equilibrium quantity of employment. Answer: C Topic: Supply of labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 86) Which of the following statements is TRUE? A) According to the labor supply curve, as the real wage rises, employers are willing to provide more jobs. B) According to the labor supply curve, as the real wage rises, workers are willing to provide more hours of labor. C) According to the labor supply curve, as the real wage rises, employers are willing to provide fewer jobs. D) According to the labor supply curve, as the real wage rises, workers are willing to provide fewer hours of labor. E) According to the labor supply curve, as the real wage rises, more workers leave the labor force. Answer: B Topic: Supply of labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

87) Households increase the quantity of labor supplied when the A) real wage rate rises because the opportunity cost of not working falls. B) nominal wage rate rises because the real wage rate must also rise. C) real wage rate rises because the opportunity cost of not working rises. D) nominal wage rate falls because the opportunity cost of not working rises. E) income tax rises because an increase in the income tax increases the demand for labor. Answer: C Topic: Supply of labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 88) Households increase the quantity of labor supplied when A) the real wage rate increases. B) the real wage rate decreases. C) job opportunities increase. D) the nominal wage decreases and the price level rises. E) income taxes increase. Answer: A Topic: Supply of labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 89) Holding all other influences constant, the quantity of labor supplied in a given time period depends A) inversely on the real wage rate so that a higher real wage decreases the quantity of labor supplied. B) directly on the real wage rate so that a higher real wage increases the quantity of labor supplied. C) inversely on the quantity of labor demanded. D) on the money wage rate not the real wage rate. E) directly on the quantity of labor demanded. Answer: B Topic: Supply of labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

90) When all other influences on work plans remain the same, the A) lower the real wage rate, the smaller the quantity of labor supplied. B) higher the real wage rate, the greater the quantity of labor demanded. C) lower the real wage rate, the greater the quantity of labor supplied. D) lower the real wage rate, the smaller the quantity of labor demanded. E) lower the real wage rate, the larger the labor force participation. Answer: A Topic: Supply of labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 91) The quantity of labor supplied increases as the real wage rises because A) higher real wages mean that nominal wages have increased. B) the opportunity cost of working increases. C) the quantity of labor demanded increases. D) the opportunity cost of leisure rises. E) labor force participation decreases so that only serious workers are left in the labor force. Answer: D Topic: Supply of labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 92) As the real wage rate rises, the opportunity cost of A) working rises. B) saving rises. C) leisure rises. D) leisure falls. E) buying goods and services rises. Answer: C Topic: Supply of labor Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

93) The labor force participation rate A) increases as the real wage increases. B) decreases as the real wage increases. C) has nothing to do with the real wage rate. D) increases as the opportunity cost of working increases. E) is one of the major reasons that firms pay efficiency wages. Answer: A Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 94) The labor market is in equilibrium whenever A) the nominal wage rate is decreasing. B) the nominal wage rate is increasing. C) the nominal wage rate is not changing. D) the real wage rate is increasing. E) the quantity of labor demanded equals the quantity of labor supplied. Answer: E Topic: Labor market equilibrium Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 95) A surplus of labor is eliminated by ________ in the real wage rate and a shortage of labor is eliminated by ________ in the real wage rate. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease E) None of the above answers is correct because shortages and surpluses are eliminated by changes in the demand for labor and the supply of labor, not the wage rate. Answer: C Topic: Labor market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

96) A surplus in the labor market indicates that the A) real wage rate is above the equilibrium wage rate but it is too low to eliminate the surplus of labor. B) quantity of labor demanded is less than the quantity of labor supplied. C) real wage rate has to rise before the labor market will reach equilibrium. D) workers are not looking for work because they enjoy their leisure time. E) real wage rate is less than the equilibrium wage rate. Answer: B Topic: Labor market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 97) When the labor market is in equilibrium so that the quantity of labor supplied equals the quantity demanded A) there is no unemployment. B) the economy is at full employment. C) nominal GDP equals real GDP. D) there is no inflation. E) real GDP might be more than, less than, or equal to potential GDP. Answer: B Topic: Labor market equilibrium Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 98) When the labor market is in equilibrium i. the quantity demanded of labor equals the quantity supplied. ii. there is full employment. iii. potential GDP is produced. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Labor market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

99) When the labor market is in equilibrium A) there is excess labor supplied, which keeps real GDP less than potential GDP. B) there is full employment, which means that real GDP equals potential GDP. C) the real wage rate falls to equal the nominal wage rate because real GDP is greater than potential GDP. D) the real wage rate rises to allow real GDP to equal potential GDP. E) there is full employment but real GDP might be greater than, less than, or equal to potential GDP. Answer: B Topic: Labor market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 100) In a labor market without an efficiency wage, minimum wage, or union wage, when the real wage rate exceeds the equilibrium real wage rate, there is a ________ of labor and the real wage rate will ________. A) surplus; fall B) shortage; fall C) shortage; rise D) surplus; rise E) surplus; not change because only efficiency wages or union wages can change. Answer: A Topic: Labor market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

101) The table above shows the labor demand and labor supply schedules for a nation. The equilibrium real wage rate is ________ and the equilibrium quantity of labor is ________ billions of hours per year. A) $25; 260 B) $20; 280 C) $20; 260 D) $15; 260 E) $40; 320 Answer: B Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills

102) The tables above show a nation's labor demand and labor supply schedules and its production function. The equilibrium real wage rate is ________ and the equilibrium quantity of labor is ________ billion hours per year. A) $50; 100 B) $40; 90 C) $30; 80 D) $40; 80 E) $20; 110 Answer: B Topic: Full employment and potential GDP Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills 103) The tables above show a nation's labor demand and labor supply schedules and its production function. Given the equilibrium in the labor market, potential GDP is A) $3.0 trillion. B) $3.7 trillion. C) $4.2 trillion. D) $4.5 trillion. E) $2.0 trillion. Answer: C Topic: Full employment and potential GDP Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills

104) In the United States between the 1970s and the 2000s, the productivity of labor increased. This increase led to A) an increase in the demand for labor. B) an increase in the supply of labor. C) a downward shift of the production function. D) a decrease in the supply of labor. E) no change in either the demand for or the supply of labor. Answer: A Topic: Demand for labor Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 105) ________ adopts the view that aggregate fluctuations are a natural consequence of an expanding economy. A) Classical macroeconomics B) Keynesian economics C) Monetarist macroeconomics D) The Lucas Wedge E) The Okun Gap Answer: A Topic: New macroeconomics Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 106) Potential GDP A) is the quantity of GDP produced when the economy is at full employment of all resources. B) can never be exceeded. C) can never be attained. D) is another name for real GDP. E) is another name for nominal GDP. Answer: A Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

107) With fixed quantities of capital, land, and entrepreneurship and fixed technology, the amount of real GDP produced increases when ________ increases. i. the quantity of labor employed ii. the inflation rate iii. the price level A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: A Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 108) The production function graphs the relationship between A) nominal GDP and real GDP. B) real GDP and the quantity of labor employed. C) real GDP and capital. D) nominal GDP and the quantity of labor employed. E) real GDP and the supply of labor. Answer: B Topic: Production function Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 109) The quantity of labor demanded definitely increases if the A) real wage rate rises. B) real wage rate falls. C) nominal wage rate rises. D) nominal wage rate falls. E) supply of labor decreases. Answer: B Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

110) The supply of labor curve has a ________ slope because as the real wage rate rises, ________. A) negative; firms hire fewer workers B) positive; the opportunity cost of leisure rises C) positive; the opportunity cost of leisure falls D) negative; households work more hours E) positive; firms offer more jobs Answer: B Topic: Supply of labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 111) The real wage rate is $35 an hour. At this wage rate there are 100 billion labor hours supplied and 200 billion labor hours demanded. There is a A) shortage of 300 billion hours of labor. B) shortage of 100 billion hours of labor. C) surplus of 100 billion hours of labor. D) surplus of 300 billion hours of labor. E) shortage of 200 billion hours of labor. Answer: B Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills 112) When the labor market is in equilibrium, real GDP ________ potential GDP. A) is greater than B) is equal to C) is less than D) might be greater than, less than, or equal to E) is not comparable to Answer: B Topic: Labor market equilibrium Skill: Level 1: Definition Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking

113) Compared to the U.S. production function, the European production function is A) higher. B) lower. C) the same. D) lower than the U.S. production function at low levels of employment and higher than the U.S. production function at high levels of employment. E) higher than the U.S. production function at low levels of employment and lower than the U.S. production function at high levels of employment. Answer: B Topic: Eye on the global economy, why do Americans earn more Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Reflective thinking 114) The substantially larger real GDP per worker in the United States then in Europe is explained by A) greater production per hour. B) longer work hours. C) better US technology. D) all of the above E) none of the above Answer: D Topic: Eye on the global economy, why do Americans earn more Skill: Level 5: Critical thinking Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills 115) The U.S. labor demand curve lies to the ________ of the European demand curve because the U.S. labor is ________ than the EU labor, and U.S. employers are ________ for a given quantity of labor than European employers are. A) left; more productive; willing to pay more B) right; more productive; willing to pay more C) left; less productive; paying less D) right; less productive; paying less E) none of the above Answer: B Topic: Eye on the global economy, why do Americans earn more Skill: Level 5: Critical thinking Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

116) The European labor supply curve lies to the ________ of the U.S. labor supply curve because higher income taxes and benefits in Europe mean that to induce a person to work in Europe, European firms must offer a ________ wage rate then a firm in the United States must offer. A) left; higher B) right; lower C) left; lower D) right; higher E) none of the above Answer: A Topic: Eye on the global economy, why do Americans earn more Skill: Level 5: Critical thinking Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills 117) U.S. equilibrium employment is ________ European equilibrium employment and the U.S. equilibrium real wage rate is ________ the European equilibrium real wage rate. A) greater than; higher than B) greater than; equal to C) less than; higher than D) less than; less than E) greater than; less than Answer: A Topic: Eye on the global economy, why do Americans earn more Skill: Level 5: Critical thinking Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

118) The above figure that most accurately shows a production possibilities frontier is A) Figure A. B) Figure B. C) Figure C. D) Figure D. E) Both Figure A and Figure B; Figure A for an economy with an excess of labor and Figure B for an economy with a shortage of labor. Answer: B Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

119) Based on the production function in the above figure, which of the following is unattainable combination of labor and real GDP? i. 300 billion hours of labor and real GDP of $20 trillion ii. 300 billion hours of labor and real GDP of $8 trillion iii. 100 billion hours of labor and real GDP of $12 trillion A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: D Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills 120) Based on the production function in the above figure, which of the following is an attainable combination of labor and real GDP? i. 300 billion hours of labor and real GDP of $20 trillion ii. 300 billion hours of labor and real GDP of $8 trillion iii. 100 billion hours of labor and real GDP of $8 trillion A) i only B) ii only C) iii only D) ii and iii E) i and ii Answer: D Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills

121) The figure above shows the U.S. supply of labor curve. What would be the effect on the labor supply curve of U.S. policies that allow more immigration? A) rightward shift of the supply of labor curve B) movement upward along the supply of labor curve from a point such as C to a point such as B C) movement downward along the supply of labor curve from a point such as A to a point such as B D) leftward shift of the supply of labor curve E) None of the above answers is correct because there would be no change in the supply of labor curve. Answer: A Topic: Supply of labor curve Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills

122) The figure above shows the U.S. supply of labor curve. What would be the effect on the labor supply curve of U.S. policies that restrict immigration? A) rightward shift of the supply of labor curve B) movement upward along the supply of labor curve from a point such as C to a point such as B C) movement downward along the supply of labor curve from a point such as A to a point such as B D) leftward shift of the supply of labor curve E) None of the above answers is correct because there would be no change in the supply of labor curve. Answer: D Topic: Supply of labor curve Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills 123) The figure above shows the U.S. supply of labor curve. What would be the effect on the labor supply curve of a higher income tax rate? A) rightward shift of the supply of labor curve B) movement upward along the supply of labor curve from a point such as C to a point such as B C) movement downward along the supply of labor curve from a point such as A to a point such as B D) leftward shift of the supply of labor curve E) None of the above answers is correct because there would be no change in the supply of labor curve. Answer: D Topic: Supply of labor curve Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills 124) The figure above shows the U.S. supply of labor curve. How would more generous unemployment benefits affect the labor supply curve? A) rightward shift of the supply of labor curve B) movement upward along the supply of labor curve from a point such as C to a point such as B C) movement downward along the supply of labor curve from a point such as A to a point such as B D) leftward shift of the supply of labor curve E) None of the above answers is correct because there would be no change in the supply of labor curve. Answer: D Topic: Supply of labor curve Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills 47 Copyright © 2023 Pearson Education Ltd.

125) The figure above shows the U.S. supply of labor curve. What was the effect of the bulge in birth rates during the 1940s and early 1950s on the supply of labor during the 1970s? A) a rightward shift of the supply of labor curve B) the supply of labor curve became steeper C) a movement downward along the supply of labor curve from a point such as A to a point such as B D) a leftward shift of the supply of labor curve E) None of the above answers is correct because there was no change in the supply of labor curve. Answer: A Topic: Supply of labor curve Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills 24.2 The Natural Unemployment Rate 1) The unemployment rate at full employment is A) zero. B) the natural unemployment rate. C) equal to the rationed rate of unemployment. D) undefined because the economy is never at full employment. E) equal the amount of unemployment caused by job search. Answer: B Topic: Natural unemployment rate Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 2) Which of the following explain the natural rate of unemployment? i. job search ii. the Okun Gap iii. the production function A) i and iii B) i only C) iii only D) ii and iii E) i and ii Answer: B Topic: Natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 48 Copyright © 2023 Pearson Education Ltd.

3) The natural unemployment rate is the result of A) bad government policies. B) insufficient demand for labor. C) job search and job rationing. D) the Lucas Wedge. E) the Okun Gap. Answer: C Topic: Natural unemployment rate Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 4) Suppose job search has decreased over the last several years. This decrease could be a result of i. a change in unemployment benefits. ii. a positive structural change. iii. a higher inflation rate. A) ii only B) i only C) i and ii D) ii and iii E) i and iii Answer: C Topic: Job search Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 5) The increase in the average unemployment rate in the 1970s was the result of A) the reduction of overly generous unemployment benefits in the 1970s. B) an increase in the birth rate in the early 1970s. C) an increase in the birth rate in the late 1940s and early 1950s. D) higher real wage rates. E) repeated increases in the minimum wage. Answer: C Topic: Demographic change Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

6) A newspaper headline reads "A New Wave of Workers Enters the Job Market!" This wave of young, new entrants to the labor market is likely to lead to A) an increase in the natural unemployment rate. B) a decrease in the unemployment rate. C) no effect on the unemployment rate. D) a decrease in the country's potential GDP. E) a decrease in the natural unemployment rate but an increase in the actual unemployment rate. Answer: A Topic: Demographic change Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Old AACSB: Written and oral communication 7) Which of the following increases frictional and/or structural unemployment? i. more young workers entering the labor force ii. more generous unemployment benefits iii. a structural slump with some industries dying A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Demographic change, unemployment benefits Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 8) The length of time an unemployed person searches for a job is likely to increase as A) the working age population gets older. B) the birth rate declines. C) new technologies make workers more productive. D) unemployment benefits become more generous. E) job rationing decreases. Answer: D Topic: Demographic change, unemployment benefits Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

9) If the amount paid as unemployment benefits decreases, the opportunity cost of job search A) rises and people would stay unemployed longer. B) is not affected because unemployment benefits do not change job availability. C) rises and people stay unemployed for a shorter time. D) falls and people stay unemployed for a shorter time. E) falls and people stay unemployed for a longer time. Answer: C Topic: Unemployment benefits Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 10) More generous unemployment benefits ________ the opportunity cost of looking for a new job and therefore ________ the job search process A) lower; extend B) lower; shorten C) raise; extend D) raise; shorten E) lower; does not change Answer: A Topic: Unemployment benefits Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 11) The natural unemployment rate is higher if A) unemployment benefits become more generous. B) there is a decrease in the working-age population. C) there are fewer two-income households. D) many of the new jobs created require skills possessed by the available labor. E) efficiency wages are lower. Answer: A Topic: Unemployment benefits Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

12) The lower the amount of unemployment benefits citizens receive, the A) higher the opportunity cost of job search. B) lower the opportunity cost of job search. C) the higher the natural unemployment rate. D) the longer people search for jobs. E) higher the wage people must be offered before they accept a job. Answer: A Topic: Unemployment benefits Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 13) The length of time people spend in search of a job increases if A) the population ages. B) unemployment benefits increase. C) the criteria necessary to qualify for unemployment benefits increases. D) there is a sudden change in technology. E) the minimum wage is decreased. Answer: B Topic: Unemployment benefits Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 14) France is considering implementing policies that will reduce the duration of job search. A possible option is for France to A) increase the minimum wage. B) help negotiate higher union benefits for employed workers. C) reduce unemployment benefits. D) require all residents between the ages of 19 and 26 to obtain a part-time or full-time job. E) Both answers A and B are correct. Answer: C Topic: Unemployment benefits Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

15) If we compare the Canadian natural unemployment rate to the U.S. natural unemployment rate, we find that for most years since 1980 A) they are essentially the same because we have a lot in common. B) the Canadian rate is higher, possibly the result of higher unemployment benefits in Canada for most of those years. C) the U.S. rate is higher, possibly the result of greater job search within a larger country. D) the Canadian rate is higher, possibly the result of higher unemployment benefits in the United States for most of those years. E) The U.S. rate is higher, possibly the result of more structural change occurring in the United States. Answer: B Topic: Eye on the global economy, unemployment benefits Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 16) Structural change influences the unemployment rate and such structural change is created by changes in A) real GDP. B) the seasons. C) technology. D) population. E) the minimum wage. Answer: C Topic: Structural change Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 17) Job rationing occurs when the real wage rate is A) below the equilibrium wage rate so there is an excess supply of labor. B) above the equilibrium wage rate so there is a shortage of labor. C) equal to the equilibrium wage rate so there is no excess supply of labor. D) above the equilibrium wage rate so there is an excess supply of labor. E) Both answers A and D are correct because whenever the real wage rate is above or below the equilibrium wage rate, there is an excess supply of labor. Answer: D Topic: Job rationing Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

18) Which of the following creates job rationing? A) The real wage rate is below the equilibrium level. B) The real wage rate is above the equilibrium level. C) The real wage rate is equal to the equilibrium level. D) Job search decreases. E) An increase in unemployment benefits. Answer: B Topic: Job rationing Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 19) Job rationing occurs when the real wage is ________ the equilibrium level and there is a ________ of labor. A) above; shortage B) above; surplus C) below; shortage D) below; surplus E) equal to; shortage Answer: B Topic: Job rationing Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 20) Which of the following can result in job rationing? i. minimum wage ii. union wage iii. diminishing returns A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Job rationing Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

21) Suppose the full-employment equilibrium real wage rate is $11 per hour while the actual real wage rate is $12 per hour. If the actual real wage rate does not change, then A) job rationing will occur. B) job search will decline. C) a positive Okun Gap will occur. D) the production function will shift downward. E) job rationing will decrease. Answer: A Topic: Job rationing Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 22) Efficiency wages, above equilibrium minimum wage rates, and higher union wages are likely to A) increase the natural unemployment rate. B) increase cyclical unemployment. C) reduce the equilibrium real wage rate. D) increase the equilibrium real wage rate. E) decrease the natural unemployment rate. Answer: A Topic: Job rationing Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 23) The presence of efficiency, minimum and union wages A) can explain job rationing because they lower the natural unemployment rate. B) can explain job rationing because they raise the real wage rate above equilibrium. C) can explain job rationing because they lower the real wage rate below equilibrium. D) does not affect job rationing because they affect only the amount of job search. E) cannot explain job rationing because they are a natural part of the economy. Answer: B Topic: Job rationing Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

24) Efficiency wages are A) mandated by law. B) set below the equilibrium level of the real wage. C) offered by firms who want to reduce turnover in the labor force. D) special wages offered to teenagers. E) the result of demographic change. Answer: C Topic: Efficiency wage Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 25) An efficiency wage A) is set above the equilibrium real wage rate to induce greater work effort. B) is set below the equilibrium real wage rate to reduce labor costs. C) increases the supply of labor and therefore increases potential GDP. D) increases the demand for labor and therefore increases potential GDP. E) reduces frictional unemployment. Answer: A Topic: Efficiency wage Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 26) An efficiency wage is designed to A) induce more work effort. B) keep the minimum wage from rising. C) keep the minimum wage from falling. D) to induce more employment. E) decrease the need for workers to search for jobs. Answer: A Topic: Efficiency wage Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

27) An efficiency wage is designed to ________ work effort and to ________ labor turnover. A) decrease; lower B) decrease; raise C) increase; raise D) increase; lower E) not change; decrease Answer: D Topic: Efficiency wage Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 28) An efficiency wage is ________ because the result is ________. A) set above the equilibrium real wage; reduced turnover and less work effort B) set above the equilibrium real wage; increased turnover and more work effort C) set below the equilibrium real wage; reduced turnover and more work effort D) set above the equilibrium real wage; reduced turnover and more work effort E) not often used; not much different from minimum wage use Answer: D Topic: Efficiency wage Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 29) An efficiency wage ________ because ________. A) decreases job rationing; the real wage rate is lowered below the equilibrium B) increases job rationing; the real wage rate is lowered below the equilibrium C) decreases job rationing; the real wage rate is raised above the equilibrium D) increases job rationing; the real wage rate is raised above the equilibrium E) is used often; it is inexpensive and effective Answer: D Topic: Efficiency wage Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

30) Efficiency wages are A) the legal minimum wage a firm can pay a worker. B) a possible cause of job rationing because they drive wages below their equilibrium level. C) a possible cause of job rationing because they drive wages above their equilibrium level. D) a possible cause of job rationing because they force wages to equal their equilibrium level. E) another name for the equilibrium wage. Answer: C Topic: Efficiency wage Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

31) The figure above shows the market for fast food restaurant employees in a college town in a small nation to the East. The local Taco Bell pays its workers $12 an hour. This wage rate is A) an efficiency wage aimed at reducing employee turnover. B) designed reduce the unemployment rate. C) an effort to increase the demand for labor. D) the actual equilibrium wage rate. E) illegal because the equilibrium wage rate is $6 an hour. Answer: A Topic: Efficiency wage Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Revised AACSB: Analytic skills

32) The figure above shows the labor market in a small town. If the government imposes a wage of $10 that firms must at least pay A) the government has imposed a minimum wage and market forces are not allowed to work. B) the government has imposed an efficiency wage. C) job search will decrease. D) job rationing will decrease. E) inflation will occur as wages rise. Answer: A Topic: Minimum wage, search Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Revised AACSB: Analytic skills 33) The figure above shows the labor market in a small town. If the government imposes ________ that firms must at least pay, the effect will be ________ because ________. A) a minimum wage of $10; an increase in unemployment; a surplus of labor is created B) a minimum wage of $10; a decrease in unemployment; a shortage of labor is created C) an efficiency wage of $10; a decrease in unemployment; a surplus of labor is created D) an efficiency wage of $10; an increase in unemployment; a shortage of labor is created E) a minimum wage of $10; no change in unemployment; it will not affect how firms demand labor Answer: A Topic: Minimum wage, search Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Revised AACSB: Analytic skills 34) To increase workers' incomes, the City of New York's government set a wage below which it is illegal for employers to pay employees. This wage is referred to as the A) minimum wage. B) efficiency wage. C) government wage. D) union wage. E) city wage. Answer: A Topic: Minimum wage Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

35) A minimum wage rate that is set ________ the equilibrium real wage rate creates a ________ of labor. A) above; surplus B) above; shortage C) below; surplus D) below; shortage E) equal to; shortage Answer: A Topic: Minimum wage Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 36) If the minimum wage rate is set above the equilibrium wage rate, then A) unemployment definitely increases. B) unemployment definitely decreases. C) unemployment definitely does not change. D) unemployment either decreases or does not change. E) None of the above answers is correct because the minimum wage decreases search but its effect on unemployment is ambiguous. Answer: A Topic: Minimum wage Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 37) The minimum wage is a A) possible cause of job search because it lowers wages below their equilibrium. B) possible cause of job rationing because it lowers wages below their equilibrium. C) government established highest wage that is legal to pay. D) possible cause of job rationing because it raises wages above their equilibrium. E) factor that decreases unemployment because fewer people search for work if the minimum wage is increased. Answer: D Topic: Minimum wage Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

38) A minimum wage set above the equilibrium wage rate A) increases the natural unemployment rate. B) increases the demand for labor. C) increases the number of workers employed. D) decreases job rationing. E) decreases the natural unemployment rate because fewer workers will become unemployed. Answer: A Topic: Minimum wage Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 39) Which of the following will increase the natural unemployment rate? i. a minimum wage set above the equilibrium wage rate ii. efficiency wages iii. union-negotiated wages A) i only B) i and ii C) i and iii only D) ii and iii only E) i, ii and iii Answer: E Topic: Natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 40) If the minimum wage is set A) below the equilibrium wage rate, it will create unemployment. B) above the equilibrium wage rate, it will create unemployment. C) equal to the equilibrium wage rate, it will create a shortage of labor. D) below the equilibrium wage rate, it will create a shortage of labor. E) equal to the equilibrium wage rate, it will create a surplus of labor. Answer: B Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

41) According to the above table, if the minimum wage is set at $20 per hour, then A) there is an excess demand for labor. B) the quantity of labor supplied exceeds the quantity of labor demanded by 50 million hours per month. C) the quantity of labor demanded will increase until it is equal to the quantity of labor supplied. D) the labor demand curve will shift until $20 is the new equilibrium real wage rate. E) the labor supply curve will shift until $20 is the new equilibrium real wage rate. Answer: B Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Revised AACSB: Analytic skills

42) The table above gives the labor market for a small foreign economy. Equilibrium in the labor market occurs at a real wage rate of A) $7.15 per hour. B) $7.65 per hour. C) $8.00 per hour. D) $8.50 per hour. E) $9.00 per hour. Answer: C Topic: The labor market Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Revised AACSB: Analytic skills

43) The table above gives the labor market for a small foreign economy. A minimum wage law that sets the minimum wage at $8.50 per hour produces A) equilibrium in the labor market. B) a labor surplus of 25 million hours. C) a labor shortage of 25 million hours. D) a labor surplus of $0.50 per hour. E) a labor surplus of 65 million hours. Answer: B Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Revised AACSB: Analytic skills 44) The table above gives the labor market for a small foreign economy. A(n) ________ would create ________. A) minimum wage of $5.00; an increase in job rationing B) union-negotiated wage of $7.50; unemployment and job rationing C) efficiency wage of $8.00; unemployment and job rationing D) efficiency wage of $9.00; an increase in job rationing E) minimum wage of $9.00; a decrease in job search Answer: D Topic: Job rationing Skill: Level 4: Applying models Section: Checkpoint 24.2 Status: Revised AACSB: Analytic skills

45) In the above figure, a minimum wage will not change the unemployment rate if it is set at A) $6.00. B) $9.00. C) $12.00. D) Both B and C are correct because any wage rate that exceeds $9 per hour has no effect on the unemployment rate. E) None of the above because the minimum wage always affects the unemployment rate. Answer: A Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Revised AACSB: Analytic skills 46) In the above figure, a(n) ________ would be set ________. A) efficiency wage; above $9.00 and would increase the natural rate of unemployment B) effective minimum wage; above $6.00 C) union wage; above $9.00 but would not affect the natural rate of unemployment D) efficiency wage; above $6.00 E) efficiency wage; below $9.00 Answer: A Topic: Unemployment rate Skill: Level 4: Applying models Section: Checkpoint 24.2 Status: Revised AACSB: Analytic skills

47) It is estimated that, on the average and without taking account of skill differentials, union wages are A) less than nonunion wages. B) equal to nonunion wages. C) 30 percent higher than nonunion wages. D) 100 percent higher than nonunion wages. E) 66 percent higher than nonunion wages. Answer: C Topic: Union wage Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 48) It is estimated that, on the average and taking account of skill differentials, union wages are A) less than nonunion wages. B) equal to nonunion wages. C) 10-25 percent higher than nonunion wages. D) 100 percent higher than nonunion wages. E) 66 percent higher than nonunion wages. Answer: C Topic: Union wage Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 49) It is estimated that, on the average and ________, union wages are ________ because ________. A) without taking account of skill differentials; 15-20 percent higher than nonunion wages; employers are biased against nonunion workers B) taking account of skill differentials; 30 percent higher than nonunion wages; in some industries union workers perform jobs that require greater skill than nonunion workers and employers show bias against nonunion workers C) without taking account of skill differentials; 30 percent higher than nonunion wages; in some industries union workers perform jobs that require greater skill than nonunion workers D) taking account of skill differentials; 30 percent higher than nonunion wages; union workers are better qualified than nonunion workers E) without taking account of skill differentials; equal to nonunion wages; differentiating based on union membership is discrimination and illegal Answer: C Topic: Union wage Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 65 Copyright © 2023 Pearson Education Ltd.

50) The presence of union wages leads to A) a fall in the real wage rate as fewer people are hired. B) a fall in the real wage rate as more people are hired. C) less job search as more workers are hired. D) job rationing because the real wage exceeds the equilibrium real wage. E) lower unemployment because workers do not want to lose the high union wage they are being paid. Answer: D Topic: Union wage Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 51) The Fair Labor Standards Act ORIGINALLY set the minimum wage at A) $1.25 in 1983. B) $1.25 in 1938. C) $0.25 in 1938. D) $0.25 in 1983. E) $3.00 in 1960. Answer: C Topic: Eye on the U.S. economy, the federal minimum wage Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 52) The real minimum wage rate A) has generally increased since 1967. B) has generally decreased during the 1970s and 1980s and has fluctuated around $8 per hour since the mid-1980s. C) was at its highest level in 1995. D) fell after 1967 until it reached a minimum around 1985 and has generally risen since then. E) has stayed in the range between $6 and $5 (measured in 2012 dollars per hour) since 1967. Answer: B Topic: Eye on the U.S. economy, the federal minimum wage Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Revised AACSB: Reflective thinking

53) The two fundamental causes of unemployment at full employment are A) seasonal jobs and technological change. B) foreign competition and financial bankruptcies. C) job search and job rationing. D) decreases in labor productivity and more generous retirement benefits. E) demographic change and decreases in the demand for labor. Answer: C Topic: Natural unemployment rate Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 54) In the United States since 1960, the average unemployment rate was highest during the decade of the A) 1960s. B) 1970s. C) 1980s. D) 1990s. E) 2000s. Answer: C Topic: Eye on the past, average unemployment rates Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 55) Job search is defined as A) the activity of looking for an acceptable, vacant job. B) saying you are looking for a job when you are actually not looking. C) attending school to increase your employability. D) equivalent to job rationing. E) being paid an efficiency wage. Answer: A Topic: Job search Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

56) The more generous the amount of unemployment benefits, the A) higher the opportunity cost of job search. B) lower the opportunity cost of job search. C) shorter the time spent searching until accepting a suitable job. D) shorter the time spent searching for a suitable job and the higher the opportunity cost of being unemployed. E) lower the natural unemployment rate. Answer: B Topic: Unemployment benefits Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 57) The existence of union wages, efficiency wages, and the minimum wage A) raises the real wage rate above the equilibrium wage rate and creates a shortage of labor. B) lowers the real wage rate below the equilibrium wage rate and creates a shortage of labor. C) raises the real wage rate above the equilibrium wage rate and raises the natural unemployment rate. D) does not have an impact on the equilibrium wage rate or on the amount of unemployment. E) raises the real wage rate above the equilibrium wage rate and lowers the natural unemployment rate. Answer: C Topic: Job rationing Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 58) Job rationing occurs if A) the minimum wage is set below the equilibrium wage rate. B) an efficiency wage is set below the equilibrium wage rate. C) a union wage is set below the equilibrium wage rate. D) the real wage rate is pushed above the equilibrium wage rate. E) the Lucas wedge is positive. Answer: D Topic: Job rationing Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

59) Intel wants to attract the most productive and knowledgeable workers. To achieve this goal it could pay ________ wage. A) an efficiency B) a minimum C) a nominal D) an equilibrium E) a Lucas wedge Answer: A Topic: Efficiency wage Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking 60) Collective bargaining by unions can result in a union wage rate that is ________ the equilibrium real wage rate and creates a ________ of labor. A) above; surplus B) above; shortage C) below; surplus D) below; shortage E) equal to; surplus Answer: A Topic: Union wage Skill: Level 1: Definition Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

61) In the above figure, a minimum wage will change the unemployment rate if it is set at A) $6.00. B) $9.00. C) $12.00. D) Both A and B are correct because any wage rate set below $9 per hour will affect the unemployment rate. E) None of the above because the minimum wage always affects the unemployment rate. Answer: C Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Old AACSB: Analytic skills

24.3 Chapter Figures

1) The figure above shows the U.S. production function. How would an increase in capital be shown in the figure? A) an upward shift or rotation of the production function B) a downward shift or rotation of the production function C) a movement from point A to point B D) a movement from point C to point B E) None of the above because the effects of an increase in capital cannot be shown in the figure. Answer: A Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills

2) The figure above shows the U.S. production function. How would an increase in unemployment benefits be shown in the figure? A) a movement from point C to point B B) a movement from point A to point B C) an upward shift or rotation of the production function D) a downward shift or rotation of the production function E) None of the above because the effects of an increase in unemployment benefits cannot be shown in the figure. Answer: A Topic: Production function Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills 3) The figure above shows the U.S. production function. How would an increase in income taxes be shown in the figure? A) a movement from point C to point B B) a movement from point A to point B C) an upward shift or rotation of the production function D) a downward shift or rotation of the production function E) None of the above because the effects of an increase in taxes cannot be shown in the figure. Answer: A Topic: Production function Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills

4) The figure above shows the U.S. demand for labor curve. If there is a simultaneous increase in the nominal wage rate of 10 percent and a 10 percent increase in the price level, there will be a A) rightward shift of the demand for labor curve. B) leftward shift of the demand for labor curve. C) movement downward along the demand for labor curve from a point such as A to a point such as B. D) movement upward along the demand for labor curve from a point such as C to a point such as B. E) None of the above answers is correct because there is no change in the demand for labor curve. Answer: E Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills

5) The figure above shows the U.S. supply of labor curve. If there is a simultaneous increase in the nominal wage rate of 10 percent and a 10 percent increase in the price level, there will be a A) rightward shift of the supply of labor curve. B) leftward shift of the supply of labor curve. C) movement downward along the supply of labor curve from a point such as A to a point such as B. D) movement upward along the supply of labor curve from a point such as C to a point such as B. E) None of the above answers is correct because there is no change in the supply of labor curve. Answer: E Topic: Supply of labor curve Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills

6) The figure above shows the U.S. supply of labor curve. An increase in the income tax rate leads to a A) rightward shift of the supply of labor curve. B) movement upward along the supply of labor curve from a point such as C to a point such as B. C) movement downward along the supply of labor curve from a point such as A to a point such as B. D) leftward shift of the supply of labor curve. E) None of the above answers is correct because there is no change in the supply of labor curve. Answer: D Topic: Supply of labor curve Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills 7) The figure above shows the U.S. supply of labor curve. What was the effect of the decline in birth rates during the 1960s and 1970s on the supply of labor curve in the 1980s? A) a rightward shift of the supply of labor curve B) The supply of labor curve became steeper. C) a movement downward along the supply of labor curve from a point such as A to a point such as B D) a leftward shift of the supply of labor curve E) None of the above answers is correct because there was no change in the supply of labor curve. Answer: D Topic: Supply of labor curve Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills 24.4 Integrative Questions 1) If the government increases unemployment benefits, then the labor A) demand curve shifts rightward. B) demand curve shifts leftward. C) supply curve shifts rightward. D) supply curve shifts leftward. E) Both answers B and D are correct. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 75 Copyright © 2023 Pearson Education Ltd.

2) If the government increases unemployment benefits, then the equilibrium amount of employment ________ and potential GDP ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 3) If the government raises income taxes, then the labor A) demand curve shifts rightward. B) demand curve shifts leftward. C) supply curve shifts rightward. D) supply curve shifts leftward. E) Both answers B and D are correct. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 4) If the government raises income taxes, then the equilibrium amount of employment ________ and potential GDP ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

5) An increase in the time spent on job search A) decreases potential GDP. B) decreases the unemployment rate. C) decreases the labor force participation rate. D) decreases the demand for labor. E) decreases the real wage rate. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 6) The smaller the extent of job rationing, the A) lower potential GDP. B) lower the unemployment rate. C) lower the labor force participation rate. D) higher the labor supply. E) higher the real wage rate. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 24.5 Essay: Potential GDP 1) Define potential GDP. Under what circumstances does actual real GDP fall short of potential GDP, equal potential GDP, and exceed potential GDP? Answer: Potential GDP is the level of real GDP that the economy produces when it is at full employment. Potential GDP can be contrasted with actual real GDP, the amount of real GDP the country actually produces. Actual real GDP can be less than potential GDP when the economy is producing at less than full employment, that is, when there is less than full employment in the labor market. Actual real GDP equals potential GDP when the economy is producing at full employment. Actual real GDP can exceed potential GDP temporarily as the economy approaches and then recedes from a business cycle peak. Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Written and oral communication

2) Briefly define real and potential GDP, and explain the relationship between real GDP and potential GDP. How can we measure potential GDP? Answer: Real GDP is the actual level of GDP, adjusted for inflation. Potential GDP is what the GDP would be if the economy was fully employed. Because of the business cycle, real GDP fluctuates around potential GDP. Thus real GDP is sometimes greater than potential GDP, sometimes smaller than potential GDP, and sometimes equal to potential GDP. Over time, the larger-than-normal and smaller-than-normal values cancel out and we can estimate potential GDP by using the average of real GDP. Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Written and oral communication 3) Discuss the production function. How does the production function relate to the labor market and potential GDP? Answer: The production function shows the maximum amounts of real GDP that can be produced as the quantity of labor changes, holding constant all other influences on production. As the quantity of labor increases, real GDP increases but at a decreasing rate, that is, the production function shows diminishing returns. The production function "stands between" the labor market and potential GDP. In particular, the quantity of employment is determined in the labor market. The production function then shows the amount of real GDP that is produced by this quantity of employment. When the quantity of employment determined in the labor market is the equilibrium quantity, then the amount of real GDP produced is potential GDP. Topic: Production function Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Written and oral communication 4) Define the production function. Discuss why the production function exhibits diminishing returns. Answer: The production function is the relationship that shows the maximum quantity of real GDP that can be produced as the quantity of labor employed changes and all other influences on production remain the same. The production function exhibits diminishing returns because the quantity of capital (and other resources) is fixed. As more labor is hired, the extra output produced decreases because the extra workers have less capital with which to work. As a result, the additional workers cannot produce as much additional output as did the previously hired workers. Topic: Production function Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Written and oral communication

5) Explain how the real wage and the extra output produced by each worker determine the quantity of labor demanded by a firm. Answer: The firm compares the cost of hiring an extra worker (the real wage) to the benefit (the extra output produced by an extra worker). Because the firm wants to make a profit, it hires the worker as long as the extra output is greater than the real wage. Thus the firm will demand (hire) the quantity of workers such that the extra output produced by the worker is greater than or equal to the real wage rate. Because labor has diminishing returns, there is some point at which the last worker hired produces just enough output to justify the wage rate and so additional workers will not be hired. Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills 6) Explain how the labor market and the production function determine potential GDP. Answer: The labor market determines the equilibrium quantity of labor. In other words, the amount of employment is determined by supply and demand in the labor market. The production function shows the amount of output, real GDP, that is produced for all different amounts of employment. In other words, the production function "converts" the amount of employment from the labor market into real GDP. If the labor market is in equilibrium, so that the level of employment is equal to full employment, then the amount of real GDP produced, determined from the production function is potential GDP. Topic: Full employment and potential GDP Skill: Level 3: Using models Section: Checkpoint 24.1 Status: Old AACSB: Analytic skills

7) The first table above gives the labor demand and labor supply schedules for a nation. The second table gives its production function. a. What are the equilibrium real wage rate and the level of employment? b. What is potential GDP? Answer: a. The equilibrium real wage rate is $15 an hour because this is the real wage rate for which the quantity of labor demanded equals the quantity supplied. The equilibrium level of employment is 3 billion hours a year. b. With employment equal to 3 billion hours per year, potential GDP is equal to $60 billion. Topic: Full employment and potential GDP Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills

8) The first table above gives the labor demand and labor supply schedules for a nation. The second table gives its production function. a. What are the equilibrium real wage rate and the level of employment? b. What is potential GDP? Answer: a. The equilibrium real wage rate is $15 an hour because this is the real wage rate for which the quantity of labor demanded equals the quantity supplied. The equilibrium level of employment is 400 billion hours a year. b. With employment equal to 400 billion hours per year, potential GDP is equal to $4.8 trillion. Topic: Full employment and potential GDP Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills 80 Copyright © 2023 Pearson Education Ltd.

9) The first table above gives the labor demand and labor supply schedules for a nation. The second table gives its production function. a. What are the equilibrium real wage rate and the level of employment? b. What is potential GDP? If you cannot determine a precise amount, give the range in which potential GDP must lie. Answer: a. The equilibrium real wage rate is $15 an hour because this is the real wage rate for which the quantity of labor demanded equals the quantity supplied. The equilibrium level of employment is 300 billion hours a year. b. With employment equal to 300 billion hours per year, potential GDP is equal to $3.8 trillion. Topic: Full employment and potential GDP Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills

10) Over the last decade, a country experiences a significant increase in labor productivity. a. Draw and label a labor market supply and demand diagram. Show how the equilibrium real wage rate and the equilibrium quantity of labor change as productivity increases. b. Draw and label a production function. Show how potential GDP changes as labor productivity increases. Answer:

a. The figure above shows the effect of an increase in productivity in the labor market. The increase in productivity shifts the labor demand curve rightward and, as illustrated, raises the real wage rate and increases the quantity of employment.

b. The production function shifts upward as shown in the figure. Potential GDP increases for two reasons: there is a greater quantity of labor, and the new production function is higher than the old one. Topic: Full employment and potential GDP Skill: Level 4: Applying models Section: Checkpoint 24.1 Status: Revised AACSB: Analytic skills 24.6 Essay: The Natural Unemployment Rate 1) What is the effect of an increase in unemployment benefits on the unemployment rate? Answer: An increase in unemployment benefits decreases the overall costs of being unemployed. As a result it increases the length of time unemployed workers search for a new job and hence increases the unemployment rate. Topic: Unemployment benefits Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Written and oral communication

2) For most years since 1980, the natural unemployment rate was higher in Canada than in the United States. What possible explanation for some of this difference has been suggested? Answer: Quite likely unemployment benefits are at least part of the reason why the natural unemployment rate has been higher in Canada than in the United States. Canada has more generous and more widely available unemployment benefits than the does the United States. This difference gives workers in Canada the incentive to search longer for jobs, which raises the natural unemployment rate in Canada. Topic: Eye on the global economy, unemployment benefits Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Written and oral communication 3) What is job search and what is the relationship between job search and unemployment? What factors can affect the amount of job search? Briefly discuss the effect of each factor. Answer: Job search is the activity of looking for a suitable job. Unemployed workers are searching for a job, and so the longer these workers search, the greater the amount of unemployment. Three major factors affect the amount of job search: demographic change, unemployment benefits, and structural change. Demographic change refers to the fact that at times there are more young people looking for their first jobs and at other times there are fewer young people searching for a job. When more young people are searching, the unemployment rate rises and when fewer young people are searching, the unemployment rate falls. Unemployment benefits affect the amount of job search. An increase in unemployment benefits lowers the cost of remaining unemployed and so workers search for longer periods of time. As a result, the unemployment rate rises. Finally, structural change affects the amount of job search. Structural change is the result of technological change. At times, this change creates a slump during which workers from failing industries are not good matches for the jobs created in booming sectors. In this case, the amount of job search and unemployment rises. At other times, the workers released by the slowing sectors have skills that are good matches for the expanding sectors and so the amount of job search and unemployment falls. Topic: Job search Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Written and oral communication

4) Explain how some structural changes can increase the natural unemployment rate while other structural changes can decrease the natural unemployment rate. Answer: Any structural change creates some jobs and destroys others. The effect of structural change on the natural unemployment rate depends on how well the skills required for the new jobs align with the skills possessed by workers looking for jobs and how well the locations of the jobs align with the workers looking for jobs. If the skills and locations are similar, so that the jobs are good matches for people looking for work, then the structural change brings a structural boom and the natural unemployment rate decreases. However, if the skills and locations are different, so that the workers looking for work are not good matches for the newly created jobs, structural change creates a structural slump and the natural unemployment rate rises. Topic: Structural change Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Old AACSB: Written and oral communication 5) What factors can lead the real wage rate to be above its full-employment equilibrium level? Answer: There are at least three reasons why the real wage rate might be above its equilibrium level. First, firms might pay an efficiency wage, which is a wage rate set above the fullemployment equilibrium wage rate in order to induce greater work effort from workers. Second, a minimum wage law might set a minimum wage that is above the full-employment equilibrium wage rate. Finally, a union might negotiate a wage rate that is above the full-employment equilibrium level. Topic: Real wage rate Skill: Level 4: Applying models Section: Checkpoint 24.2 Status: Old AACSB: Written and oral communication 6) "Job rationing occurs when the quantity of labor demanded exceeds the quantity supplied." Is the previous statement true or false? Explain your answer. Answer: The statement is false. Job rationing occurs when the quantity of labor supplied exceeds the quantity demanded. In this circumstance, jobs must be apportioned—rationed— among the people willing to work. Topic: Job rationing Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Reflective thinking

7) What is job rationing and how does it relate to unemployment? What factors can lead to job rationing? Briefly explain these factors. Answer: Job rationing occurs when the real wage is above its equilibrium level and there is a surplus of labor. In this case, not all the workers who are looking for work can find jobs and therefore the jobs must somehow be divided—rationed—among them. Three factors can account for job rationing: efficiency wage, the minimum wage, and union wage. An efficiency wage is a wage rate set by a firm above the equilibrium wage rate. An efficiency wage motivates the firm's workers to work hard in order to keep their jobs because the workers know that if they are fired, the wage rate they will get at a new job probably will be less than the efficiency wage. The minimum wage is a government regulation that sets the lowest legal wage. If the minimum wage is set above the equilibrium wage rate, the equilibrium wage rate becomes illegal and, because the minimum wage exceeds the equilibrium wage, a surplus of labor results. Finally, a union wage is a wage rate that results from bargaining between a firm and a labor union. Typically the labor union can negotiate a wage rate that exceeds the equilibrium level in a competitive market and so, once again, there is a surplus of labor. Topic: Job rationing Skill: Level 2: Using definitions Section: Checkpoint 24.2 Status: Old AACSB: Written and oral communication 8) What factors can push the real wage rate above its equilibrium level? Briefly explain each factor. Answer: The three factors that can push the real wage rate above the equilibrium wage rate are efficiency wages, the minimum wage, and union wages. An efficiency wage is a wage rate that is set by a firm above the equilibrium wage rate. The idea is that the firm's workers will work hard in order to keep their jobs because they know that if they are fired the (equilibrium) wage they are likely to get at a new job will be less than the efficiency wage. The minimum wage is a government regulation that sets the lowest legal wage. If the minimum wage is set above the equilibrium wage rate, the equilibrium wage rate becomes illegal. Finally, a union wage is a wage rate that results from bargaining between a firm and a labor union. Typically the labor union can negotiate a wage rate that exceeds the equilibrium level in a competitive market. Topic: Job rationing Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Old AACSB: Written and oral communication

9) What is an efficiency wage and what effect does it have in the labor market? Answer: An efficiency wage rate is a wage that is set by a firm above the equilibrium wage rate in order to motivate the firm's workers to work hard. The idea is that workers will work hard in order to keep their jobs because they know that if they are fired the (equilibrium) wage rate they are likely to get at a new job will be less than the efficiency wage. An efficiency wage is one of the factors that push the wage rate above its equilibrium and thereby create unemployment. Topic: Efficiency wage Skill: Level 3: Using models Section: Checkpoint 24.2 Status: Old AACSB: Written and oral communication

Foundations of Economics, 9e (Bade), GE Chapter 9 Economic Growth 25.1 The Basics of Economic Growth 1) Economic growth is defined as A) a decrease in the rate of inflation. B) an increase in employment. C) a sustained expansion of production possibilities. D) an increase in the wage rate. E) an increase in the nation's population. Answer: C Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 2) Economic growth is a sustained expansion of production possibilities, as measured by the increase in ________ over time. A) real GDP B) population C) inflation D) the price level E) employment Answer: A Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 3) A country will likely experience an increase in poverty if A) its population decreases over time. B) its real GDP growth rate decreases or slows over time. C) its inflation rate decreases or slows over time. D) its real GDP per person growth rate increases over time. E) it does not receive foreign aid. Answer: B Topic: Economic growth Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking

4) Economic growth is defined as equal to the increase in A) employment. B) population. C) real GDP. D) the price level. E) the inflation rate. Answer: C Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 5) Which of the following variables is used to determine a country's economic growth? i. real GDP ii. wages iii. inflation A) i and ii only B) i, ii and iii C) ii and iii D) i only E) i and iii Answer: D Topic: Economic growth Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 6) The growth rate of real GDP equals A) [(employment in the current year - employment in previous year)/employment in previous year] × 100. B) [(real GDP in current year - real GDP in previous year) ÷ real GDP in previous year] × 100. C) [(real GDP in previous year - real GDP in current year) ÷ real GDP in previous year] × 100. D) [(real GDP in current year - real GDP in previous year) ÷ real GDP in current year] × 100. E) (real GDP in current year - real GDP in previous year) × 100. Answer: B Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

7) If real GDP was $13.1 trillion last year and $13.3 trillion this year, what is the growth rate? A) 15.0 percent B) -1.5 percent C) 1.5 percent D) $0.2 trillion E) 2.1 percent Answer: C Topic: Calculating growth rates Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Revised AACSB: Analytic skills 8) Suppose France's real GDP grew from $750 billion last year to $821 billion this year. What was the growth rate of France's real GDP? A) 10 percent B) 9.5 percent C) 9.1 percent D) 8.6 percent E) $71 billion Answer: B Topic: Growth rate Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Revised AACSB: Analytic skills 9) U.S. real GDP in 2007 was $13.25 trillion and U.S. real GDP in 2008 was $13.31 trillion. What was the economic growth rate of the United States during this period? A) 18 percent B) -1.36 percent C) 0.45 percent D) 6.9 percent E) $1.8 trillion Answer: C Topic: Calculating growth rates Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

10) If real GDP in year 1 is $72 million and real GDP in year 2 is $87 million, then the growth rate of real GDP is A) 15 percent. B) $15 million. C) 20.8 percent. D) 17 percent. E) 83 percent. Answer: C Topic: Calculating growth rates Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 11) In 2008, real GDP in the United States was $13,312 billion. In 2009, real GDP in the United States was $13,112 billion. What was the U.S. economic growth rate from 2008 to 2009? A) -1.5 percent B) 1.5 percent C) 0.98 percent D) 0.12 percent E) $200 million Answer: A Topic: Growth rate Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

12) Using the data in the table above, the growth rate of real GDP for 2018 is equal to A) 9.09 percent. B) 7.00 percent. C) 5.00 percent. D) 4.76 percent. E) 10.0 percent. Answer: B Topic: Calculating growth rates Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Revised AACSB: Analytic skills 4 Copyright © 2023 Pearson Education Ltd.

13) Using the data in the table above, real GDP per person in 2017 is A) $70,000. B) $71,429. C) $75,000. D) $70 trillion. E) 7 percent. Answer: A Topic: Calculating growth rates Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Revised AACSB: Analytic skills 14) Using the data in the table above, the growth rate of real GDP has A) increased from year to year. B) increased more rapidly from year to year. C) remained constant from year to year. D) slowed from year to year. E) probably changed, but more information is needed about the price level to determine by how much it has changed. Answer: A Topic: Calculating growth rates Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 15) Suppose India wants to measure how much the standard of living has changed over the last decade. Which piece of data should India use? A) population B) real GDP per person C) real GDP D) wages E) inflation Answer: B Topic: Standard of living Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking

16) To measure the change in the standard of living, it is best to use the growth rate A) from the Rule of 70. B) of real GDP. C) of the population. D) of real GDP per person. E) of the price level. Answer: D Topic: Standard of living Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 17) In growth theory, the change in a country's standard of living is measured by the change in A) real GDP per person. B) real GDP. C) the nation's capital stock. D) wages per person. E) employment. Answer: A Topic: Standard of living Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 18) A measure of growth in the standard of living is the growth in A) real GDP. B) population. C) real GDP minus the growth in population. D) population minus the growth in real GDP. E) employment. Answer: C Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking

19) Growth in the standard of living is measured by the increase in A) real GDP. B) the Rule of 70. C) employment. D) real GDP per person. E) consumption. Answer: D Topic: Standard of living Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 20) The growth rate of real GDP per person equals the A) population growth rate plus the growth rate of real GDP. B) change in the economic growth rate divided by the change in the population growth rate. C) the economic growth rate per person divided by the change in the population growth rate. D) growth rate of real GDP minus the growth rate of the population. E) population growth rate plus the growth rate of real GDP then divided by the initial level of real GDP. Answer: D Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 21) If real GDP grows at a faster rate than does population, then the standard of living, as measured by real GDP per person A) improves. B) worsens. C) remains the same. D) cannot be measured. E) either improves, worsens, or stays the same, depending on the size of the population and the actual level of real GDP. Answer: A Topic: Growth rate, real GDP per person Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking

22) The population in the current year is 31.5 million and the real GDP is $814 million. The previous year's statistics were a population of 31 million and a real GDP of $800 million. The change in the standard of living, measured by growth in real GDP per person, is A) 1.6 percent. B) 7.75 percent. C) 0.13 percent. D) 6 percent. E) 0 percent. Answer: C Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 23) Assume the population growth rate is 2 percent and the real GDP growth rate is 5 percent. The change in standard of living, as measured by the growth rate in real GDP per person, is A) 7 percent. B) 2.5 percent. C) 5 percent. D) 3 percent. E) -3 percent. Answer: D Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 24) Real GDP in the country of Oz is growing at 5 percent and its population is growing at 2 percent. In the country of Lilliput, real GDP is growing at 4 percent and its population is growing at 0.5 percent. Thus A) real GDP per person in Oz is growing at a faster rate than in Lilliput. B) real GDP per person in Lilliput is growing at a faster rate than in Oz. C) real GDP per person in Lilliput is growing at the same rate as in Oz. D) real GDP per person in Lilliput is growing at a rate that is not comparable to that in Oz. E) We need more information to determine if real GDP per person in Lilliput is growing faster or slower than real GDP per person in Oz. Answer: B Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

25) If the U.S. population grew at a 0.9 percent and real GDP grew at a 4.4 percent during the same period, what was the growth rate of real GDP per person? A) 3.5 percent B) 5.3 percent C) 4.0 percent D) -3.5 percent E) 4.4 percent Answer: A Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 26) If real GDP grows at a rate of 6 percent and population grows at a rate of 2 percent, then real GDP per person grows at a rate of A) 4 percent. B) 2 percent. C) 0.5 percent. D) -3 percent. E) 8 percent. Answer: A Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 27) Iceland's real GDP grows at a rate of 2.6 percent and population grows at a rate of 0.8 percent. Iceland's real GDP per person grows at a rate of A) 1.8 percent. B) 2.6 percent. C) 3.4 percent. D) 3.0 percent. E) 3.2 percent. Answer: A Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

28) If an economy's growth rate of real GDP is 3 percent per year and the growth rate of the population is 2.5 percent per year, the growth rate of real GDP per person is A) 3 + 2.5 = 5.5 percent per year. B) [(3 - 2.5) ÷ 2.5] × 100 = 20 percent per year. C) [(2.5 - 3) ÷ 3] × 100 = 16.6 percent per year. D) 3 - 2.5 = 0.5 percent per year. E) 2.5 - 3 = -0.5 percent per year. Answer: D Topic: Growth rate, real GDP per person Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 29) In 2009, U.S. real GDP decreased by 3 percent and the population grew by 1 percent. Thus, real GDP per person A) increased 2 percent. B) decreased 2 percent. C) increased 4 percent. D) decreased 4 percent. E) decreased 3 percent. Answer: D Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 30) If a country experiences a real GDP growth rate of 1 percent and population growth of 2 percent, then the growth rate of real GDP per person is A) 3 percent. B) 2 percent. C) 1 percent. D) -1 percent. E) 0 percent. Answer: D Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

31) During 2008, Swaziland had a real GDP growth rate of 1.8 percent and a real GDP growth rate per person of -1.3 percent. These rates indicate that in Swaziland A) there was an error when calculating the growth rates because the growth rate of real GDP per person cannot be negative. B) the population growth rate was negative. C) the population grew at a faster rate than real GDP. D) poverty levels are declining. E) real GDP grew more rapidly than did the population. Answer: C Topic: Growth rate, real GDP per person Skill: Level 5: Critical thinking Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 32) In India last year, the growth rate of real GDP was 3.5 percent and the population grew from 1,000 million people to 1,100 million. Real GDP per person A) increased by 13.5 percent. B) decreased by 6.5 percent. C) increased by 6.5 percent. D) decreased by 13.5 percent. E) increased by 3.5 percent. Answer: B Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 33) Belgium's real GDP per person is $33,000 and Austria's is $34,700. The population growth rate in Belgium is 0.13 percent and the growth rate of real GDP is 3.0 percent. The population growth rate in Austria is 0.08 percent and the growth rate of real GDP is 3.3 percent. If these growth rates continue, how many years will it take for Belgium's real GDP per person to equal Austria's real GDP per person? A) Belgium's standard of living will never equal Austria's. B) just over 23 years C) just over 24 years D) just over 21 years E) over 230 years Answer: A Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

34) If Country A's real GDP is growing at 6 percent per year and Country B's real GDP is growing at 6 percent per year, then the standard of living is A) growing more rapidly in Country A. B) higher in Country B. C) changing at the same rate in Country A and Country B. D) growing more slowly in Country A. E) changing at the same rate in Country A and Country B only if the rate of population growth is the same in both countries. Answer: E Topic: Growth rate, real GDP per person Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 35) If Country A's real GDP per person is growing at 6 percent and Country B's real GDP per person is growing at 3 percent, then A) the standard of living is higher in Country A. B) the standard of living is higher in Country B. C) the standard of living is growing more rapidly in Country A. D) We cannot say whose standard of living is growing more rapidly without knowing the population growth rate. E) We cannot say whose standard of living is growing more rapidly without knowing the growth rate of real GDP. Answer: C Topic: Growth rate, real GDP per person Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking

36) According to the data in the table above A) the standard of living improved between year 1 and year 2. B) the standard of living worsened between year 1 and year 2. C) as measured by real GDP per person, the standard of living remained the same between year 1 and year 2. D) real GDP grew more rapidly than population between year 1 and year 2. E) real GDP grew more slowly than population between year 1 and year 2. Answer: C Topic: Standard of living Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Revised AACSB: Analytic skills 37) According to the data in the table above, real GDP grew at a rate of ________ between year 1 and year 2. A) 10 percent B) 1 percent C) 50 percent D) 5 percent E) 55 percent Answer: A Topic: Calculating growth rates Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Revised AACSB: Analytic skills 38) According to the data in the table above, real GDP per person grew at a rate of ________ between year 1 and year 2. A) 10 percent B) 0 percent C) 1 percent D) 5 percent E) 50 percent Answer: B Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Revised AACSB: Analytic skills 13 Copyright © 2023 Pearson Education Ltd.

39) The Rule of ________ can be used to calculate the number of years that it takes for the level of a variable to ________. A) 20; double B) 70; triple C) 70; double D) 20; triple E) thumb; double Answer: C Topic: Rule of 70 Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 40) The Rule of 70 states that the level of a variable will double in A) 70 years. B) the number of years equal to the variable's annual rate of growth divided by 70. C) the number of years equal to 70 divided by the variable's annual growth rate. D) the number of years equal to the variable's annual growth rate minus 70. E) the number of years equal to 70 multiplied by the variable's annual growth rate expressed as a decimal. Answer: C Topic: Rule of 70 Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 41) The Rule of 70, as applied to real GDP growth, can be used to find the A) real GDP growth rate necessary to double growth. B) number of years it takes for the level of real GDP to double. C) growth rate of real GDP. D) number of years it takes for the growth rate of real GDP to double. E) population growth rate necessary to double the GDP growth rate. Answer: B Topic: Rule of 70 Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking

42) The Rule of 70 can be used to calculate the A) economic growth rate per month. B) population growth rate per year. C) number of years it would take for the level of any variable to double. D) 70 percent level of the economic growth rate. E) economic growth rate per year. Answer: C Topic: Rule of 70 Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 43) Approximately how long will it take Ethiopia to double its real GDP per person of $100 if its growth rate of real GDP per person is 0.9 percent? A) 63 years B) 77.7 years C) 70 years D) 109 years E) 100 years Answer: B Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 44) If Country A's real GDP grows at a rate of 14 percent per year, about how many years will it take for Country A's real GDP to double? A) 10 B) 7 C) 5 D) 30 E) 14 Answer: C Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

45) According to the Rule of 70, if a country grows at 2.0 percent per year instead of 1.5 percent per year, how many fewer years will it take to double its level of real GDP? A) It will take 11.6 years fewer. B) It will take 35 years fewer. C) It will take 58.3 years fewer. D) It will take 20 years fewer. E) It will take 17.9 years fewer. Answer: A Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 46) The annual growth rate of an economy is 10 percent. The economy's GDP will double in about ________ years. A) 7 B) 10 C) 12 D) 14 E) 20 Answer: A Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 47) Using the rule of 70, a sustained 3 percent per year real GDP growth rate will A) last for 70 years. B) double the current level of real GDP in about 23 years. C) double the current level of real GDP in about 210 years. D) double the current level of real GDP in about 70 years. E) double the current level of real GDP in about 40 years. Answer: B Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

48) A nation's annual growth rate of real GDP per person is 2 percent. Its standard of living will A) double in 35 years. B) not change because its population is growing. C) fall because of its population growth. D) double in 10 years. E) double in 50 years. Answer: A Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 49) If a country experiences a real GDP growth rate of 6 percent, real GDP will double in A) 10 years. B) 11.67 years. C) 14 years. D) 17.5 years. E) 16.67 years. Answer: B Topic: Rule of 70 Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 50) This year, real GDP per person in Country A is eight times real GDP per person in Country B. If Country B's real GDP per person grows at a rate of 5 percent, about how many years will it take for Country B to reach the level of real GDP per person in Country A in this year? A) 14 years B) 28 years C) 56 years D) 42 years E) It will never reach Country A's level of GDP per person. Answer: D Topic: Rule of 70 Skill: Level 4: Applying models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

51) This year Iceland has a real GDP per person that is approximately 8 times greater than that of Cape Verde. Cape Verde's growth rate of real GDP per person was 5.2 percent. If Cape Verde maintains this current growth rate, approximately how many years will it take for Cape Verde's real GDP per person to reach the same level that Iceland has this year? A) 13.5 years B) 20 years C) 27 years D) 40 years E) 54 years Answer: D Topic: Rule of 70 Skill: Level 4: Applying models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 52) If it took 20 years for real GDP to double, what was the growth rate of real GDP? A) 4.5 percent B) 3.0 percent C) 3.5 percent D) 4 percent E) 5 percent Answer: C Topic: Rule of 70 Skill: Level 4: Applying models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 53) In this year, Country A has a real GDP per person that is 4 times greater than that of Country B. Country B's growth rate of real GDP per person is 3.5 percent per year. How many years will it take for Country B's real GDP per person to reach the same level that Country A had in this year? A) 10 years B) 20 years C) 40 years D) 60 years E) 56 years Answer: C Topic: Rule of 70 Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

54) For the world, what period of time experienced the fastest growth rate of real GDP per person? A) around 500 B.C. B) around 400 A.D. C) between 1000 A.D. and 1500 A.D. D) after about 1750 A.D. E) between 1500 A.D. and 1850 A.D. Answer: D Topic: Eye on the past, how fast has real GDP per person grown? Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 55) Over the last six decades, in the United States the decade with the slowest real GDP per person growth rate is A) 1960s. B) 1980s. C) 1990s. D) 2000s. E) 2010s. Answer: E Topic: Eye on the US Economy, US growth is slowing Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Revised AACSB: Reflective thinking 56) The economic growth rate is measured as the A) annual percentage change of real GDP. B) annual percentage change of employment. C) amount of real GDP. D) annual percentage change of the population. E) amount of population. Answer: A Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking

57) Economic growth is a sustained expansion of production possibilities measured as the increase in ________ over a given period. A) real GDP B) real GDP per person C) the standard of living D) capital per person E) population Answer: A Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 58) The economic growth rate is expressed as the A) annual percentage change of real GDP per person. B) growth rate of real GDP minus the growth rate of population. C) standard of living. D) annual percentage change of real GDP. E) growth rate of the population. Answer: D Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 59) Real GDP is $9 trillion in the current year and $8.6 trillion in the previous year. The economic growth rate between these years has been A) 10.31 percent. B) 4.65 percent. C) 5.67 percent. D) 7.67 percent. E) $0.4 trillion. Answer: B Topic: Calculating growth rates Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

60) The table gives information about the economy of Japan. The economic growth rate in 1997 is ________ percent. A) 8.0 B) 0.8 C) 0.08 D) 0.008 E) 4 Answer: B Topic: Calculating growth rates Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 61) The standard of living is measured by A) real GDP. B) employment. C) employment per person. D) real GDP per person. E) the population. Answer: D Topic: Standard of living Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 62) If the growth rate of population is greater than a nation's growth rate of real GDP, then its real GDP per person A) falls. B) rises. C) does not change. D) might rise, fall, or not change. E) cannot be measured. Answer: A Topic: Standard of living Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking

63) The table above gives information about the economy of France. The growth rate of real GDP per person in 1998 is ________ percent. A) 3.1 B) 0.4 C) 3.6 D) 4.0 E) 1.9 Answer: C Topic: Growth rate, real GDP per person Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Revised AACSB: Analytic skills 64) If real GDP increases by 6 percent and at the same time the population increases by 2 percent, then real GDP per person grows by A) 6 percent. B) 4 percent. C) 2 percent. D) 8 percent. E) 3 percent. Answer: B Topic: Growth rate, real GDP per person Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 65) If real GDP grew 5 percent last year and the population grew 2 percent, then real GDP per person grew by ________ percent. A) 10 B) 5 C) 3 D) 2 E) 7 Answer: C Topic: Growth rate, real GDP per person Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 22 Copyright © 2023 Pearson Education Ltd.

66) If a country experiences a real GDP growth rate of 4 percent, real GDP will double in A) 14 years. B) 17.5 years. C) 23.3 years. D) 35 years. E) 25 years. Answer: B Topic: Rule of 70 Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 67) Suppose that in the future, real GDP per person grows 2 percent a year in the United States and 4 percent a year in China. It will take real GDP per person approximately ________ years to double in the United States and approximately ________ years to double in China. A) 70; 35 B) 35; 17.5 C) 35; 8.75 D) 50; 25 E) 20; 10 Answer: B Topic: Rule of 70 Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

68) The table above gives information about the economy of Spain. If the growth rate in 1998 is maintained, real GDP will double in ________ years. A) 4 B) 19 C) 10 D) 18 E) 25 Answer: D Topic: Rule of 70 Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 23 Copyright © 2023 Pearson Education Ltd.

69) When was the real GDP per person at its 1-million year lowest level? A) 1340s, during the Black Death B) 1620s, after Columbus arrived in the Americas C) 500 B.C., in Ancient Greece D) 1750, just before the Industrial Revolution E) 1850, before the Industrial Revolution started to boost real GDP per person Answer: A Topic: Eye on the past, how fast has real GDP per person grown? Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 70) Looking at the world economic history, during what period of time was the growth rate of real GDP per person the fastest? A) around 500 B.C. because of Aristotle and Plato knowledge spillovers B) around 400 A.D, after decline of Rome C) after 1620, when Pilgrims arrived to America D) after 1750, the Industrial Revolution E) after 1430s, the discovery of Americas Answer: D Topic: Eye on the past, how fast has real GDP per person grown? Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 71) Since the 1960s, the growth rate of US potential GDP per person has slowed from about ________ to ________ so that the real GDP doubling period in 2010s is ________. A) 3 percent; 1.5 percent; 24 years B) 5 percent; 1 percent; 30 years C) 3 percent; 1.5 percent; 34 years D) 5 percent; 3 percent; 43 years E) 3 percent, 0.8 percent; 82 years Answer: E Topic: Eye on the US Economy, US growth is slowing Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Revised AACSB: Reflective thinking

25.2 Labor Productivity Growth 1) Labor productivity is defined as A) total real GDP. B) real GDP per person. C) total output multiplied by total hours of labor. D) real GDP per hour of labor. E) hours of work per person. Answer: D Topic: Sources of growth, labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 2) Labor productivity equals A) real GDP. B) real GDP per hour of labor. C) the total production of labor. D) the quantity of labor hours divided by real GDP. E) real GDP divided by the amount of human capital. Answer: B Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 3) Labor productivity is equal to the quantity of A) real GDP produced by one hour of labor. B) workers employed during one hour. C) real GDP consumed by the total population in one hour. D) real GDP. E) workers who are gainfully employed. Answer: A Topic: Labor productivity Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

4) The quantity of real GDP produced by one hour of labor is defined as A) real GDP per person. B) the advance in technology. C) the growth rate of technology. D) labor productivity. E) economic growth. Answer: D Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 5) Labor productivity is calculated as A) (real GDP ÷ aggregate hours). B) (real GDP ÷ aggregate hours × number of workers). C) (real GDP ÷ number of workers × ratio of capital per worker). D) (real GDP ÷ technology level). E) (real GDP ÷ aggregate hours × number of workers) × 100. Answer: A Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 6) Sustained increases in the standard of living depend on A) increases in the quantity of labor. B) increases in the population. C) increases in aggregate hours. D) increases in labor productivity. E) decreases in labor productivity. Answer: D Topic: Sources of growth, labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

7) An increase in labor productivity A) increases the standard of living. B) decreases the standard of living. C) might be the result of an increase in the quantity of labor. D) generally occurs when physical capital decreases because firms must then hire more workers. E) cannot occur without a corresponding increase in employment. Answer: A Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 8) Last year, in a nation far to the South, real GDP was $90 million and 900,000 workers were employed. This year real GDP is $100 million, 950,000 workers are employed, and the number of hours each worker works per year did not change. Hence, labor productivity A) has increased. B) has decreased. C) has remained constant. D) cannot be compared between the two years because both real GDP and the number of workers increased. E) might have changed, but more information is needed to determine if it changed. Answer: A Topic: Labor productivity Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills 9) If real GDP is $6,460 billion, the population is 184.6 million people, and aggregate hours is 170 billion hours, labor productivity is A) $2.63 an hour. B) $2.86 an hour. C) $35,000. D) $38.00 an hour. E) 920 hours. Answer: D Topic: Labor productivity Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills

10) Real GDP is $700 billion, average hours worked per week is 42 and aggregate hours is 150 billion hours. What is the economy's labor productivity? A) $1.80 per hour B) $3.75 per hour C) $16.67 per hour D) $4.67 per hour E) $4.50 per hour Answer: D Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills 11) Labor productivity growth depends on i. saving and investment. ii. increases in human capital. iii. technological growth. A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: Increase in labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 12) Labor force productivity has increased from $30 per hour to $32 per hour over the past year. This could result from A) only an increase in real GDP. B) an increase in real GDP with no change in the aggregate hours or a decrease in aggregate hours with no change in real GDP. C) only a decrease in aggregate hours. D) an increase in the labor force participation rate. E) an increase in population. Answer: B Topic: Increase in labor productivity Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

13) In recent years, Taiwan has experienced increases in savings and investment. As a result of the higher investment and saving, we expect i. increases in physical capital. ii. increases in the inflation rate. iii. advances in technology. A) i and iii B) i and ii C) ii only D) ii and iii E) i, ii and iii Answer: A Topic: Increase in labor productivity, physical capital Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 14) If the stock of physical capital (that is machinery, equipment, etc.) and human capital remains the same and the population increases, then A) labor productivity will increase. B) labor productivity will decrease. C) the standard of living will increase. D) the new labor will be more productive. E) real GDP decreases. Answer: B Topic: Increase in labor productivity, physical capital Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 15) The widespread adoption of computers in the workplace has likely led to A) no change in the quantity of labor hours. B) an increase in labor productivity because computers are a capital good. C) a decrease in labor productivity because computers are a capital good. D) a decrease in human capital because computers are physical capital. E) an increase in the supply of labor because people are needed to operate the computers. Answer: B Topic: Increase in labor productivity, physical capital Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

16) An increase in capital brings a large increase in output at a ________ quantity of capital and a small increase in output at a ________ quantity of capital because of ________. A) small; large; increasing returns along the productivity curve B) small; large; diminishing returns along the productivity curve C) large; small; diminishing returns along the productivity curve D) large; small; increasing returns along the productivity curve E) large; small; the greater the quantity of capital the greater the output Answer: B Topic: Increase in labor productivity, physical capital Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 17) Which of the following are required for economic growth? i. more goods and services produced per hour of work ii. an increase in the average hours of labor per person iii. an increase in prices A) i and iii B) i and ii C) ii and iii D) i only E) ii only Answer: B Topic: Increase in labor productivity Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 18) A reason for an increase in labor productivity growth is A) an increase in people's human capital. B) a decrease in the capital stock so that firms must hire more workers. C) growth in the supply of labor. D) an increase in the population so that firms hire more workers. E) an increase in the quantity of labor. Answer: A Topic: Increase in labor productivity, human capital Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

19) Human capital refers to the A) accumulated skill and knowledge of human beings. B) accumulated equipment used by human beings. C) accumulation of money by human beings. D) accumulation of money and equipment used by human beings. E) accumulated financial capital people have acquired. Answer: A Topic: Increase in labor productivity, human capital Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 20) Human capital is defined as the A) amount of machinery human beings have. B) number of factories built for human beings. C) accumulated skill and knowledge of human beings. D) accumulated amount of machinery and factories human beings own. E) skills that people are born with. Answer: C Topic: Increase in labor productivity, human capital Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 21) Increases in human capital can come A) only from formal schooling. B) from employing more machinery. C) only from on-the-job experience. D) from formal education and on-the-job learning. E) from nowhere because whatever human capital an individual possesses is what he or she was born with. Answer: D Topic: Increase in labor productivity, human capital Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

22) Expansion of a nation's human capital can be achieved through A) education and training. B) education and saving. C) education and technology improvements. D) education only. E) nothing because human capital is determined by the skills people are born with. Answer: A Topic: Increase in labor productivity, human capital Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 23) Human capital is acquired A) only in school. B) only through on-the-job training. C) only through job experience. D) through schooling, job training, and experience. E) only at birth, that is, it's people's inborn talents. Answer: D Topic: Increase in labor productivity, human capital Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 24) Advances in technology and growth in human capital ________ because ________. A) shift the productivity curve downward; labor and capital become less productive B) shift the productivity curve downward; labor and capital become more productive C) shift the productivity curve upward; labor and capital become less productive D) shift the productivity curve upward; labor and capital become more productive E) do not shift the productivity curve; there is a movement along the productivity curve Answer: D Topic: Increase in labor productivity, human capital Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

25) The expansion of human capital and the discovery of new technologies ________ because ________. A) are subject to diminishing returns; they shift the productivity curve downward B) are subject to diminishing returns; they shift the productivity curve upward C) are not subject to diminishing returns; they shift the productivity curve downward D) are not subject to diminishing returns; they shift the productivity curve upward E) are not subject to diminishing returns; they result in a movement along the productivity curve Answer: D Topic: Increase in labor productivity, human capital Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 26) Labor productivity increases if i. human capital decreases. ii. technology advances. iii. quality of education decreases. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: B Topic: Increase in labor productivity, technology Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 27) ________ increases with education, training, and job experience. i. Physical capital ii. Human capital iii. Financial capital A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: B Topic: Increase in labor productivity, human capital Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

28) U.S. labor productivity slowed during the 1970s because of i. increasing government taxes and regulations on production. ii. the necessity to cope with energy price increases. iii. inflation, which shortened the horizon over which businesses made their borrowing plans. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Eye on the U.S. economy, U.S. labor productivity growth Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 29) Over the last 60 years, U.S. labor productivity grew the fastest during the ________ because of ________. A) 2000s; the war on terror and return to the basics of education B) 1990s; advancements in healthcare due to the unlocking of the human genome C) 1980s; the invention of the computer and the oil embargo D) 1970s; an increase in government taxes and expanded regulations E) 1960s; fast paced technological change and large increases in human capital accumulation Answer: E Topic: Eye on the U.S. economy, U.S. labor productivity growth Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 30) The law of diminishing marginal returns states that A) output increases at a constant rate as more capital is added. B) output decreases at a constant rate as more capital is added. C) as both labor and capital are increased, output does not change. D) as both labor and capital are increased, output increases at a decreasing rate. E) output increases at a decreasing rate as more capital is added. Answer: E Topic: Law of diminishing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

31) According to the law of diminishing returns, an additional unit of A) capital produces more output than an additional unit of labor. B) labor decreases output. C) capital produces the same amount of output as an additional unit of labor. D) capital produces more output than the previous unit. E) capital produces less output than the previous unit. Answer: E Topic: Law of diminishing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 32) The shape of the productivity curve reflects the A) effects of capital accumulation. B) effects of technological progress. C) change in labor productivity as human capital increases. D) law of diminishing marginal returns. E) effects of population growth. Answer: D Topic: Law of diminishing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 33) The productivity curve is a relationship between A) real GDP per hour of labor and capital per hour of labor, with technology held constant. B) nominal GDP per hour of labor and capital per hour of labor, with technology held constant. C) real GDP per hour of labor and capital per hour of labor whenever technological growth occurs. D) real GDP per unit of capital and capital per hour of labor, with technology held constant. E) capital per hour of labor and technological growth. Answer: A Topic: Productivity curve Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

34) The productivity curve is a relationship between ________ and ________. A) real GDP; hours of labor B) real GDP; capital C) real GDP per hour of labor; capital D) capital per hour of labor; labor per hour of capital E) real GDP per hour of labor; capital per hour of labor Answer: E Topic: Productivity curve Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 35) The productivity curve A) has a positive slope. B) has a negative slope. C) is vertical. D) is horizontal. E) is U-shaped. Answer: A Topic: Productivity curve Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 36) Suppose that an Intel worker rearranges existing machines and labor and increases the quantity of chips Intel can produce. Using the productivity curve graphed, this innovation would be described as A) a movement upward along the curve. B) a movement downward along the curve. C) a shift of the curve upward. D) a shift of the curve downward. E) no change to the productivity curve. Answer: C Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills

37) If capital per hour of labor increases, GDP per hour of labor A) decreases for a given level of technology. B) increases because the level of technology advances. C) increases for a given level of technology. D) decreases because the level of technology decreases. E) changes only if technology also advances. Answer: C Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills 38) If capital per hour of labor decreases, real GDP per hour of labor A) decreases because the level of technology decreases. B) increases because the level of technology increases. C) increases for a given level of technology. D) decreases for a given level of technology. E) changes only if technology also advances. Answer: D Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills 39) If the level of technology rises, GDP per hour of labor A) increases for any level of capital per hour of labor. B) increases because the level of capital per hour of labor increases. C) decreases for a given level of capital per hour of labor. D) decreases because the level of capital per hour of labor decreases. E) does not change because GDP increases only when capital or labor increases. Answer: A Topic: Productivity curve, technological advance Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills

40) A technological change ________ and a change in the capital stock ________. A) shifts the productivity curve; shifts the productivity curve B) shifts the productivity curve; creates a movement along the productivity curve C) creates a movement along the productivity curve; shifts the productivity curve D) does not change the productivity curve; creates a movement along the productivity curve E) does not change the productivity curve; shifts the productivity curve Answer: B Topic: Productivity curve Skill: Level 4: Applying models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills 41) The expansion of human capital and the discovery of new technologies ________ because ________. A) decrease real GDP; they shift the productivity curve downward B) decrease real GDP; they shift the productivity curve upward C) increase real GDP; they shift the productivity curve downward D) increase real GDP; they shift the productivity curve upward E) increase real GDP; they result in a movement upward along the productivity curve Answer: D Topic: Labor productivity Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 42) Increases in capital per worker ________ because ________. A) increase real GDP; they shift the productivity curve downward B) increase real GDP; they shift the productivity curve upward C) increase real GDP; they create a movement downward along the productivity curve D) increase real GDP; they create a movement upward along the productivity curve E) may increase or decrease real GDP; the result is a movement along the productivity curve but the direction depends on other factors not given Answer: D Topic: Labor productivity Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

43) Labor productivity equals A) real GDP × aggregate hours. B) real GDP ÷ aggregate hours. C) aggregate hours ÷ real GDP. D) aggregate hours × labor productivity. E) aggregate hours ÷ labor productivity. Answer: B Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 44) Labor productivity equals A) real GDP divided by the capital stock. B) real GDP divided by the population. C) total wages divided by real GDP. D) real GDP divided by aggregate hours. E) aggregate hours divided by employment. Answer: D Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 45) If real GDP is $1,200 billion, the population is 60 million, and aggregate hours are 80 billion, labor productivity is A) $5.00 an hour. B) $6.67 an hour. C) $15.00 an hour. D) $20,000. E) $150 an hour. Answer: C Topic: Labor productivity Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

46) If aggregate hours are 100 billion hours and labor productivity is $40 an hour, than real GDP equals A) $100 billion. B) $40 billion. C) $100 trillion. D) $2.5 trillion. E) $4 trillion. Answer: E Topic: Labor productivity Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills 47) Which of the following lists gives factors that increase labor productivity? A) saving and investment in physical capital, and wage increases B) expansion of human capital, labor force increases, and discovery of new technologies C) expansion of human capital, population growth, and discovery of new technologies D) saving and investment in physical capital, expansion of human capital, and discovery of new technologies E) labor force increases and wage increases Answer: D Topic: Increase in labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking 48) Growth in physical capital depends most directly upon the A) amount of saving and investment. B) number of firms in the nation. C) speed of population growth. D) amount of government expenditures. E) level of human capital. Answer: A Topic: Sources of economic growth Skill: Level 2: Using definitions Section: Checkpoint 25.2 Status: Old AACSB: Reflective thinking

49) The productivity curve shifts upward when A) physical capital increases. B) human capital decreases. C) hours of labor increase. D) hours of labor decrease. E) technology advances. Answer: E Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills

00000000 50) In the productivity curve figure above, when the quantity of capital per hour of labor increases, the change in the labor productivity could be illustrated as A) movement from A to B. B) movement from B to A. C) shift from A to C. D) shift from A to D. E) shift from B to D. Answer: A Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Revised AACSB: Analytic skills

51) In the productivity curve figure above, the discovery of new technologies could be illustrated as A) movement from A to B. B) movement from B to A. C) movement from C to D. D) shift from A to C. E) shift from D to B. Answer: D Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Revised AACSB: Analytic skills 52) In the productivity curve figure above, the impact of eduction and training the increases workers' human capital could be illustrated as A) movement from A to B. B) movement from B to A. C) movement from C to D. D) shift from A to C. E) shift from D to B. Answer: D Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Revised AACSB: Analytic skills 53) In the productivity curve figure above, the discovery of a better method of producing electronic chips could be illustrated as A) a movement from A to B. B) a movement from B to A. C) a movement from C to D. D) a shift from A to C. E) a shift from D to B. Answer: D Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Revised AACSB: Analytic skills

54) In the productivity curve figure above, the combined effect of capital accumulation, discovery of new technologies, and the expansion of human capital on the labor productivity could be illustrated as A) a movement from A to B. B) a movement from C to D. C) a shift from A to C. D) a shift from A to D. E) a shift from B to D. Answer: D Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Revised AACSB: Analytic skills 25.3 Economic Growth Theories: Old and New 1) Thomas Malthus was an economist who contributed to the ________ theory of growth. A) classical B) neoclassical C) new growth D) socialist E) Keynesian Answer: A Topic: Classical growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 2) The Malthusian theory A) is also called the classical growth theory and predicts that we will run out of resources. B) is also called the neoclassical growth theory. C) predicts that the real GDP per person will continue to increase as long as technology increases. D) claims that the subsistence wage will increase over time. E) shows that the production function will shift upward continuously. Answer: A Topic: Classical growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

3) A key element of the classical growth theory is that A) economic growth can be sustained as long as government intervention does not occur. B) increases in technology drive economic growth. C) an increase in population leads to increase in labor supply and a decline in real GDP per person. D) low taxes promote economic growth. E) market forces drive economic growth. Answer: C Topic: Classical growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 4) The classical theory was developed in the late 18th and early 19th centuries A) and therefore is not accepted today. B) during a time of population decline. C) and has proponents today who fear population growth and overpopulation. D) and cannot be explained using the modern tool of the productivity function. E) and still applies to the most developed nations today, though not to the less developed nations. Answer: C Topic: Classical growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 5) Classical growth theory predicts that in the long run there will be A) zero economic growth. B) positive economic growth. C) negative economic growth. D) sustained increases in the productivity growth rate. E) sustained increases in economic growth. Answer: A Topic: Classical growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

6) According to classical growth theory, people earn only a subsistence real income because of growth in A) technology. B) capital. C) population. D) employment. E) labor productivity. Answer: C Topic: Classical growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 7) Which of the following are predicted by the classical growth theory? i. Population growth will end economic growth. ii. Real GDP per person will return to subsistence level. iii. Technology drives persistent economic growth. A) i and ii B) i, ii and iii C) i only D) ii only E) i and iii Answer: A Topic: Classical growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 8) If real GDP per person rises above the subsistence level then, according to classical growth theory A) population growth will slow down. B) a population explosion will occur. C) labor productivity growth permanently increases. D) real GDP per person will remain above the subsistence level. E) real GDP per person will fall below the subsistence level. Answer: B Topic: Classical growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

9) According to classical growth theory, if labor productivity increases A) the population grows and eventually real GDP returns to the subsistence level. B) the population grows but more slowly than real GDP so that people's incomes are permanently higher. C) the pursuit of profit causes further increases in capital per hour and technology and economic growth continues indefinitely. D) the growth rate of real GDP per person permanently increases. E) people save more, which increases the capital per hour even more, and so economic growth continues indefinitely. Answer: A Topic: Classical growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 10) Classical growth theory predicts that increases in real GDP per person will A) not last because higher income leads to a population explosion. B) last because higher growth leads to new technology. C) last because people make choices in the pursuit of higher profits. D) not last because higher income encourages smaller families and a lower population growth rate. E) last only if the government directs firms to make more investments in capital and new technology. Answer: A Topic: Classical growth theory Skill: Level 3: Using models Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 11) Classical growth theory predicts that economic growth A) will continue at the classical rate of 3 percent forever. B) will eventually stop because of population growth. C) occurs because of hard-working citizens. D) is merely an illusion. E) decreases the supply of labor. Answer: B Topic: Classical growth theory Skill: Level 3: Using models Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

12) The classical growth theory asserts that A) economic growth will continue indefinitely. B) economic growth and population growth complement each other. C) population growth increases a nation's economic growth. D) population growth will lead to people earning only a subsistence level of income. E) population growth leads to more growth in technology. Answer: D Topic: Classical growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 13) In classical growth theory, if real GDP per person is above the subsistence level A) the economy will keep growing without limit. B) population grows and lowers real GDP per person to its subsistence level. C) technological growth occurs and keeps real GDP per person above its subsistence level. D) the pursuit of profit will cause economic growth to accelerate. E) None of the above is correct because the classical growth theory asserts that real GDP per person can never exceed the subsistence level. Answer: B Topic: Classical growth theory Skill: Level 3: Using models Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 14) Classical growth theory predicts A) a slowdown in population growth over time. B) real GDP per person will remain at the subsistence level over time. C) sustained increases in economic growth in the long run. D) the population growth rate slows as real GDP per person rises. E) sustained increases in the standard of living in the long run. Answer: B Topic: Classical growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

15) The new growth theory was developed by ________ and proposes that ________. A) Paul Romer; the desire for profits drives increases in real GDP per person B) Robert Solow; increases in technology growth are responsible for economic growth C) Thomas Malthus; increases in population drive wages to their subsistence level D) Adam Smith; markets will determine the appropriate economic growth rate E) Ben Bernanke; changes in the money supply drive economic growth Answer: A Topic: New growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 16) In explaining economic growth, new growth theory stresses the role played by A) human choices. B) population moderation. C) women in the workforce. D) the participation rate of elderly workers. E) the government in directing the nation's investments. Answer: A Topic: New growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 17) According to the new growth theory, which of the following promote economic growth? i. discoveries that bring profit ii. choices that expand human capital iii. random events that create technology change A) i and iii B) i and ii C) i, ii and iii D) ii only E) i only Answer: B Topic: New growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

18) In new growth theory, growth in real GDP per person occurs because i. human capital grows indefinitely. ii. technology advances as a result of choices individuals make. iii. profit incentives encourage technological change. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: New growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 19) New growth theory asserts that i. human capital grows because of choices. ii. discoveries result from choices. iii. competition brings profits. A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: E Topic: New growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 20) According to the new growth theory, real GDP per person grows because A) the population increases. B) the labor force participation rate increases. C) people make choices in pursuit of profits. D) the retirement age increases. E) the government subsidizes firms' research and development. Answer: C Topic: New growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

21) The new growth theory asserts that profits are A) permanent, because they are derived from discoveries. B) temporary, because the discoveries that lead to profits are eventually used by all. C) an illusion, since costs are never fully covered. D) permanent, because physical activities can be replicated. E) not an essential component determining whether the economy grows or not. Answer: B Topic: New growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 22) The new growth theory asserts that A) the population growth rate will increase when real GDP per person increases. B) a discovery can be used by only one person, the discoverer. C) technology improves slowly while population grows rapidly. D) production processes can be replicated at many different firms in the economy. E) eventually people earn only a subsistence living. Answer: D Topic: New growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 23) A central theme of the new growth theory is that A) firms don't really experience profit. B) humans can work harder than previously thought. C) the economy doesn't experience diminishing returns. D) firms don't experience diminishing returns. E) the government is more efficient than private markets. Answer: C Topic: New growth theory Skill: Level 3: Using models Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

24) The new growth theory A) corrects for poor estimates of population growth. B) eliminates technological advances from the growth picture. C) applies to only very poor, less-developed nations. D) explains the source of technological advances. E) asserts that economic growth can be rapid but can only persist for a limited period of time. Answer: D Topic: New growth theory Skill: Level 3: Using models Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 25) New growth theory asserts that ________ will lead us to greater productivity and economic growth. A) new machinery B) government regulation C) unlimited wants D) leisure time E) nothing Answer: C Topic: New growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 26) Which of the following statements is likely to be made by someone who believes in the new growth theory? A) Population growth will limit long-run gains in real GDP per person. B) Competition will encourage discoveries of new ideas leading to greater economic growth. C) Although technological changes increase real GDP, these changes are random and unexplainable. D) Choices made by human capital are likely to be inefficient. E) Economic growth will eventually slow. Answer: B Topic: New growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

27) The new growth theory's comparison of the economy to a perpetual motion machine implies that A) permanent growth is not possible. B) the economy will forever create and destroy jobs. C) overpopulation will eventually overtake the resources of the planet. D) technology changes just happen. E) labor productivity has no influence on the economy. Answer: B Topic: New growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 28) Which of the following theories predicts that there can be no sustained rise in real GDP per person above the subsistence level? i. Classical growth theory ii. New growth theory A) i only B) ii only C) neither i nor ii D) both i and ii E) None of the above because whether the rise in real GDP per person is sustained or not depends on what created the rise. Answer: A Topic: Classical growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 29) Classical growth theory predicts that increases in A) real GDP per person are permanent and sustainable. B) real GDP per person are temporary and not sustainable. C) resources permanently increase labor productivity. D) resources permanently increase real GDP per person. E) competition increase economic growth. Answer: B Topic: Classical growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

30) If real GDP per person is above the subsistence level then, according to classical growth theory A) the population will increase. B) the population will decrease. C) the standard of living will continue to improve. D) labor productivity will increase. E) more technological advances occur. Answer: A Topic: Classical growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 31) According to classical growth theory, when real GDP per person ________, the population grows. A) is less than the subsistence real income B) exceeds the subsistence real income C) exceeds capital per hour of labor D) is less than capital per hour of labor E) is constant Answer: B Topic: Classical growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 32) New growth theory predicts that A) economic growth is only temporary. B) economic growth can last indefinitely. C) economic growth is eroded by changes in taxes. D) government policies can do nothing to foster increased growth. E) ultimately people earn a subsistence wage. Answer: B Topic: New growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

33) The new growth theory states that A) technological advances are the result of random chance. B) technological advances are the result of discoveries and choices. C) technological advances are the responsibility of the government. D) the subsistence level income leads to technological advances. E) it is impossible to replicate production activities. Answer: B Topic: New growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 34) According to new growth theory, growth A) occurs when real GDP greater than the subsistence level. B) is unending. C) ends when competition disappears. D) depends on the population growth rate. E) cannot be sustained without government help. Answer: B Topic: New growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 35) The theory that suggests that our unlimited wants will lead to perpetual economic growth is the A) classical growth theory. B) sustained growth theory. C) old growth theory. D) new growth theory. E) Malthusian growth theory. Answer: D Topic: New growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking

36) According to the new growth theory, ________ is the factor that motivates technological change. A) random chance B) profit C) diminishing returns D) the replication of activities E) decisions about how much human capital to acquire Answer: B Topic: New growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 37) The increase in income inequality starting the early 1980s has been called A) random chance. B) the Great Divergence. C) the Great Compression. D) the Great Depression. E) the Great Convergence. Answer: B Topic: Distributions of income Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Reflective thinking 25.4 Achieving Faster Growth 1) At its most basic level, economic growth depends on A) creating the right incentives. B) saving by the government. C) government leadership. D) government's fixing prices to encourage stability. E) political freedom. Answer: A Topic: Preconditions for growth Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

2) If a country lacks ________, economic growth ________. A) a democratic form of government; cannot occur B) a proper incentive system; cannot occur C) pure capitalism; will be slower compared to other countries D) a proper incentive system; will occur at a pace suggested by the new growth theory E) economic freedom; will increase at a faster pace Answer: B Topic: Preconditions for growth Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 3) The presence of an incentive system that encourages growth A) guarantees that growth will occur. B) creates the right conditions for growth to occur. C) cannot exist in poor countries. D) existed even in hunter-gatherer societies. E) means that the government must be a democracy. Answer: B Topic: Preconditions for growth Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 4) All of the following are preconditions for economic growth EXCEPT i. property rights. ii. democracy. iii. free markets. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: B Topic: Preconditions for growth Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

5) A key reason why some nations show little or no growth is A) overpopulation that overuses limited resources. B) lack of incentives to undertake actions toward growth. C) too much private property not directed by the government. D) patents in rich nations that keep technology only for the rich. E) too much international trade so that all economic growth spills over to foreigners. Answer: B Topic: Preconditions for growth Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 6) An important condition required for economic growth is A) a democratic government. B) a totalitarian government. C) a libertarian government. D) economic freedom. E) the incentive to limit international trade so that all economic growth remains within the country. Answer: D Topic: Preconditions for growth, economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 7) A basic precondition necessary to achieve economic growth is A) well-functioning factories. B) well-being of society. C) a well-functioning legal system. D) a well-organized work force. E) a strong central government that directs the nation's research and development activities. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

8) Economic freedom A) is not important for nations to grow. B) must come from a democratic government. C) is founded, in part, on the rule of law. D) is created when the nation imposes many regulations on businesses. E) is harmed by having too many property rights. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 9) Economic freedom requires A) that there are no regulations and restrictions set on businesses and households by the government. B) the rule of law and the ability to enforce the laws. C) strong labor unions. D) freedom to bribe government officials. E) that the government be a democracy. Answer: B Topic: Preconditions for growth, economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 10) Economic freedom provides the A) political system that encourages democracy. B) social system that supports families. C) production system that discourages property rights. D) incentive system that encourages growth-producing activities. E) necessary alternative to free markets. Answer: D Topic: Preconditions for growth, economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

11) Countries that enjoy economic growth A) have property rights and markets which provide incentives for discovering new technologies. B) have economies that allow the government to make decisions in everyone's best interests. C) restrict international trade so that domestic industries can grow. D) place high taxes on saving and investment. E) place controls on property rights so that firms are protected from competition. Answer: A Topic: Preconditions for growth, economic freedom Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 12) For economic freedom to exist A) copyright laws must be abolished and markets supervised by the government. B) democracy must exist. C) property rights must be protected and markets must be free. D) human capital must be given away free. E) money must be free. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 13) Hong Kong is an example of an economy that A) does not experience economic growth because it is not a democracy. B) experiences economic growth in spite of the fact that is lacks democratic freedom. C) grows more slowly than other Asian countries because property rights are not valued. D) needs to promote investment so that economic growth can occur. E) lacks economic freedom and therefore experiences the slowest economic growth of all developed economies. Answer: B Topic: Preconditions for growth, economic freedom Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

14) A condition necessary for a country to achieve economic growth is A) high tax rates so the government can purchase a lot of capital equipment. B) strict environmental regulations. C) economic freedom. D) government control of the banking system. E) democracy. Answer: C Topic: Preconditions to economic growth, economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 15) Economic freedom is a precondition for economic growth. Which of the following is a characteristic of economic freedom? i. A democratic form of government ii. Property rights must be protected. iii. The government must support and pay for inventions and innovations. A) i only B) ii only C) i and ii D) ii and iii E) i and iii Answer: B Topic: Preconditions for growth, economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 16) Economic freedom is present, at least in part, when A) there are no property rights to limit people's freedom. B) there is no private property. C) people are able to make personal choices. D) there is no government. E) money is free. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

17) Economic growth is slow or absent in some economies because those lack A) political freedom. B) economic freedom. C) democracy. D) cultural freedom. E) a strong government. Answer: B Topic: Preconditions for growth, economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 18) A key reason why some countries are growing very slowly is A) they lack a democratic government. B) they lack economic freedom. C) their inflation rate is too high. D) they are too poor, so there is no saving. E) there is too much competition within their economies. Answer: B Topic: Preconditions for growth, economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 19) A reason why many of the third world countries are NOT achieving an increase in their standard of living is that they A) don't have enough natural resources. B) don't have strong military power to force people to work harder. C) don't have social institutions with a strong rule of law and economic freedom. D) strongly encouraged international trade. E) don't have a strong central government. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

20) Property rights A) don't include intellectual property. B) don't include financial property. C) don't include physical property. D) include physical, financial, and intellectual property. E) slow the economic growth by placing limits on who can use what. Answer: D Topic: Preconditions for growth, property rights Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 21) Property rights assure people that A) the government will not confiscate their income or savings. B) the government will provide a minimum standard of living. C) the factors of production and goods are owned jointly by the government and the people. D) economic growth will enhance government involvement in the economy. E) international trade will be limited. Answer: A Topic: Preconditions to economic growth, property rights Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 22) Jose and Julia were discussing the necessary components to achieve economic growth. Jose stated that the economy must include free markets, specialization and trade, and an ethical judicial system. Julia reminded Jose that another key component is A) freedom of speech. B) freedom of religion. C) a guaranteed high rate of return on savings. D) property rights. E) democracy. Answer: D Topic: Preconditions for growth, property rights Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

23) One possible way of achieving faster economic growth is to A) regulate the amount of international trade and limit it so that not too much occurs. B) limit research and development because research and development does not contribute anything to today's production. C) assign the government ownership of all capital. D) protect property rights and free markets. E) tax saving so that people spend more and firms' profits are higher. Answer: D Topic: Preconditions for growth, property rights Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 24) Which of the following are important for countries to promote with property rights and incentives if economic growth is to occur? i. specialization ii. saving and investment iii. increases in human capital iv. discovery of new technology A) i, ii, iii and iv. B) ii and iii. C) iii and iv. D) ii and iv. E) i, ii and iv only. Answer: A Topic: Preconditions for growth, property rights Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 25) One way to achieve faster growth in GDP per person is to increase the A) number of women working in the home rather than in the workforce. B) growth rate of the quantity of money. C) growth rate of human capital. D) growth rate of the population. E) limits on international trade in order to keep more of total spending on domestically produced goods. Answer: C Topic: Preconditions for growth, human capital Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

26) The following government policies will help achieve faster economic growth EXCEPT A) discouraging saving and encouraging spending. B) encouraging research and development. C) establishing and protecting property rights. D) improving the quality of education. E) increasing saving. Answer: A Topic: Policies for faster growth, saving Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 27) If Turkey wants to promote faster economic growth, it will need to A) promote incentive systems to encourage saving, research and development, increased trade and improved education. B) restrict economic freedom so the government has better control of markets. C) restrict international trade to protects its own workers. D) promote government intervention to help markets determine incentives. E) restrict property rights so that individuals can better share inventions. Answer: A Topic: Policies for faster growth Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 28) Retirement savings accounts, such as IRAs, help increase economic growth because A) people have an incentive to work harder and longer hours to save for the future. B) they keep the interest rates high. C) savings finances investment. D) government invests them. E) they encourage international trade. Answer: C Topic: Policies for faster growth, saving Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

29) One possible way of achieving faster economic growth is to A) encourage saving. B) protect the economy from international trade. C) limit investment because investment adds nothing to production today. D) eliminate property rights because they prevent people from using other people's ideas. E) tax saving so that people spend more and businesses make more profit. Answer: A Topic: Policies for faster growth, saving Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 30) East Asian economies have grown A) rapidly because of high saving rates. B) rapidly despite a lack of property rights. C) slowly because of a lack of property rights. D) slowly because of low saving rates. E) rapidly because they virtually eliminated international trade. Answer: A Topic: Policies for faster growth, saving Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 31) One of the possible roles governments can play in sponsoring growth is to A) provide tax incentives to encourage saving. B) own more of the nation's resources in order to put them to use. C) close the nation to trade in order to protect its domestic producers. D) make decisions for its citizens as to the most suitable job. E) limit the use of property rights in order to decrease the harm they create. Answer: A Topic: Policies for faster growth, saving Skill: Level 3: Using models Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

32) Many economists argue that an incentive to save is A) high income tax rates. B) a tax on consumption rather than on income. C) a tax on income rather than a tax on consumption. D) greater government regulation of the banking and securities industries. E) strengthening the property rights that savers have to the physical capital they purchase. Answer: B Topic: Policies for faster growth, saving Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 33) One possible way of achieving faster economic growth is to A) abolish the system of patents and copyrights so that everyone can use people's ideas. B) limit international trade to only a few countries so that the nation is not hurt by too much trade. C) encourage research and development. D) limit schooling in order to have more people in the labor force, producing goods and services. E) promote tax saving so that people spend more and businesses' profits are larger. Answer: C Topic: Preconditions for growth, R&D Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 34) One possible way of achieving faster economic growth is to A) limit international trade. B) encourage international trade. C) limit research and development and concentrate on production of goods and services. D) abolish the system of patents and copyrights so that everyone can use people's ideas. E) let the government decide what research and development should be undertaken. Answer: B Topic: Policies for faster growth, international trade Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

35) Encouraging international trade will A) slow economic growth when a country is forced to specialize and trade with other countries. B) slow economic growth as many workers lose their jobs to foreign workers. C) speed economic growth as workers diversify their knowledge and limit trade. D) speed economic growth as workers specialize and trade with others. E) speed economic growth because international trade limits the harm done by property rights. Answer: D Topic: Policies for faster growth, international trade Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 36) The fastest growing nations today A) are not saving but instead are investing. B) have erected many trade barriers to protect domestic firms. C) have the fastest growing exports and imports. D) have non-democratic political systems. E) have the government directing all their research and development. Answer: C Topic: Policies for faster growth, international trade Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 37) China's growth rate has ________ that of most other countries, ________. A) topped; but its real GDP per person is still lower than other industrialized countries B) lagged behind; and its real GDP is close to other Asian economies C) lagged behind; but its real GDP per person is higher than other Asian economies D) topped: but its real GDP per person declined in 2008-09 E) equalled; and its real GDP per person declined in 2008-09 Answer: A Topic: Eye on Rich and Poor Nations Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

38) Governments should promote education because education contributes to the nation's A) employment. B) free markets. C) economic growth potential. D) international trade. E) protection of property rights. Answer: C Topic: Policies for faster growth, education Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 39) Brian is running for state senator and if elected, pledges to improve economic growth. His plan for economic growth includes increasing spending on public education and providing tax incentives to encourage improved private education. His plan is likely to A) slow economic growth because it includes a provision for private education. B) have no effect on economic growth because property rights are not changed. C) speed economic growth as the quality of resources improve. D) fail because the provision for private education limits government involvement in education. E) have no effect on economic growth because government spending cannot affect the economic growth rate. Answer: C Topic: Policies for faster growth, education Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 40) If Kenya institutes policies that support economic freedom and growth, it is likely that Kenya will A) immediately reap the benefits of double digit increase in economic growth. B) immediately reap the benefits of a 4 percent to 6 percent increase in economic growth. C) slowly reap the benefits of economic growth as the economy grows over time. D) lose control of the economy and plunge into a long recession. E) suffer from too much competition within its economy. Answer: C Topic: Faster growth, the difference policy makes Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

41) Which of the following is NOT a necessary precondition for economic growth? A) economic freedom B) democracy C) property rights D) free markets E) ALL of the above are necessary preconditions. Answer: B Topic: Preconditions for growth Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 42) Which of the following characteristics is a precondition for economic growth? i. economic freedom ii. free markets iii. active government policy to discourage saving A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: D Topic: Preconditions for growth Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 43) Economic freedom means that A) firms are regulated by the government. B) some goods and services are free. C) people are able to make personal choices and their property is protected. D) the rule of law does not apply. E) the nation's government is a democracy. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

44) Property rights protect A) only the rights to physical property. B) only the rights to financial property. C) all rights except rights to intellectual property. D) rights to physical property, financial property, and intellectual property. E) the government's right to impose taxes. Answer: D Topic: Preconditions for growth, property rights Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 45) Activities that encourage faster growth are A) high levels of saving and investment in human capital. B) high levels of consumption and low levels of savings. C) taxes on saving that serve to encourage more spending and less saving. D) imposing trade barriers to limit international trade and thereby protect national industries. E) limiting property rights so that everyone can use any invention. Answer: A Topic: Policies for faster growth Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 46) Which of the following statements is FALSE? A) Saving helps create economic growth. B) Improvements in quality of education are important for economic growth. C) Free international trade helps create economic growth. D) Faster population growth is the key to growth in real GDP per person. E) Economic freedom requires property rights. Answer: D Topic: Policies for faster growth Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

47) In order to increase economic growth, a government can A) discourage research and development. B) decrease funding on education. C) discourage specialization and trade. D) establish property rights and a legal system. E) tax saving in order to encourage more spending. Answer: D Topic: Policies for faster growth Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 48) Saving A) slows growth because it decreases consumption. B) finances investment which brings capital accumulation. C) has no impact on economic growth. D) is very low in most East Asian nations. E) is important for a country to gain the benefits of international trade. Answer: B Topic: Policies for faster growth, saving Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 49) A government policy that taxes saving in order to discourage saving and encourage spending will A) slow economic growth. B) speed economic growth. C) create a greater incentive for people to specialize. D) strengthen people's property rights. E) increase the growth rate of capital. Answer: A Topic: Policies for faster growth, saving Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking

50) The fastest growing nations today are those with A) barriers that significantly limit international trade. B) the fastest growing exports and imports. C) government intervention in markets to ensure high prices. D) few funds spent on research and development. E) the least saving. Answer: B Topic: Policies for faster growth, international trade Skill: Level 2: Using definitions Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 51) Economic growth is enhanced by A) free international trade. B) limiting international trade so that the domestic economy can prosper. C) discouraging saving, because increased saving means less spending. D) ignoring incentive systems. E) increasing welfare payments to the poor so they can afford to buy goods. Answer: A Topic: Policies for faster growth, international trade Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Reflective thinking 25.5 Integrative Questions 1) Economic growth in Cuba has been slow. What can best explain the slow growth? A) lack of economic resources B) lack of incentive mechanisms and economic freedom C) labor productivity is low D) a non-democratic form of government E) too much competition within the economy Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

2) The idea of continuous economic growth as a "perpetual motion machine" best reflects the prediction of which growth theory? A) the classical growth theory B) the traditional growth theory C) the Keynesian growth theory D) the new growth theory E) no growth theory Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 3) Workers in the United States are ________ workers in China because ________. A) more productive than; workers in the United States have more capital per worker B) more productive than; there are more college-educated workers in the United States C) less productive than; there are fewer workers in the United States D) less productive than; the labor force participation rate is lower in the United States E) equally as productive as; China's real GDP per person equals the U.S. real GDP per person Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 4) The presence of government corruption in some countries A) slows their economic growth. B) speeds their economic growth. C) invalidates the new growth theory's predictions. D) supports the classical growth theory's predictions. E) invalidates the neoclassical growth theory's predictions. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

5) Which of the following policies encourages economic growth? A) increased taxes on income and business profits B) reduction of government support of higher education C) high tariffs and strict import quotas on foreign-made products D) creation of tax free savings accounts E) limiting the years people spend in education so that they can start productive work Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 25.6 Essay: The Basics of Economic Growth 1) Why is growth in GDP different from growth in a nation's standard of living? Is it possible for a nation's GDP to grow while its standard of living falls? Answer: The standard of living is measured by real GDP per person, so growth in the standard of living equals growth in real GDP per person. The growth rate of real GDP per person equals the growth rate of real GDP minus the growth rate of the population. Hence it is indeed possible for a nation's GDP to grow, while its standard of living decreases. This outcome occurs whenever the population grows more rapidly than real GDP. Topic: Standard of living Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Written and oral communication 2) How do we calculate growth in a nation's standard of living? Answer: The standard of living is measured by real GDP per person. Thus growth in the standard of living is calculated using the growth rate of real GDP per person. Topic: Standard of living Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking 3) What is the Rule of 70? Answer: The Rule of 70 is that the number of years it takes for the level of any variable to double is approximately 70 divided the annual percentage growth rate of the variable. Topic: Rule of 70 Skill: Level 1: Definition Section: Checkpoint 25.1 Status: Old AACSB: Reflective thinking

4) A nation's population was 250 million last year and is 255 million this year. If its real GDP was $8.5 trillion last year and is $8.8 trillion this year, what is its growth rate of real GDP per person? Answer: Last year real GDP per person equaled ($8.5 trillion)/(250 million) = $34,000 per person. This year, real GDP per person is $34,510 per person. Thus the growth in real GDP per person equals × 100 = 1.5 percent. Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

5) U.S. real GDP per person grew rapidly in the early 1960s. The table above has U.S. real GDP and population for 1961 and 1962. a. What was U.S. real GDP per person in 1961? b. What was U.S. real GDP per person in 1962? c. Between 1961 and 1962, how rapidly did U.S. real GDP per person grow? Answer: a. U.S. real GDP per person in 1961 = ($2,432 billion)/(184 million) = $13,217. b. U.S. real GDP per person in 1962 = ($2,578 billion)/(186 million) = $13,860. c. The growth rate of real GDP per person equals × 100 = 4.9 percent. Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 6) If a nation's population grows at 2 percent and its real GDP grows at 4 percent, what is the growth rate of real GDP per person? Answer: The growth rate of real GDP per person equals the growth rate of real GDP minus the population growth rate. Hence, in the question at hand, the real GDP per person growth rate equals 4 percent minus 2 percent, or 2 percent. Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

7) Suppose that real GDP grows at 3 percent per year. What is the growth rate of real GDP per person if the population grows at a. 2 percent? What happens to the standard of living? b. 3 percent? What happens to the standard of living? c. 4 percent? What happens to the standard of living? Answer: a. The growth rate of real GDP per person equals the growth rate of real GDP minus the population growth rate. Hence the growth rate of real GDP per person equals 3 percent minus 2 percent or 1 percent. The standard of living increases because real GDP per person increases. b. The growth rate of real GDP per person equals 3 percent minus 3 percent or 0 percent. The standard of living does not change because real GDP per person does not change. c. The growth rate of real GDP per person equals 3 percent minus 4 percent or -1 percent. The standard of living decreases because real GDP per person decreases. Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 8) Suppose real GDP in Ireland grew 9.8 percent. If Ireland maintains this level of growth in the future, real GDP will double in approximately how many years? Answer: With an annual growth rate of 9.8 percent, the Rule of 70 shows that Ireland's real GDP will double in approximately 70 ÷ 9.8 = 7.1 years. Topic: Rule of 70 Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills 9) Suppose real GDP grows at 7 percent per year and the population grows at 2 percent per year. How many years will it take for real GDP and real GDP per person to double? Answer: Use the Rule of 70 for both answers. The growth rate of real GDP is given in the question, and so the Rule of 70 directly indicates that real GDP doubles in 70 ÷ 7 = 10 years. To determine the number of years it takes for real GDP per person to double, it is necessary to calculate the growth rate of real GDP per person. The growth rate of real GDP per person equals 7 percent minus 2 percent or 5 percent per year. Hence the Rule of 70 shows that real GDP per person doubles in . Topic: Rule of 70 Skill: Level 2: Using definitions Section: Checkpoint 25.1 Status: Old AACSB: Analytic skills

25.7 Essay: Labor Productivity Growth 1) Real GDP can increase either because the quantity of labor increases or because labor productivity increases. What is the effect on the standard of living if real GDP increases because a. the quantity of labor increases? b. labor productivity increases? Answer: a. An increase in real GDP because the quantity of labor increases has no effect on the standard of living. b. An increase in real GDP because labor productivity increases boosts the nation's standard of living. Topic: Labor productivity Skill: Level 5: Critical thinking Section: Checkpoint 25.2 Status: Old AACSB: Written and oral communication 2) What is the effect on real GDP per person if labor productivity increases? What is the effect on the nation's standard of living? Answer: Real GDP equals (aggregate hours) × (labor productivity). Hence an increase in labor productivity increases real GDP. Real GDP per person equals (real GDP) ÷ (population). Therefore an increase in real GDP with no change in the population increases real GDP per person. The nation's standard of living is measured by real GDP per person. So, an increase in labor productivity boosts real GDP per person and therefore boosts the nation's standard of living. Topic: Labor productivity Skill: Level 5: Critical thinking Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills 3) Real GDP equals $12 trillion and aggregate hours equals 300 billion hours. What does labor productivity equal? Answer: Labor productivity is defined as (real GDP ÷ aggregate hours), so labor productivity equals ($12 trillion ÷ 300 billion hours) = $40 per hour. Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills

4) Labor productivity is $30 per hour and aggregate hours are 165 billion hours. What does real GDP equal? Answer: Real GDP equals (labor productivity × aggregate hours) = ($30 per hour × 165 billion hours) = $4,950 billion. Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills 5) Labor productivity is $20 per hour and aggregate hours are 400 billion hours. a. What does real GDP equal? b. Because of technological advances, labor productivity doubles to $40 per hour. Furthermore, assume that aggregate hours decrease to 300 billion hours. What does real GDP equal? Answer: a. Real GDP equals (labor productivity × aggregate hours) = ($20 per hour × 400 billion hours) = $8 trillion. b. Real GDP now equals $12 trillion. Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills 6) Define labor productivity. Discuss the relationship between labor productivity, human capital growth, and technology change. Answer: Labor productivity is real GDP per hour of labor, so it equals (real GDP) ÷ (aggregate hours). The expansion of human capital and the discovery of new technology are two factors that increase labor productivity. Increasing human capital increases labor productivity because workers' skills and knowledge increase, which allows them to produce more goods and services without boosting aggregate hours. Similarly, the discovery and use of new technologies allows workers to produce more goods and services without increasing aggregate hours. Topic: Increase in labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills

7) List and explain the three factors that can increase labor productivity. Answer: The three factors that can increase labor productivity are saving and investment in physical capital, expansion of human capital, and discovery of new technology. Saving and investing in physical capital increases the amount of capital per worker and thereby increases workers' productivity. Increasing the amount of human capital means that workers' skills, knowledge, and talents increase, which thereby increases their productivity. And, the discovery and use of new technologies allows workers to produce more goods and services than before, which increases their productivity. Topic: Increase in labor productivity Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Written and oral communication 8) What are the sources of human capital? Answer: Human capital, the accumulated skills and knowledge people possess, comes from both formal education and training, and from on-the-job experience. On-the-job experience creates "learning by doing," in which workers become more knowledgeable about the best way to accomplish a task as they do the task. Topic: Labor productivity, human capital Skill: Level 1: Definition Section: Checkpoint 25.2 Status: Old AACSB: Written and oral communication 9) Explain the productivity curve and how the components interact. Answer: The productivity curve is a relationship that shows how real GDP per hour of labor varies as the amount of capital per hour of labor changes with no change in technology. An increase in the amount of capital per hour of labor leads to a movement along a productivity curve. An increase in technology shifts the productivity curve upward. Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills

10) What does a productivity curve reflect? What leads to movements along a productivity curve and what leads to shifts in a productivity curve? Answer: The productivity curve shows the relationship between the amount of capital per hour of labor and real GDP per hour of labor, that is, between capital per hour labor and labor productivity. The curve is upward sloping, but, due to diminishing returns, the slope becomes less steep as capital per hour of labor increases. If the amount of capital per hour of labor changes, there is a movement along the productivity curve. If the amount of human capital increases and/or technology advance occurs, the productivity curve shifts upward. Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills 11) What is the law of diminishing returns? Give an example of what the law of diminishing returns implies. Answer: The law of diminishing returns is the observation that as the quantity of one input increases with the quantities of all other inputs remaining the same, output increases but by ever smaller increments. Hence, as more workers (or capital) are used by a firm, each additional worker (or unit of capital) increases output, but by less than previous worker (or unit of capital). For instance, a law firm might have one paralegal typing briefs on one personal computer. Hiring an additional paralegal will increase the number of briefs, but with only one personal computer, the additional paralegal will not double the number of briefs. Similarly, buying another computer, while employing only one paralegal, might increase the number of briefs typed, but will not double the number. Topic: Productivity curve Skill: Level 4: Applying models Section: Checkpoint 25.2 Status: Old AACSB: Analytic skills 25.8 Essay: Economic Growth Theories: Old and New 1) In the classical theory of growth, what is the final outcome of an increase in growth and labor productivity? Answer: In the classical growth theory, a rise in labor productivity and the resulting economic growth result in a population explosion that drives real GDP per person back to the subsistence level. In the classical viewpoint, resources are limited and technological change occurs infrequently, so that technological advances are not sufficient to compensate for the lack of resources. Hence, in the long run people earn only a subsistence level of real income. Topic: Classical growth theory Skill: Level 1: Definition Section: Checkpoint 25.3 Status: Old AACSB: Written and oral communication

2) Of the two economic growth theories, which is the most optimistic about the chances of real GDP per person growing indefinitely? Which is the most pessimistic? What accounts for the differences? Answer: The most optimistic is the new growth theory, which concludes that real GDP per person can continue to grow indefinitely. The most pessimistic is the classical theory, which concludes that growth in real GDP per person will stop and that people will produce only the subsistence level of real GDP per person. The difference in the two conclusions can be traced to differences in assumptions in three key areas. First, the new growth theory concludes that technology will advance forever because people, seeking profit, make decisions to develop new technology. Classical growth theory assumes that technological advances are rare and infrequent. Second, the new growth theory assumes that the economy is not subject to diminishing returns. Hence, as the economy accumulates more capital, the returns to capital do not diminish and so the incentive to add yet more capital continues undiminished. The classical growth theory assumes that capital (and labor) is subject to diminishing returns. Thus as more capital is accumulated, the returns diminish, and so the incentive to continue adding more capital disappears. Thus the capital stock eventually stops growing. Finally, the new growth theory assumes that the population does not grow more rapidly as real GDP per person increases. The classical theory assumes that whenever real GDP per person exceeds the subsistence level, rapid population growth occurs and, because of diminishing returns to labor, the increased population drives the level of real GDP back to the subsistence amount. Topic: New growth theory Skill: Level 2: Using definitions Section: Checkpoint 25.3 Status: Old AACSB: Written and oral communication 3) What do the classical growth theory and the new growth theory predict for global growth amongst different nations? Comment on the accuracy of the predictions. Answer: The classical growth theory predicts that nations will produce only the subsistence level of real GDP per person. This prediction is incorrect. According to the theory, each country is driven to the subsistence level by increased population growth whenever real GDP per person exceeds the subsistence amount. Hence the classical theory predicts that the nations with the highest levels of real GDP per person will be the nations in which real GDP per person is falling the most rapidly. This prediction also is wildly at variance with the facts. The new growth theory predicts that nations will grow indefinitely and that the growth rate depends on the incentives within each nation to save, invest, accumulate human capital, and develop new technology. Hence the new growth theory predicts that real GDP per person will converge among some nations (those with similar incentives) while the gaps in real GDP per person among other nations will persist. This prediction is accurate. Topic: Growth in the global economy Skill: Level 4: Applying models Section: Checkpoint 25.3 Status: Old AACSB: Written and oral communication

25.9 Essay: Achieving Faster Growth 1) What is economic freedom and why is it important for economic growth? Answer: Economic freedom is a condition when people are able to make their own choices, their private property is protected, and they are free to trade in markets. Economic freedom is a necessary precondition for economic growth because all three aspects of economic freedom are highly growth enhancing. People are the best judges of their own interests and abilities, so allowing them to make their own decisions creates the best decisions about what activities will be undertaken. Protecting private property is necessary in order to give people the incentives to specialize and trade as well as to save and invest, all actions that will increase economic growth. Letting people trade in free markets again respects people's abilities to make the best decisions for themselves, and also increases people's incentives to specialize and trade. Topic: Economic freedom Skill: Level 1: Definition Section: Checkpoint 25.4 Status: Old AACSB: Written and oral communication 2) Why is economic growth so slow or non-existent in many third world countries? What policies would you propose to improve the situation? Answer: Slow-growing third world countries generally lack the necessary preconditions for economic growth: economic freedom, secure property rights, and freely functioning markets. In many of these nations, a corrupt legal system and government means that the rule of law and property rights are absent. In order to increase economic growth in these nations, policies that create economic freedom, secure property rights, and free markets must be adopted. It does not matter if these policies are adopted by a democratic government or by an authoritarian government, the key point is that they are necessary for the nation to grow. Thus, specific policies include creating an efficient legal system that respects the rule of law and enforces property rights and contracts; eliminating government corruption that undermines the rule of law; and, in order to establish free markets, decreasing government bureaucracy and limits to trade, such as high taxes, regulations, and import bans. Topic: Preconditions for growth, economic freedom Skill: Level 4: Applying models Section: Checkpoint 25.4 Status: Old AACSB: Written and oral communication

3) What policies can a government undertake to achieve faster economic growth? Answer: There are several policies a government can undertake. First the government must insure that the preconditions for growth are present. The government must insure that economic freedom exists, that property rights are enforced, and that markets are free. After these crucial preconditions are in place, the government can create incentive mechanisms to save, invest, and innovate; can encourage saving; can encourage research and development; can encourage international trade; and can improve the quality of education. Topic: Policies for faster growth Skill: Level 4: Applying models Section: Checkpoint 25.4 Status: Old AACSB: Written and oral communication 4) A country's leadership believes that the neoclassical growth theory is correct. The country already has the necessary preconditions for growth, so suggest policy changes the government might enact to help speed economic growth. Answer: The policy changes should encourage technological innovation and capital formation because these are the key engines of growth within the neoclassical growth theory. Hence, the government should encourage research and development, possibly by directly funding research and development. In addition, the government should support policies that increase saving, because an increase in saving will lead to increased investment and hence new capital, some of which will have the new technologies embodied in it. Topic: Policies for faster growth, research and development Skill: Level 5: Critical thinking Section: Checkpoint 25.4 Status: Old AACSB: Written and oral communication 5) Why are the governments of developed countries concerned about the quality of education in their countries? What effect does education play in determining the country's economic growth rate and its standard of living? Why does it have this effect? Answer: Improving the quality of education is an important policy that the government can undertake to increase the nation's economic growth rate. A higher quality education increases the nation's human capital. Increases in human capital boost labor productivity and, in turn, the increase in labor productivity raises the nation's economic growth rate as well as its standard of living. Topic: Policies for faster growth, education Skill: Level 5: Critical thinking Section: Checkpoint 25.4 Status: Old AACSB: Written and oral communication

Foundations of Economics, 9e (Bade), GE Chapter 10 Finance, Saving, and Investment 26.1 Financial Institutions and Markets 1) Economists use the word "capital" to mean A) the tools, instruments, and other produced goods used to produce goods and services. B) the funds that firms use to buy and operate their businesses. C) purchases in the market for stocks and bonds. D) the workers that firms employ to produce goods and services. E) people's skills and talents. Answer: A Topic: Physical capital Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 2) Federal Express's purchase of trucks and planes A) is financial capital. B) includes depreciation. C) is an example of physical capital. D) creates wealth. E) reflects capital gains. Answer: C Topic: Physical capital Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 3) The distinction between physical and financial capital is that A) physical capital is equal to financial capital plus depreciation. B) financial capital is used to purchase and operate physical capital. C) the value of financial capital depends on the amount of available physical capital. D) physical capital is equal to financial capital minus depreciation. E) financial capital depreciates and physical capital does not. Answer: B Topic: Physical capital and financial capital Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

4) Financial capital A) is accumulated investment. B) is another name for the machines and tools that businesses buy. C) is independent of physical capital. D) depends on saving and borrowing decisions. E) depreciates each year. Answer: D Topic: Financial capital Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 5) Financial capital is used to help finance A) consumption expenditure by households. B) the purchase of physical capital by firms. C) gross investment but not net investment. D) net investment but not gross investment. E) people's savings. Answer: B Topic: Financial capital Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 6) The funds firms use to buy and operate physical capital are referred to as A) physical capital. B) financial capital. C) government capital. D) human capital. E) business capital. Answer: B Topic: Financial capital Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

7) An example of financial capital is A) machines. B) buildings. C) computers. D) bonds. E) the talents of a highly paid movie star. Answer: D Topic: Financial capital Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 8) ________ increases the quantity of capital, and ________ decreases the quantity of capital. A) Net investment; gross investment B) Investment; depreciation C) Depreciation; net investment D) Investment; saving E) Gross investment; net investment Answer: B Topic: Depreciation, investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 9) ________ decreases a firm's capital stock, and ________ increases its capital stock. A) Saving; depreciation B) Saving; investment C) Depreciation; investment D) Time; depreciation E) Investment; saving Answer: C Topic: Depreciation, investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

10) The total amount spent on new capital goods is called A) net investment. B) gross investment. C) depreciation. D) financial capital. E) wealth. Answer: B Topic: Gross investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 11) Which of the following is correct? A) Gross investment equals net investment minus depreciation. B) Net investment is the same as capital consumption. C) Gross investment is the total spent on capital. D) Net investment is the total spent on capital. E) The change in the nation's capital stock over a year equals the amount of gross investment. Answer: C Topic: Gross investment, net investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 12) The total amount spent to buy new physical capital and replace old capital is referred to as A) depreciation. B) net investment. C) savings. D) gross investment. E) wealth. Answer: D Topic: Gross investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

13) Bill's Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers break and are not worth fixing. Bill also expands his business and buys 10 more mowers. Bill's gross investment is ________ mowers. A) 10 B) 13 C) 7 D) 27 E) 30 Answer: A Topic: Gross investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 14) During the year, suppose a country's total purchases of newly produced capital goods is $2,000 billion, it issues $1,600 billion of stock certificates, and has $500 billion in depreciation. Gross investment in this country equals A) $2,000 billion. B) $2,500 billion. C) $3,600 billion. D) $4,100 billion. E) $2,100 billion. Answer: A Topic: Gross investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 15) On January 1, Rick's Photo owned $50,000 of equipment. During the year, the value of the equipment fell by $10,000, plus Rick bought $25,000 in new equipment. Rick's company experienced A) $10,000 of depreciation. B) $40,000 of depreciation. C) an increase of new capital by $10,000. D) an increase of net investment of $35,000. E) a change in total financial capital of $15,000. Answer: A Topic: Depreciation Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills

16) Gross investment equals A) net investment plus depreciation. B) net investment minus depreciation. C) gross financial capital minus depreciation. D) gross financial capital plus depreciation. E) net investment financial investment. Answer: A Topic: Gross investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 17) Net investment equals A) new capital plus old capital. B) capital plus depreciation. C) gross investment minus depreciation. D) gross investment plus depreciation. E) the amount of national wealth. Answer: C Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 18) Net investment equals A) gross financial capital minus stock dividends. B) depreciation plus gross investment. C) gross investment minus interest payments. D) gross investment minus depreciation. E) depreciation minus gross investment. Answer: D Topic: Net investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

19) Net investment is A) the same as gross investment. B) the same as depreciation. C) gross investment minus depreciation. D) gross investment plus depreciation. E) the same as wealth. Answer: C Topic: Net investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 20) Which of the following statements is correct? A) Gross investment minus financial capital equals net investment. B) Net investment plus depreciation equals gross investment. C) Net investment plus corporate profits equals gross investment. D) Net investment is greater than gross investment. E) Net investment minus depreciation equals gross investment. Answer: B Topic: Net investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 21) If an economy's depreciation is greater than its gross investment, then A) net investment is positive and saving is negative. B) the economy's capital stock decreases. C) net investment is positive and saving is positive. D) net investment is negative and saving is negative. E) net investment must equal saving. Answer: B Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills

22) The Zonamo company produces waste disposal machines and sells them to militaries all over the world. The company started last year with $10 million of capital on hand and invested $15 million in new capital throughout the year. At the end of the year, the company's capital stock was $17 million. Hence, for the year, depreciation equaled ________ and net investment equaled ________. A) $8 million; $7 million B) $7 million; $8 million C) $25 million; $5 million D) $5 million; $5 million E) $8 million; $15 million Answer: A Topic: Net investment Skill: Level 3: Using models Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 23) The local Allied Moving Company begins this year with capital equal to $250,000. During the year the firm depreciates $150,000 worth of its capital and ends the year with capital equal to $250,000. Which statement correctly summarizes Allied Moving Company's investment? A) Allied Moving Company made no capital investment during the year. B) Allied Moving Company made no gross investment during the year. C) Allied Moving Company made no net investment during the year. D) Allied Moving Company made net investment of $150,000 during the year. E) Allied Moving Company made gross investment of $250,000 during the year. Answer: C Topic: Net investment Skill: Level 3: Using models Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 24) Bill's Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers break and are not worth fixing. Bill also expands his business and buys 10 more mowers. Bill's net investment is ________ mowers. A) 10 B) 13 C) 7 D) 27 E) 20 Answer: C Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 8 Copyright © 2023 Pearson Education Ltd.

25) Bill's Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers break and are not worth fixing. Bill also expands his business and buys 10 more mowers. Bill's capital at the end of the year is ________ mowers. A) 20 B) 30 C) 27 D) 33 E) 10 Answer: C Topic: Capital Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 26) At the beginning of the year, AAA-1 Towing owns trucks and buildings for a total value of $1 million. During the year, it invests $250,000 to replace towing trucks worth $230,000 destroyed in a flood and to cover $50,000 worth of depreciation. AAA-1 Towing's net investment was A) $200,000. B) $20,000. C) $280,000. D) -$30,000. E) $250,000. Answer: D Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 27) At the beginning of the year, AAA-1 Towing owns trucks and buildings for a total value of $1 million. During the year, it invests $250,000 to replace towing trucks worth $230,000 destroyed in a flood and to cover $50,000 worth of depreciation. AAA-1 Towing's capital stock at the end of the year was A) $970,000. B) $1,250,000. C) $950,000. D) $1,280,000. E) $1,020,000. Answer: A Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 9 Copyright © 2023 Pearson Education Ltd.

28) On January 1, Rick's Photo owned $50,000 of equipment. During the year, the value of the equipment fell by $10,000, plus Rick bought $25,000 in new equipment. Rick's company experienced A) net investment of $15,000. B) an increase in financial capital of $65,000. C) a decrease in financial capital of $15,000. D) depreciation of $15,000. E) gross investment of $50,000. Answer: A Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 29) On January 1, Rick's Photo owned $50,000 of equipment. During the year, the value of the equipment fell by $10,000, plus Rick bought $25,000 in new equipment. Rick's company experienced ________ because ________. A) net investment of $15,000; net investment equals gross investment minus depreciation B) gross investment of $15,000; gross investment equals net investment minus depreciation C) gross investment of $40,000; gross investment equals net investment plus depreciation D) net investment of $15,000; net investment equals beginning year financial capital minus depreciations and investment E) depreciation of $15,000; depreciation equals investment in new products minus loss in values Answer: A Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 30) On January 1, Derek had CD recording devices valued at $30,000. During the year, the value of Derek's devices depreciated by $20,000. He spent $30,000 on new devices. Derek's net investment was ________ and at the end of the year Derek had capital valued at ________. A) $10,000; $40,000 B) $30,000; $40,000 C) $20,000; $60,000 D) $40,000; $70,000 E) $10,000; $60,000 Answer: A Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills

31) During the year, a country's total purchases of newly produced capital goods are $1,000 billion, the country issues $750 billion of stock certificates, and there is $200 billion of depreciation. Net investment in this country equals A) $800 billion. B) $1,550 billion. C) $1,000 billion. D) $1,750 billion. E) $550 billion. Answer: A Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Revised AACSB: Analytic skills 32) The change in the quantity of capital from one period to the next is equal to A) net investment. B) gross investment. C) depreciation. D) financial investment. E) wealth. Answer: A Topic: Net investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 33) Which of the following equals the change in an economy's capital stock from one period to the next? A) depreciation B) gross investment C) net investment D) wealth E) stock Answer: C Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

34) The difference between the amount of capital at the beginning of a year and the amount of capital at the end of the year is equal to A) net investment. B) capital consumption. C) gross investment. D) financial consumption. E) depreciation. Answer: A Topic: Net investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 35) U.S. capital at the end of a year equals U.S. capital at the beginning of the year plus A) nothing, because capital can't change in just one year. B) gross investment during the year. C) gross investment during the year minus net investment during the year. D) net investment during the year. E) depreciation during the year minus gross investment during the year. Answer: D Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Revised AACSB: Reflective thinking 36) Wealth is to ________ as capital stock is to ________. A) saving; investment B) income; earnings C) investment; saving D) income; net investment E) saving; depreciation Answer: A Topic: Wealth and saving Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

37) Economists use the term wealth to mean A) the same thing as income. B) what a person earns. C) what a person owns. D) the amount of income that is spent and not saved. E) a person's investment. Answer: C Topic: Wealth Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 38) Wealth is A) defined as the money in your savings account. B) another name for income. C) the value of all the things that a person owns. D) equivalent to saving. E) the same as investment in financial capital. Answer: C Topic: Wealth Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 39) A household increases its wealth by A) spending more on consumption goods. B) saving. C) increasing its capital consumption. D) decreasing its depreciation. E) making sure that its net investment exceeds its gross investment. Answer: B Topic: Wealth and saving Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

40) If capital gains equal zero, then the Ng family's wealth at the end of the year equals their wealth at the beginning of the year A) minus personal income taxes. B) plus saving. C) minus consumption. D) plus income. E) plus consumption minus income. Answer: B Topic: Wealth Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 41) During this year, Barbara earned $60,000 as a financial analyst, paid taxes of $5,000 and consumed $53,000. If Barbara's wealth was $4,000 at the beginning of the year, at the end of the year Barbara's wealth was A) $2,000. B) $4,000. C) $5,000. D) $6,000. E) $60,000. Answer: D Topic: Wealth Skill: Level 3: Using models Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 42) Assuming there are no capital gains, a nation's wealth at the start of a year is equal to the wealth at the start of the previous year plus A) nothing because wealth does not change from one year to the next. B) income. C) saving during the year. D) income minus saving during the year. E) saving minus depreciation during the year. Answer: C Topic: National wealth Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

43) During the year a country's income was $6.0 trillion and its consumption was $5.5 trillion. At the start of the year its wealth was $30.0 trillion. The country's wealth at the end of the year was A) $30.0 trillion. B) $30.5 trillion. C) $35.5 trillion. D) $36.0 trillion. E) $6.0 trillion. Answer: B Topic: National wealth Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 44) To acquire financial capital, a firm can i. obtain a loan from a bank. ii. issue stock. iii. issue bonds. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Financial markets Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 45) A document that promises to pay specified sums of money on specified dates and is a debt to the issuer is called A) a stock. B) a bond. C) net investment. D) depreciation. E) gross investment. Answer: B Topic: Bond Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

46) When Bank of America finances your purchase of a new car, you are A) lending in the capital market. B) borrowing in the bond market. C) lending in the bond market. D) borrowing in the loan market. E) borrowing in the stock market. Answer: D Topic: Loan market Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 47) Which of the following are typically financed in the loan market? i. a mortgage for a house iii. credit card balances iii. the purchase of a share of stock in a corporation. A) i and iii B) i only C) i, ii and iii D) i and ii E) ii and iii Answer: D Topic: Loan market Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 48) Which of the following are typically financed in a "bond market"? i. a mortgage for a house ii. state government borrowing for a new road project iii. your purchase of 4,000 shares of stock in Google A) ii only B) i and ii C) ii and iii D) i only E) i and iii Answer: A Topic: Bond market Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

49) Lulu purchased a security that promises to pay $50 twice a year from January 15, 2020 to January 15, 2026 and then pay $1,000 on January 15, 2026. The security is a debt to the company that issued it. The security is a A) depreciating asset. B) bond. C) share of stock. D) physical capital. E) net investment to the company that issued it. Answer: B Topic: Bond Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Revised AACSB: Reflective thinking 50) A share of stock is a A) promise to pay specified sums of money on specified dates. B) certificate of ownership and claim to the profits made by a firm. C) collection of funds that travels the world looking for the highest return. D) set of demanders and suppliers for the savings of households. E) form of investment in physical capital. Answer: B Topic: Stock Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 51) A certificate of ownership and claim to part of a firm's profits is called A) a stock. B) a bond. C) a certificate of deposit. D) depreciation. E) physical capital. Answer: A Topic: Stock Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

52) Which of the following are typically financed in a "stock market"? i. shares sold by a firm to finance its international growth plans ii. new mortgages for home buyers iii. credit card balances A) i only B) i, ii and iii C) ii and iii D) ii only E) i and iii Answer: A Topic: Stock market Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 53) Which of the following represents ownership of a firm? A) stocks B) bonds C) short-term securities D) loans E) commodities Answer: A Topic: Stock Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 54) A distinction between stocks and bonds is that A) bonds can be traded many times in the bond market, while stocks are non-transferable. B) although the return on a bond is determined by the forces of supply and demand, the return on a stock is set by the stock exchange. C) bonds cannot be sold to anyone other than the company that issued it while stocks can be resold to anyone. D) stocks represent ownership claims to the company and bonds do not. E) bonds must be held for a fixed number of years whereas stocks can be bought and sold at any time. Answer: D Topic: Bonds versus stocks Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

55) A stockholder ________ an owner of the firm, and a bondholder ________ an owner of the firm. A) is; is B) is; is not C) is not; is D) is not; is not E) might be; is not Answer: B Topic: Bonds versus stocks Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 56) Investment banks differ from commercial banks in the fact that A) investment banks help other financial institutions and governments engage in financial markets while commercial banks work with individuals. B) investment banks work only with wealthy customers while commercial banks work only with private firms. C) commercial banks service the needs of local governments while investment banks work with the federal government. D) commercial banks issue stocks and bonds while investment banks do not. E) commercial banks sell stocks on behalf of their customers while investment banks just finance loans. Answer: A Topic: Investment banks Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 57) What do Fannie Mae and Freddie Mac have in common? A) They are both government-sponsored mortgage lenders. B) They are both investment banks. C) They are both pension funds. D) Both firms went out of business in the 2008 financial crisis. E) Both firms issue bonds on behalf of the government. Answer: A Topic: Fannie and Freddie Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

58) Which of the following is NOT an example of physical capital? A) a building B) a bond C) a dump truck D) a lawn mower E) a computer Answer: B Topic: Physical capital Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 59) The decrease in the value of the capital that results from its use and obsolescence is A) appreciation. B) deconstruction. C) depreciation. D) gross investment. E) net investment. Answer: C Topic: Depreciation Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 60) Which of the following formulas is correct? A) net investment = gross investment + depreciation B) net investment = gross investment + capital C) net investment = gross investment - depreciation D) net investment = gross investment - saving E) net investment = gross investment - wealth Answer: C Topic: Net investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills

61) Intel's capital at the end of the year equals Intel's capital at the beginning of the year A) minus its stock dividends. B) plus net investment. C) minus depreciation. D) plus gross investment. E) plus depreciation. Answer: B Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 62) Economists use the term "financial markets" to mean the markets in which A) firms purchase their physical capital. B) firms supply their goods and services. C) households supply their labor services. D) firms get the funds that they use to buy physical capital. E) the government borrows to fund any budget surplus. Answer: D Topic: Financial markets Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 63) When a student uses a credit card to buy an iPod, the student is A) borrowing in the bond market. B) lending in the bond market. C) lending in the loan market. D) borrowing in the loan market. E) lending in the stock market. Answer: D Topic: Financial markets Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

64) Which of the following is NOT a financial institution? A) an insurance company B) a pension fund C) Freddie Mac D) a commercial bank E) None of the above is correct because they are all financial institutions. Answer: E Topic: Financial markets Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 65) A bond's price is $80 and the bond pays $8 in interest every year. The bond's interest rate is A) 8 percent. B) 10 percent. C) 4 percent. D) 80 percent E) None of the above are correct. Answer: B Topic: Interest rates Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 66) The economic benefits of financial markets do NOT include A) making it easier to invest in new capital, such as a home. B) raising the interest rate borrowers pay. C) smoothing people's consumption so it does not vary dramatically from one time period the next. D) sharing risk. E) None of the above are correct because all are benefits. Answer: B Topic: Benefits from financial markets Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: New AACSB: Reflective thinking

26.2 The Loanable Funds Market 1) One type of demander in the loanable funds market A) wants funds to purchase financial capital. B) wants funds to purchase physical capital. C) lends funds to purchase financial capital. D) lends funds to purchase physical capital. E) wants physical capital in order to purchase financial capital. Answer: B Topic: Loanable funds market Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 2) The demand for loanable funds includes demand for i. loans. ii. stocks. iii. bonds. A) i, ii and iii B) i only C) i and ii D) iii only E) ii and iii Answer: A Topic: Demand for loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

3) In the loanable funds market, demanders of funds are ________ and suppliers of funds are ________. A) firms and the government if it has a budget surplus; households and the government if it has a budget deficit B) firms and the government if it has a budget deficit; households and the government if it has a budget surplus C) households and the government if it has a budget surplus; firms and the government if it has a budget deficit D) households and the government if it has a budget deficit; firms and the government if it has a budget surplus E) households and firms; the government if it has a budget deficit Answer: B Topic: Loanable funds market Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 4) In the loanable funds market, which of the following is an example of investment demand? A) Mary buying stocks for her retirement portfolio B) George purchasing U.S. savings bonds for his son's college fund C) Scott purchasing a rookie-year baseball card for last year's World Series MVP D) Brian, owner of Bryan Games, purchasing computers to enhance the production of games E) Mark buying rare gold coins Answer: D Topic: Investment demand Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 5) The opportunity cost of the financial resources used to finance the purchase of capital is A) the real interest rate. B) the supply of investment. C) capital investment. D) the quantity of investment demanded. E) the price of the capital goods purchased. Answer: A Topic: Investment demand Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

6) ________ reflects a use of loanable funds, while ________ reflects a supply of loanable funds. A) Business investment; the government budget deficit B) International investment; business investment C) The government budget deficit; private saving D) A government budget surplus; a government budget deficit E) International borrowing; a government budget deficit Answer: C Topic: Loanable funds market Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 7) If a firm wants to borrow $10 million and the real interest rate increases from 5 percent to 6 percent, then the cost of the investment has increased by A) $1 million per year. B) $100,000 per year. C) $6 million per year. D) $600,000 per year. E) nothing because the real interest rate is the return the firm will earn on its investment. Answer: B Topic: Investment demand Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 8) Other things remaining the same, as the real interest rate increases A) firms will borrow more funds. B) firms will borrow less funds. C) firms' demand for funds will not change. D) firms will purchase new capital with its own funds instead of taking a loan. E) the demand for loanable funds curve shifts leftward. Answer: B Topic: Quantity of loanable funds demanded Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

9) Other things remaining the same, the ________ the real interest rate, the ________. A) lower; greater the quantity of loanable funds demanded B) lower; greater the demand for loanable funds C) higher; greater the quantity of loanable funds demanded D) higher; greater the demand for loanable funds E) lower; greater the quantity of loanable funds supplied Answer: A Topic: Quantity of loanable funds demanded Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 10) Suppose the real interest rate increases from 4 percent to 6 percent. As a result A) governments decrease the quantity supplied of loanable funds. B) firms increase their demand for loanable funds. C) governments decrease their demand for loanable funds. D) firms decrease the quantity demanded of loanable funds. E) governments increase the supply of loanable funds. Answer: D Topic: Quantity of loanable funds demanded Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 11) If the real interest rate rises A) the quantity of loanable funds demanded increases. B) the quantity of loanable funds demanded decreases. C) there is is movement down along the demand for loanable funds curve. D) the demand for loanable funds curve shifts leftward. E) the demand for loanable funds curve shifts rightward. Answer: B Topic: Quantity of loanable funds demanded Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

12) An increase in the quantity of loanable funds demanded occurs when A) the real interest rate falls. B) the real interest rate rises. C) the supply of loanable funds decreases. D) the expected profit rises. E) wealth decreases. Answer: A Topic: Quantity of loanable funds demanded Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 13) The quantity of loanable funds demanded increases if the real interest rate falls, all other things remaining the same, because the real interest rate A) determines the cost of living. B) is the opportunity cost of investment. C) affects the quantity of saving supplied. D) is not related to the price of bonds and stocks. E) affects the supply of saving which, in turn, determines the quantity of investment. Answer: B Topic: Quantity of loanable funds demanded Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 14) As the economy enters a strong expansion, then firms' demand for loanable funds A) increases because expected profit increases. B) decreases because expected profit decreases. C) increases because the nominal interest rate rises. D) decreases because the nominal interest rate falls. E) increases because the real interest rate rises. Answer: A Topic: Demand for loanable funds Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

15) Ford Motor Corporation is considering purchasing new technology that will increase productivity by twenty percent. If Ford Motor Corporation decides to make this investment at the going real interest rate, then A) the quantity of loanable funds demanded increases. B) the supply of loanable funds increases. C) the demand for loanable funds increases. D) Ford's profits will decline. E) saving increases. Answer: C Topic: Changes in the demand for loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 16) The demand for loanable funds A) increases in an expansion and decreases in a recession. B) decreases in an expansion and increases in a recession. C) increases if population growth declines. D) increases if the expected rate of profit decreases. E) increases if wealth increases. Answer: A Topic: Changes in the demand for loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 17) Which of the following decreases the demand for loanable funds and shifts the demand for loanable funds curve leftward? A) The real interest rate rises. B) The economy experiences a recession. C) Technology that increases productivity is introduced. D) An economy experiences a rapid increase in population. E) Wealth decreases. Answer: B Topic: Changes in the demand for loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

18) Technological change can increase the demand for loanable funds because it A) lowers the interest rate. B) can increase the expected profit. C) has little effect on production cost. D) decreases the need for additional equipment. E) increases people's expected future disposable income. Answer: B Topic: Changes in the demand for loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 19) The demand for loanable funds curve shifts in response to changes in A) the real interest rate. B) the amount of household savings. C) expected profits. D) the expected future disposable income. E) wealth. Answer: C Topic: Changes in the demand for loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 20) The demand for loanable funds increases if A) technological growth slows. B) population growth slows. C) expected profit increases. D) firms fear a recession. E) wealth increases. Answer: C Topic: Changes in the demand for loanable funds Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

21) The demand for loanable funds curve shows the relationship between the quantity of loanable funds demanded and A) the real interest rate. B) the price level. C) the capital stock. D) depreciation. E) the expected rate of profit. Answer: A Topic: Demand for loanable funds curve Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 22) The demand for loanable funds curve shows the A) negative relationship between the interest rate and the quantity of loanable funds demanded. B) positive relationship between the interest rate and the quantity of loanable funds demanded. C) negative relationship between the demand for loanable funds curve and the supply of loanable funds curve. D) positive relationship between the demand for loanable funds curve and the supply of loanable funds curve. E) U-shaped relationship between the interest rate and the quantity of loanable funds demanded. Answer: A Topic: Demand for loanable funds curve Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 23) The demand for loanable funds curve illustrates A) the quantity of loanable funds demanded at any given level of disposable income. B) the quantity of loanable funds demanded at any given level of the real interest rate. C) the quantity of loanable funds supplied to the loanable funds market at any given level of disposable income. D) how the quantity of loanable funds demanded changes when the people's expectations about their future income changes. E) how the quantity of loanable funds demanded changes when wealth changes. Answer: B Topic: Demand for loanable funds curve Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

24) The demand for loanable funds curve shows that the higher the real interest rate, the A) smaller the quantity of loanable funds demanded. B) smaller the demand for loanable funds. C) larger the quantity of loanable funds demanded. D) larger the demand for loanable funds. E) more the loanable funds demand curve shifts leftward. Answer: A Topic: Demand for loanable funds curve Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 25) The demand for loanable funds curve slopes downward because the A) higher the real interest rate, the lower the cost of investment. B) expected rate of profit is related positively to the real interest rate. C) price of bonds and stocks is not related to the real interest rate. D) real interest rate is the opportunity cost of investment. E) expected rate of profit is factor that "rewards" firms for their investment. Answer: D Topic: Demand for loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 26) If the real interest rate falls, there is A) an upward movement along the demand for loanable funds curve. B) a downward movement along the demand for loanable funds curve. C) a rightward shift of the demand for loanable funds curve. D) a leftward shift of the demand for loanable funds curve. E) a leftward shift of the supply of loanable funds curve. Answer: B Topic: Demand for loanable funds curve Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

27) Which of the following occurs if the real interest rate falls? A) The demand for loanable funds increases and the demand for loanable funds curve shifts rightward. B) The demand for loanable funds decreases and the demand for loanable funds curve shifts leftward. C) The quantity of loanable funds demanded increases and there is a movement down along the demand for loanable funds curve. D) The quantity of loanable funds demanded decreases increases and there is a movement up along the demand for loanable funds curve. E) The quantity of loanable funds demanded increases and the demand for loanable funds curve shifts rightward. Answer: C Topic: Demand for loanable funds curve Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 28) A fall in the real interest rate brings a A) movement down along the demand for loanable funds curve but no shift in the curve. B) rightward shift of the demand for loanable funds curve but no movement along the curve. C) movement up along the demand for loanable funds curve. D) leftward shift of the demand for loanable funds curve. E) movement down along the demand for loanable funds curve and a rightward shift of the demand for loanable funds curve. Answer: A Topic: Demand for loanable funds curve Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 29) In a business cycle recession, which of the following occurs? A) Investment demand increases and the demand for loanable funds curve shifts rightward. B) Investment demand decreases and the demand for loanable funds curve shifts leftward. C) The quantity of investment demanded increases and there is a movement down along the demand for loanable funds curve but no shift in the curve. D) The quantity of investment demanded decreases increases and there is a movement up along the demand for loanable funds curve but no shift in the curve. E) The quantity of investment demanded decreases and there is a rightward shift of the demand for loanable funds curve. Answer: B Topic: Demand for loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 32 Copyright © 2023 Pearson Education Ltd.

30) During a recession, firms' expected profit from investment ________ so the demand for loanable funds curve ________. A) falls; shifts rightward B) falls; shifts leftward C) rises; shifts rightward D) rises; shifts leftward E) falls; does not shift Answer: B Topic: Demand for loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 31) What happens to the demand for loanable funds curve when the economy enters a recession? A) The demand for loanable funds curve shifts rightward because the real interest rate falls. B) The demand for loanable funds curve shifts leftward because the real interest rate falls. C) The demand for loanable funds curve shifts rightward because expected profit falls. D) The demand for loanable funds curve shifts leftward because expected profit falls. E) The demand for loanable funds curve shifts leftward because wealth decreases. Answer: D Topic: Demand for loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 32) The demand for loanable funds curve shifts rightward when A) the real interest rate rises. B) the real interest rate falls. C) expected profit increases. D) expected profit decreases. E) wealth rises. Answer: C Topic: Demand for loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

33) When the expected profit ________, investment demand ________ and the demand for loanable funds curve shifts ________. A) falls; decreases; leftward B) rises; increases; leftward C) falls; decreases; rightward D) rises; decreases; rightward E) falls; increases; rightward Answer: A Topic: Demand for loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 34) An increase in the expected profit from new capital brings about a A) movement up along the demand for loanable funds curve. B) movement down along the demand for loanable funds curve. C) rightward shift of the demand for loanable funds curve. D) leftward shift of the demand for loanable funds curve. E) rightward shift of the supply of loanable funds curve. Answer: C Topic: Demand for loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 35) Which of the following occurs if the expected profit increases? A) Investment demand increases and the demand for loanable funds curve shifts rightward. B) Investment demand decreases and the demand for loanable funds curve shifts leftward. C) The quantity of investment demanded increases and there is a movement down along the demand for loanable funds curve. D) The quantity of investment demanded decreases and there is a movement up along the demand for loanable funds curve. E) The savings increases and the supply of loanable funds curve shifts rightward. Answer: A Topic: Demand for loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

36) If firms became more optimistic about the future of the economy, which of the following occurs? A) Investment demand increases, and the demand for loanable funds curve shifts rightward. B) Investment demand decreases, and the demand for loanable funds curve shifts leftward. C) The quantity of investment demanded increases, and there is a movement down along the demand for loanable funds curve. D) The quantity of investment demanded decreases, and there is a movement up along the demand for loanable funds curve. E) The saving decreases, and the supply of loanable funds curve shifts leftward. Answer: A Topic: Demand for loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

37) In the figure above, the rightward shift from the demand for loanable funds curve DLF1 to the demand for loanable funds curve DLF2, could be the result of A) a rise in the interest rate. B) an increase in wealth. C) an increase in expected profit. D) a decrease in expected profit. E) a fall in the interest rate. Answer: C Topic: Demand for loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills 35 Copyright © 2023 Pearson Education Ltd.

38) In the figure above, the shift from DLF1 to DLF2 could result from A) the economy entering a strong expansion. B) an increase in the nominal interest rate. C) a decrease in the real interest rate. D) an increase in a government budget surplus. E) the economy entering a recession. Answer: A Topic: Demand for loanable funds curve Skill: Level 4: Applying models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills 39) In the figure above, the leftward shift from the demand for loanable funds curve DLF1 to the demand for loanable funds curve DLF3, could be the result of A) a decrease in interest rates during an economic recession. B) an increase in interest rates during an economic expansion. C) the economy entering a recession. D) a government budget surplus. E) the economy entering an expansion. Answer: C Topic: Demand for loanable funds curve Skill: Level 4: Applying models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills 40) In the figure above, the leftward shift from the demand for loanable funds curve DLF1 to the demand for loanable funds curve DLF3, could be the result of A) a fall in the interest rate. B) a decrease in expected profit. C) an advancement in technology. D) an increase in the population. E) a rise in the interest rate. Answer: B Topic: Demand for loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills

41) The supply of loanable funds is from A) households and the government if it has a budget surplus. B) households and the government if it has a budget deficit. C) firms and the government if it has a budget surplus. D) firms and the government if it has a budget deficit. E) households and firms. Answer: A Topic: Supply of loanable funds Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 42) The quantity of loanable funds supplied increases if the real interest rate rises, all other things remaining the same, because the A) real interest rate is the opportunity cost of saving. B) real interest rate is the opportunity cost of consumption. C) cost of living is determined by the real interest rate. D) real interest rate is inversely related to the cost of buying on credit. E) demand for investment increases when the real interest rate rises. Answer: B Topic: Supply of loanable funds Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 43) The quantity of loanable funds supplied increases if the ________, all other things remaining the same, because the ________. A) real interest rate rises; real interest rate is the opportunity cost of saving B) real interest rate rises; real interest rate is the opportunity cost of consumption C) real interest rate rises; cost of living is determined by the real interest rate D) real interest rate falls; real interest rate is the opportunity cost of consumption E) real interest rate falls; real interest rate is the opportunity cost of saving Answer: B Topic: Supply of loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

44) The real interest rate is ________ related to the supply of loanable funds because ________. A) positively; the opportunity cost of consumption expenditure increases as the real interest rate rises B) negatively; the opportunity cost of consumption expenditure increases as the real interest rate rises C) positively; people are motivated to increase their consumption expenditure as the real interest rate rises D) negatively; people are motivated to save more as the real interest rate rises E) None of the above answers is correct. Answer: A Topic: Supply of loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 45) If the real interest rate falls, people decide to ________ because the opportunity cost of ________. A) increase their consumption expenditure; saving has decreased B) increase their consumption expenditure; consumption has decreased C) decrease their consumption expenditure; consumption has decreased D) save more; saving has decreased E) None of the above answers is correct. Answer: B Topic: Supply of loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 46) If the interest rate on student loans ________, students will ________. A) rises from 6 percent to 12 percent; increase their saving in order to pay back the loan sooner B) rises from 6 percent to 12 percent; increase their consumption before it becomes too expensive C) falls from 6 percent to 1 percent; increase their saving in order to pay back the loan sooner D) falls from 6 percent to 1 percent; not change their saving but will change their investment E) None of the above answers is correct. Answer: A Topic: Supply of loanable funds Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

47) Increasing savings and ________ consumption expenditure go hand in hand because they both ________. A) decreasing; are the result of an increase in real interest rates on the loanable funds market B) decreasing; are the result of an increase in nominal interest rates on the loanable funds market C) increasing; are the result of an increase in real interest rates on the loanable funds market D) increasing; are the result of an increase in nominal interest rates on the loanable funds market E) None of the above answers is correct. Answer: A Topic: Supply of loanable funds Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Revised AACSB: Reflective thinking 48) The supply of loanable funds schedule shows that the A) higher the real interest rate, the greater the quantity of loanable funds supplied. B) higher the real interest rate, the greater the opportunity cost of supplying loanable funds. C) higher the real interest rate, the lower the profit from making new investment. D) lower the real interest rate, the greater the quantity of loanable funds supplied. E) higher the real interest rate, the more the supply of loanable funds curve shifts rightward. Answer: A Topic: Supply of loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 49) An increase in the real interest rate A) has no effect on the loanable funds. B) increases the quantity of loanable funds supplied. C) increases current consumption. D) decreases the quantity of loanable funds supplied. E) shifts the supply of loanable funds curve rightward. Answer: B Topic: Supply of loanable funds Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

50) As the real interest rate rises, the quantity of loanable funds supplied ________ and the quantity of loanable funds demanded ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: B Topic: Supply of loanable funds, demand for loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 51) A decrease in people's disposable income A) increases saving. B) increases consumption. C) decreases saving. D) increases saving and decrease consumption. E) increases investment demand. Answer: C Topic: Changes in saving supply Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 52) As the economy enters an expansion so that people's expected future incomes rise, there will be A) an increase in the supply of loanable funds. B) a leftward shift in the supply of loanable funds curve. C) a decrease in the nominal interest rate. D) a leftward shift in the demand for loanable funds curve. E) None of the above answers is correct. Answer: A Topic: Changes in saving supply Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

53) When disposable income increases, saving will A) decrease, and there is a movement downward along the supply of loanable funds curve. B) increase, and there is a movement upward along the supply of loanable funds curve. C) not change. D) increase, and the supply of loanable funds curve shifts rightward. E) decrease, and the supply of loanable funds curve shifts leftward. Answer: D Topic: Changes in the supply of loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 54) If the disposable income decreases, then A) the supply of loanable funds increases. B) the supply of loanable funds decreases. C) the quantity of loanable funds demanded increases. D) the quantity of loanable funds supplied decreases. E) the demand for loanable funds increases. Answer: B Topic: Changes in the supply of loanable funds Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 55) If expectations about future income change, there is A) no change in saving until income actually changes. B) a decrease in saving if people expect income to increase in the future. C) an increase in saving if people expect income to increase in the future. D) a decrease saving if people expect income to decrease in the future. E) a change in the quantity of loanable funds supplied and a movement along the supply of loanable funds curve. Answer: B Topic: Changes in the supply of loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

56) If expected future income increases, then A) the supply of loanable funds increases. B) the supply of loanable funds decreases. C) the quantity of loanable funds demanded increases. D) the quantity of loanable funds supplied decreases. E) the demand for loanable funds decreases. Answer: B Topic: Changes in the supply of loanable funds Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 57) In 2020 the fall in the value of the stock market decreased people's wealth. As a result of this change alone, the supply of loanable funds A) increased. B) did not change, and there was no movement along the supply of loanable funds curve. C) decreased. D) did not change, and there was an upward movement along the supply of loanable funds curve. E) did not change, and there was a downward movement along the supply of loanable funds curve. Answer: A Topic: Changes in the supply of loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Revised AACSB: Reflective thinking 58) When ________ changes, the supply of loanable funds curve shifts. A) the expected rate of profit B) people's expected future income C) the price level D) "animal spirits" E) investment Answer: B Topic: Shifts of the supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

59) Which of the following factors changes saving supply and hence shifts the supply of loanable funds curve? i. disposable income ii. wealth iii. expected profit A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 60) Which of the following shifts the supply of loanable funds curve? A) change in the real interest rate B) change in investment demand C) change in disposable income D) change in expected profit E) change in "animal spirits" Answer: C Topic: Supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 61) A fall in the real interest rate brings a A) movement up along the supply of loanable funds curve. B) rightward shift of the supply of loanable funds curve. C) movement down along the supply of loanable funds curve. D) leftward shift of the supply of loanable funds curve. E) rightward shift of the demand for loanable funds curve. Answer: C Topic: Supply of loanable funds curve Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

62) If the real interest rate rises, then the A) supply of saving increases and the supply of loanable funds curve shifts rightward. B) supply of saving decreases and the supply of loanable funds curve shifts leftward. C) quantity of saving increases and there is a movement up along the supply of loanable funds curve. D) quantity of saving decreases and there is a movement down along the supply of loanable funds curve. E) demand for investment decreases and the demand for loanable funds curve shifts leftward. Answer: C Topic: Supply of loanable funds curve Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 63) If the real interest rate A) rises, the supply of loanable funds curve shifts rightward. B) rises, the supply of loanable funds curve shifts leftward. C) falls, there is a movement along the supply of loanable funds curve to a higher quantity of saving. D) falls, there is a movement along the supply curve of loanable funds to a lower quantity of loanable funds. E) falls, the supply of loanable funds curve shifts leftward. Answer: D Topic: Supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 64) The supply of loanable funds curve has a positive slope because the A) higher the real interest rate, the lower the return to saving. B) average return in the stock market is directly related to the real interest rate. C) lower the real interest rate, the higher the return to saving. D) lower the real interest rate, the lower the return to saving. E) quantity of investment increases when the real interest rate increases. Answer: D Topic: Supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

65) If wealth ________, then saving increases, which is shown by a ________. A) increases; movement upward along the supply of loanable funds curve B) decreases; movement downward along the supply of loanable funds curve C) increases; rightward shift of the supply of loanable funds curve D) decreases; rightward shift of the supply of loanable funds curve E) increases; leftward shift of the supply of loanable funds curve Answer: D Topic: Supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 66) Which of the following factors does NOT shift the supply of loanable funds curve? i. change in disposable income ii. change in wealth iii. change in expected profit A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: C Topic: Supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 67) The supply of loanable funds curve has a ________ slope and the demand for loanable funds curve has a ________ slope. A) positive; positive B) positive; negative C) negative; positive D) negative; negative E) vertical; horizontal Answer: B Topic: Supply of loanable funds curve, demand for loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

68) In which of the following cases would the supply of loanable funds curve shift rightward? A) Joe is worried about cutbacks at his firm, so his expected future income falls. B) In June, Sally learns that at year's end she will receive a bonus that will double her current salary. C) The stock market booms, so people's wealth increases. D) The economy moves into a recession. E) Investment demand increases. Answer: A Topic: Shifts of the supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 69) A decrease in households' disposable income ________ saving supply, and the supply of loanable funds curve ________. A) decreases; shifts rightward B) decreases; shifts leftward C) increases; shifts rightward D) increases; shifts leftward E) does not change; does not shift Answer: B Topic: Shifts of the supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 70) An increase in disposable income leads to a A) leftward shift of the demand for loanable funds curve. B) downward movement along the supply of loanable funds curve. C) rightward shift of the supply of loanable funds curve. D) leftward shift of the supply of loanable funds curve. E) rightward shift of the demand for loanable funds curve. Answer: C Topic: Shifts of the supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

71) A decrease in wealth leads to a A) leftward shift of the demand for loanable funds curve. B) downward movement along the supply of loanable funds curve. C) rightward shift of the supply of loanable funds curve. D) leftward shift of the supply of loanable funds curve. E) rightward shift of the demand for loanable funds curve. Answer: C Topic: Shifts of the supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 72) An increase in wealth ________ saving supply, and the supply of loanable funds curve ________. A) decreases; shifts rightward B) decreases; shifts leftward C) increases; shifts rightward D) increases; shifts leftward E) does not change; does not shift Answer: B Topic: Shifts of the supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 73) When wealth ________, saving supply ________, and the supply of loanable funds curve shifts ________. A) decreases; decreases; leftward B) increases; increases; leftward C) decreases; decreases; rightward D) increases; decreases; leftward E) increases; increases; rightward Answer: D Topic: Shifts of the supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

74) An increase in people's expected future disposable income ________ saving supply, and the supply of loanable funds curve ________. A) decreases; shifts rightward B) decreases; shifts leftward C) increases; shifts rightward D) increases; shifts leftward E) does not change; does not shift Answer: B Topic: Shifts of the supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 75) A decrease in expected future income leads to a A) rightward shift of the demand for loanable funds curve. B) downward movement along the supply of loanable funds curve. C) rightward shift of the supply of loanable funds curve. D) leftward shift of the supply of loanable funds curve. E) leftward shift of the demand for loanable funds curve. Answer: C Topic: Shifts of the supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

76) Suppose that the initial supply of loanable funds curve is SLF1. In the figure above, an increase in the real interest rate leads to i. a shift in the supply of loanable funds curve from SLF1 to SLF2. ii. a shift in the supply of loanable funds curve from SLF1 to SLF3. iii. a movement along the supply of loanable funds curve SLF1. iv. no change whatever. A) i only B) ii only C) iii only D) i and iii E) iv only Answer: C Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills

77) In the figure above, the shift in the supply of loanable funds curve from SLF1 to SLF2 could be the result of A) an increase in the real interest rate. B) a decrease in disposable income. C) an increase in expected rate of profit. D) a decrease in wealth. E) an increase in expected future disposable income. Answer: D Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills 78) In the loanable funds market, a shortage of loanable funds occurs when the A) demand for loanable funds exceeds supply of loanable funds. B) supply of loanable funds exceeds demand for loanable funds. C) quantity of loanable funds supplied exceeds the quantity of loanable funds demanded. D) quantity of loanable funds demanded exceeds the quantity of loanable funds supplied. E) supply of loanable funds curve shifts rightward. Answer: D Topic: Loanable funds market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 79) If the real interest rate is less than the equilibrium real interest rate, there is a ________ of loanable funds, and ________. A) surplus; some borrowers cannot find the funds they want B) shortage; some borrowers cannot find the funds they want C) surplus; borrowers have an easy time finding the funds they want D) shortage; borrowers have an easy time finding the funds they want E) shortage; savers increase their saving supply to restore the equilibrium Answer: B Topic: Loanable funds market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

80) When the real interest rate ________ the equilibrium real interest rate, there is a ________ of loanable funds and the real interest rate ________. A) exceeds; surplus; rises B) is less than; surplus; rises C) exceeds; shortage; rises D) is less than; shortage; rises E) is less than; shortage; falls Answer: D Topic: Loanable funds market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 81) If a surplus of loanable funds exists in the loanable funds market, the real interest rate ________ and the quantity of saving ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) falls; does not change Answer: D Topic: Loanable funds market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 82) The equilibrium real interest rate is 5 percent. If the real interest rate is A) 3 percent, then the supply of loanable funds curve will shift leftward as new savers enter the market. B) 6 percent, the demand for loanable funds curve will shift rightward as firms enter the market to borrow at the lower rate. C) 8 percent, there is a surplus of loanable funds. D) 2 percent, there is a shortage of loanable funds. E) anything other than 5 percent, the supply of loanable funds curve and/or the demand for loanable funds curve will shift to move the real interest rate to 5 percent. Answer: C Topic: Loanable funds market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

83) In the loanable funds market, if the real interest rate is higher than the equilibrium real interest rate A) there is a shortage of loanable funds. B) there is a surplus of loanable funds. C) there is a surplus of investment. D) the demand for loanable funds curve shifts rightward to restore the equilibrium. E) the demand for loanable funds curve shifts leftward to restore the equilibrium. Answer: B Topic: Loanable funds market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 84) At the current interest rate, the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded. Therefore A) the real interest rate is below the equilibrium level. B) the real interest rate is above the equilibrium level. C) equilibrium will not be achieved until something shifts the supply of loanable funds curve leftward. D) equilibrium will not be achieved until something shifts the demand for loanable funds curve rightward. E) equilibrium will not be achieved until something shifts the supply of loanable funds curve rightward. Answer: B Topic: Loanable funds market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 85) When the real interest rate ________ the equilibrium real interest rate, there is a ________ of loanable funds and the real interest rate ________. A) exceeds; surplus; falls B) is less than; surplus; rises C) exceeds; shortage; rises D) is less than; shortage; falls E) exceeds; surplus; rises Answer: A Topic: Loanable funds market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

86) The figure above shows the loanable funds market. The equilibrium real interest rate is ________, and the equilibrium quantity of loanable funds is ________. A) 6 percent; $2.0 trillion B) 4 percent; $2.5 trillion C) 8 percent; $1.5 trillion D) 0 percent; $3.5 trillion E) 4 percent; $1.5 trillion Answer: A Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills 87) The figure above shows the loanable funds market. If the real interest rate is 2 percent, then A) there will be government intervention in the market to make sure there is no credit crisis. B) there will be a leftward shift in the demand for loanable funds curve. C) there is a surplus in the loanable funds market. D) there is a shortage in the loanable funds market. E) the demand for loanable funds curve will shift rightward. Answer: D Topic: Capital market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills

88) The figure above shows the loanable funds market. If the real interest rate is 10 percent, then A) there is a shortage in the loanable funds market. B) there is a surplus in the loanable funds market. C) the interest rate must increase. D) the government must intervene in order to prevent a credit crisis. E) savers will exit the market because of the high opportunity cost of saving. Answer: B Topic: Loanable funds market Skill: Level 4: Applying models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills

89) The figure above shows the loanable funds market. The equilibrium real interest rate is ________ percent, and the equilibrium quantity of loanable funds is ________. A) 4; $1.8 trillion B) 6; $1.6 trillion C) 8; $1.4 trillion D) 4; $1.4 trillion E) 8; $1.8 trillion Answer: B Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills

90) The figure above shows the loanable funds market. At an interest rate of A) 8 percent, there is a surplus of loanable funds. B) 8 percent, the quantity demanded of loanable funds exceeds the quantity supplied. C) 4 percent, the quantity supplied of loanable funds equals $18 trillion. D) 6 percent, the quantity demanded of loanable funds equals $14 trillion. E) 4 percent, there is a surplus of loanable funds. Answer: A Topic: Loanable funds market equilibrium Skill: Level 4: Applying models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills 91) The figure above shows the loanable funds market. At an interest rate of A) 4 percent, there is a surplus of loanable funds. B) 4 percent, there is a shortage of loanable funds. C) 8 percent, the quantity of loanable funds supplied is $14 trillion. D) 8 percent, the quantity demanded of loanable funds is $18 trillion. E) 6 percent, savers will exit the market because the reward to saving is too low. Answer: B Topic: Loanable funds market equilibrium Skill: Level 4: Applying models Section: Checkpoint 26.2 Status: Revised AACSB: Analytic skills 92) Suppose that there is an increase in disposable income and simultaneously an increase in the expected profitability of investment. As a result, the equilibrium real interest rate ________ and the equilibrium quantity of loanable funds ________. A) rises; increases B) falls; increases C) remains unchanged; increases D) might rise, fall, or remain unchanged; increases E) might rise, fall, or remain unchanged; decreases Answer: D Topic: Loanable funds market equilibrium Skill: Level 4: Applying models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

93) Suppose that there is an increase in expected future disposable income and simultaneously an increase in the expected profitability of investment. As a result, the equilibrium real interest rate ________ and the equilibrium quantity of loanable funds ________. A) rises; might increase, decrease, or not change B) rises; increases C) rises; decreases D) falls; might increase, decrease, or not change E) falls; increases Answer: A Topic: Loanable funds market equilibrium Skill: Level 4: Applying models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 94) Suppose firms become more optimistic about the economy's ability to avoid a recession and hence the expected profit increases. As a result, the demand for loanable funds curve shifts ________ and the real interest rate ________. A) rightward; rises B) rightward; falls C) leftward; rises D) leftward; falls E) rightward; does not change Answer: A Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 95) A decrease in expected profit A) lowers the equilibrium real interest rate. B) raises the equilibrium real interest rate. C) increases the demand for loanable funds. D) decreases the supply of loanable funds. E) increases the supply of loanable funds. Answer: A Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

96) If the real interest rate falls, other things being the same, the quantity of loanable funds demanded ________ and the quantity of loanable funds supplied ________. A) increases; decreases B) increases; increases C) decreases; does not change D) does not change; decreases E) decreases; decreases Answer: A Topic: Supply of loanable funds, demand for loanable funds Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 97) The demand for loanable funds A) increases in a recession. B) decreases in an expansion. C) increases when firms are optimistic about the profit from investing in capital. D) increases when wealth increases. E) decreases when wealth increases. Answer: C Topic: Changes in the demand for loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 98) Other things remaining the same, a ________ in the real interest rate ________ the quantity of saving supplied and ________ the quantity of loanable funds supplied. A) fall; increases; increases B) rise; increases; increases C) fall; increases; decreases D) fall; decreases; increases E) rise; increases; decreases Answer: B Topic: Saving supply Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

99) An increase in wealth leads to ________ loanable funds. A) an increase in the supply of B) an increase in the demand for C) a decrease in the supply of D) a decrease in the demand for E) no change in either the supply of loanable funds or the demand for Answer: C Topic: Changes in the supply of loanable funds Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 100) If the real interest rate falls, there is A) an upward movement along the supply of loanable funds curve. B) a downward movement along the supply of loanable funds curve. C) a rightward shift of the supply curve of loanable funds and no shift in the demand for loanable funds curve. D) a leftward shift of the supply of loanable funds curve and no shift in the demand for loanable funds curve. E) a leftward shift of the supply of loanable funds curve and a rightward shift in the demand for loanable funds curve. Answer: B Topic: Supply of loanable funds curve Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 101) If, at the current interest rate, the quantity of loanable funds supplied is less than the quantity of loanable funds demanded, then A) the supply of loanable funds curve shifts rightward and the real interest rate rises. B) the supply of loanable funds curve shifts leftward and the real interest rate falls. C) the real interest rate falls. D) the real interest rate rises. E) the supply of loanable funds curve shifts leftward and the real interest rate rises. Answer: D Topic: Loanable funds market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

102) If expected profit falls, the demand for loanable funds curve shifts ________, and the real interest rate ________. A) rightward; rises B) rightward; falls C) leftward; rises D) leftward; falls E) leftward; does not change Answer: D Topic: Loanable funds market equilibrium Skill: Level 4: Applying models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

103) The figure above shows the demand for loanable funds curve. A movement from point E to point C can be the result of A) an increase in expected profit. B) a decrease in expected profit. C) a rise in the real interest rate. D) a fall in the real interest rate. E) an increase in the government budget deficit. Answer: C Topic: Demand for loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

104) The figure above shows the demand for loanable funds curve. If the curve shifts leftward from the curve shown, the shift could be the result of A) an increase in expected profit. B) a decrease in expected profit. C) a rise in the real interest rate. D) a fall in the real interest rate. E) a decrease in real GDP. Answer: B Topic: Demand for loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

105) The figure above shows the supply for loanable funds curve. A movement from point E to point C can be the result of A) a fall in expected future income. B) an increase in disposable income. C) a rise in the real interest rate. D) a fall in the real interest rate. E) an increase in wealth. Answer: C Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

106) The figure above shows the supply for loanable funds curve. If the supply of loanable funds curve shifts leftward from the curve shown in the figure, the shift could be the result of A) a fall in expected future income. B) a decrease in disposable income. C) a decrease in the demand for loanable funds. D) a decrease in default risk. E) a decrease in wealth. Answer: B Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 107) The figure above shows the supply for loanable funds curve. If the supply of loanable funds curve shifts leftward from the curve shown in the figure, the shift could be the result of A) a rise in expected future income. B) an increase in disposable income. C) a decrease in the demand for loanable funds. D) a decrease in default risk. E) a decrease in wealth. Answer: A Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 108) The figure above shows the supply for loanable funds curve. If the supply of loanable funds curve shifts leftward from the curve shown in the figure, the shift could be the result of A) a decrease in expected future income. B) an increase in disposable income. C) a decrease in the demand for loanable funds. D) a decrease in default risk. E) an increase in wealth. Answer: E Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

109) The figure above shows the supply for loanable funds curve. If the supply of loanable funds curve shifts leftward from the curve shown in the figure, the shift could be the result of A) a decrease in expected future income. B) an increase in disposable income. C) a decrease in the demand for loanable funds. D) a decrease in default risk. E) an increase in default risk. Answer: E Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

110) In the figure above, the shift in the supply of loanable funds curve from SLF1 to SLF2 could be the result of A) an increase in the real interest rate. B) a decrease in disposable income. C) an increase in expected rate of profit. D) a decrease in expected future income. E) an increase in expected future income. Answer: D Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

111) In the figure above, the shift in the supply of loanable funds curve from SLF1 to SLF2 could be the result of A) an increase in the real interest rate. B) a decrease in disposable income. C) an increase in expected rate of profit. D) a decrease in default risk. E) an increase in expected future income. Answer: D Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 112) In the figure above, the shift in the supply of loanable funds curve from SLF1 to SLF2 could be the result of A) an increase in the real interest rate. B) a decrease in disposable income. C) an increase in expected rate of profit. D) an increase in disposable income. E) an increase in expected future income. Answer: D Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 113) In the figure above, the shift in the supply of loanable funds curve from SLF1 to SLF3 could be the result of A) an increase in the real interest rate. B) a decrease in the real interest rate. C) an increase in expected rate of profit. D) a decrease in disposable income. E) a decrease in expected future income. Answer: D Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

114) In the figure above, the shift in the supply of loanable funds curve from SLF1 to SLF3 could be the result of A) an increase in the real interest rate. B) a decrease in the real interest rate. C) an increase in expected rate of profit. D) an increase in wealth. E) a decrease in expected future income. Answer: D Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 115) In the figure above, the shift in the supply of loanable funds curve from SLF1 to SLF3 could be the result of A) an increase in the real interest rate. B) a decrease in the real interest rate. C) an increase in expected rate of profit. D) an increase in expected future income. E) a decrease in expected future income. Answer: D Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 116) In the figure above, the shift in the supply of loanable funds curve from SLF1 to SLF3 could be the result of A) an increase in the real interest rate. B) a decrease in the real interest rate. C) an increase in expected rate of profit. D) an increase in default risk. E) a decrease in expected future income. Answer: D Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

26.3 Government in Loanable Funds Market 1) For a government to add to the supply of loanable funds, it must A) borrow. B) have a budget surplus. C) have a budget deficit. D) raise the real interest rate. E) increase its investment demand. Answer: B Topic: Government saving Skill: Level 1: Definition Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 2) If a government has a budget deficit, it must A) borrow in the loanable funds market. B) increase taxes. C) lower the real interest rate. D) decrease its expenditures. E) decrease taxes. Answer: A Topic: Government saving Skill: Level 1: Definition Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 3) Government saving is equal to A) the quantity of investment demanded. B) net taxes minus government expenditures. C) net taxes plus government expenditures. D) private savings minus government expenditures. E) net taxes. Answer: B Topic: Government saving Skill: Level 1: Definition Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

4) If there is no Ricardo-Barro effect, the government A) plays no direct role in the loanable funds market because it doesn't affect either the demand for loanable funds or the supply of loanable funds. B) always has negative saving and therefore lowers the real interest rate. C) only affects the demand for loanable funds curve in the loanable funds market. D) increases the supply of loanable funds if it has a budget surplus and shifts the supply of loanable funds curve. E) has no effect because private saving changes to offset the effect that the government's budget deficit or surplus might otherwise have. Answer: D Topic: Government saving Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 5) If there is no Ricardo-Barro effect, an increase in the government budget surplus A) decreases private saving. B) increases private saving. C) decreases the supply of loanable funds. D) increases the supply of loanable funds. E) has no effect on the demand for loanable funds, the supply of loanable funds, or the real interest rate. Answer: D Topic: Government saving Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 6) If there is no Ricardo-Barro effect, a government budget surplus A) increases the supply of loanable funds. B) decreases the supply of loanable funds. C) increases the demand for loanable funds. D) decreases the demand loanable funds. E) has no effect on the demand for loanable funds, the supply of loanable funds, or the real interest rate. Answer: A Topic: Government saving Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

7) If there is no Ricardo-Barro effect, an increase in the government budget surplus will A) decrease the supply of loanable funds. B) raise the real interest rate. C) lower the real interest rate. D) decrease the demand for loanable funds. E) not change the demand for loanable funds, the supply of loanable funds, or the real interest rate. Answer: C Topic: Effect of a government budget surplus Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 8) If there is no Ricardo-Barro effect, an increase in the government budget deficit A) raises the equilibrium real interest rate. B) lowers the equilibrium real interest rate. C) decreases the demand for loanable funds. D) decreases the supply of loanable funds. E) increases the supply of loanable funds. Answer: A Topic: Effect of a government budget deficit Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 9) If there is no Ricardo-Barro effect, a government budget surplus ________ the total supply of loanable funds and ________ the real interest rate. A) increases; raises B) increases; lowers C) decreases; raises D) decreases; lowers E) does not change; does not change Answer: B Topic: Effect of a government budget surplus Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

10) With no Ricardo-Barro effect, a government budget surplus A) decreases the supply of loanable funds and lowers the real interest rate. B) decreases the demand for loanable funds and increases the real interest rate. C) increases the demand for loanable funds and lowers the real interest rate. D) increases the supply of loanable funds and lowers the real interest rate. E) increases the demand for loanable funds and raises the real interest rate. Answer: D Topic: Effect of a government budget surplus Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 11) Suppose the government has a budget surplus of $2 billion. If there is no Ricardo-Barro effect, what occurs? A) The supply of loanable funds curve shifts rightward, lowering the interest rate, and increasing investment. B) The demand for loanable funds curve shifts rightward, raising the interest rate, and increasing investment. C) The supply of loanable funds curve shifts leftward, raising the interest rate, and decreasing investment. D) The demand for loanable funds curve shifts leftward, lowering the interest rate, and decreasing investment. E) The supply of loanable funds curve shifts leftward, lowering the interest rate, and increasing investment. Answer: A Topic: Effect of a government budget surplus Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 12) China's government runs a budget surplus. As a result A) if there is no Ricardo-Barro effect, the supply of loanable funds curve lies to the right of the private supply of loanable funds curve. B) interest rates should increase. C) the Ricardo-Barro effect predicts that the real interest rate will increase. D) the quantity of loanable funds decreases. E) saving will exceed investment. Answer: A Topic: Government saving Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

13) India's government runs a government budget surplus. If there is no Ricardo-Barro effect, the surplus means that the A) private supply of loanable funds curve lies to the left of the supply of loanable funds curve. B) private demand for loanable funds curve lies to the left of the demand for loanable funds curve. C) private supply of loanable funds curve lies to the right of the supply of loanable funds curve. D) private supply of loanable funds curve is the same as the supply of loanable funds curve. E) None of the above answers is correct. Answer: A Topic: Government saving Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 14) If there is no Ricardo-Barro effect, when the government runs a budget surplus, it A) competes with businesses for private saving. B) shifts the supply of loanable funds curve leftward. C) shifts the demand for loanable funds curve leftward. D) contributes to financing investment. E) shifts the demand for loanable funds curve rightward. Answer: D Topic: Effect of a government budget surplus Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 15) If there is no Ricardo-Barro effect, a government budget surplus ________ the supply of loanable funds and ________ equilibrium investment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: A Topic: Effect of a government budget surplus Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

16) The table above gives a nation's investment demand and saving supply schedules. It also has the government's net taxes and expenditures. The government has a budget A) surplus of $60 billion. B) surplus of $20 billion. C) deficit of $20 billion. D) deficit of $60 billion. E) surplus of $40 billion. Answer: B Topic: Government saving Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills 17) The table above gives a nation's investment demand and saving supply schedules. It also has the government's net taxes and expenditures. When the real interest rate is 4 percent, the supply of loanable funds is equal to A) $80 billion. B) $30 billion. C) $50 billion. D) $90 billion. E) $10 billion. Answer: C Topic: Government saving Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills

18) The table above gives a nation's investment demand and saving supply schedules. It also has the government's net taxes and expenditures. The loanable funds market is in equilibrium when the real interest rate is A) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent. E) 3 percent. Answer: A Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills

19) In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. Given these curves, there is a government budget ________ and therefore the real interest rate is ________ than it would be otherwise. A) surplus; higher B) surplus; lower C) deficit; higher D) deficit; lower E) deficit; not different Answer: B Topic: Government saving Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills 71 Copyright © 2023 Pearson Education Ltd.

20) In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. The equilibrium interest rate is ________ percent and the equilibrium quantity of loanable funds is ________. A) 6; $1.6 trillion B) 6; $2.0 trillion C) 4; $1.4 trillion D) 4; $1.8 trillion E) 4; $2.0 trillion Answer: D Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills 21) In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. If there is no Ricardo-Barro effect and the government now runs a balanced budget A) the interest rate will increase from 4 percent to 6 percent. B) the equilibrium interest rate is 6 percent and investment is $1.6 trillion. C) the equilibrium interest rate is 4 percent and investment is $1.8 trillion. D) there is a surplus of investment funds and the interest rate falls to 4 percent. E) there is shortage of investment funds of $0.4 trillion. Answer: B Topic: Loanable funds market Skill: Level 4: Applying models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills 22) In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. If there is no Ricardo-Barro effect, the figure shows a situation in which the government has a budget A) surplus of $0.2 trillion. B) deficit of $0.2 trillion. C) surplus of $1.4 trillion. D) deficit of $1.6 trillion. E) surplus of $1.8 trillion. Answer: A Topic: Government saving Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills

23) In the figure above, if there is no Ricardo-Barro effect, the government has a ________ because ________. A) budget surplus; the SLF curve lies to the right of the PSLF curve B) budget deficit; the SLF curve lies to the right of the PSLF curve C) balanced budget; there is no Ricardo-Barro effect D) budget surplus; there is no Ricardo-Barro effect E) budget deficit; there is no Ricardo-Barro effect Answer: A Topic: Government saving Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills 24) In the figure above, if there is no Ricardo-Barro effect, the government has a budget ________ because the ________. A) surplus of 0.2 trillion; SLF curve lies to the right of the PSLF curve B) surplus of 0.4 trillion; SLF curve shows a larger quantity of LF than the PSLF curve C) deficit of 0.2 trillion; SLF curve lies to the right of the PSLF curve D) deficit of 0.4 trillion; SLF curve shows a smaller quantity of LF than the PSLF curve E) surplus of -0.2 trillion; SLF curve lies to the right of the PSLF curve Answer: A Topic: Government saving Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills

25) In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. The equilibrium interest rate is ________ percent and the equilibrium quantity of loanable funds is ________. A) 6; $12 trillion B) 6; $14 trillion C) 4; $13 trillion D) 4; $11 trillion E) 4; $14 trillion Answer: C Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills

26) In the figure above, the DLF curve is the demand for loanable funds curve and the PDLF curve is the private demand for loanable funds curve. If there is no Ricardo-Barro effect, the figure shows a situation in which the government has a budget A) deficit of $1 trillion. B) surplus of $1 trillion. C) deficit of $0.5 trillion. D) deficit of $1.5 trillion. E) surplus of $0.5 trillion. Answer: A Topic: Loanable funds market Skill: Level 4: Applying models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills 27) In the figure above, the DLF curve is the demand for loanable funds curve and the PDLF curve is the private demand for loanable funds curve. If there is no Ricardo-Barro effect, the figure shows the situation in which the government has a ________ so that the equilibrium real interest rate is ________ and the equilibrium quantity of investment is ________. A) budget surplus; 4 percent; $1 trillion B) budget deficit; 4 percent; $1 trillion C) budget deficit; 6 percent; $1.5 trillion D) budget surplus; 6 percent; $1.5 trillion E) balanced budget; 6 percent; $1.5 trillion Answer: C Topic: Loanable funds market Skill: Level 4: Applying models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills 75 Copyright © 2023 Pearson Education Ltd.

28) If there is no Ricardo-Barro effect, a government budget deficit increases A) private savings and raises the real interest rate. B) the supply of loanable funds and raises the real interest rate. C) the demand for loanable funds and raises the real interest rate. D) investment demand and lowers the real interest rate. E) private savings and lowers the real interest rate. Answer: C Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Analytic skills 29) The crowding-out effect is the tendency for A) lower private saving to decrease investment. B) higher government budget deficits to increase total savings. C) higher government budget deficits to decrease investment. D) higher private savings to decrease government budget surpluses. E) lower private saving to increase the budget deficit. Answer: C Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 30) The tendency for higher government budget deficits to decrease investment is called the A) deficit effect. B) Ricardo-Barro effect. C) wealth effect. D) crowding-out effect. E) inflation effect. Answer: D Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

31) The crowding-out effect implies that a government budget deficit ________ the demand for loanable funds and ________ equilibrium investment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: B Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 32) If there is no Ricardo-Barro effect, an increase in the budget deficit A) decreases the amount of investment. B) lowers the equilibrium real interest rate. C) increases the amount of investment. D) decreases the demand for loanable funds. E) increases the supply of loanable funds. Answer: A Topic: Crowding-out effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 33) The crowding-out effect describes how a government budget ________ ________ the real interest rate and thereby ________ equilibrium investment. A) deficit; raises; decreases B) deficit; lowers; increases C) surplus; raises; decreases D) surplus; lowers; decreases E) deficit; lowers; decreases Answer: A Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

34) Suppose the government's budget deficit increases by $500 billion. If there is no RicardoBarro effect, what occurs? A) The demand for loanable funds curve shifts rightward, the real interest rate rises, and the quantity of loanable funds increases. B) The supply of loanable funds curve shifts leftward, the real interest rate rises, and the quantity of loanable funds decreases. C) The demand for loanable funds curve shifts leftward, the real interest rate falls, and the quantity of loanable funds decreases. D) The supply of loanable funds curve shifts rightward, the real interest rate falls, and the quantity of loanable funds increases. E) The supply of loanable funds curve shifts leftward, the real interest rate rises, and the quantity of loanable funds increases. Answer: A Topic: Crowding-out effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 35) A country initially has an equilibrium real interest rate of 4 percent and an equilibrium quantity of investment of $2 trillion. The government's budget deficit then increases. According to the crowding-out effect, the A) demand for loanable funds curve shifts leftward, the real interest rate falls, and investment increases. B) supply of loanable funds curve shifts rightward, the real interest rate rises, and investment increases. C) demand for loanable funds curve shifts rightward, the real interest rate falls, and investment increases. D) demand for loanable funds curve shifts rightward, the real interest rate rises, and investment decreases. E) supply of loanable funds curve shifts leftward, the real interest rate falls, and investment decreases. Answer: D Topic: Crowding-out effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

36) Suppose the government has a budget deficit of $2 billion. If there is no Ricardo-Barro effect, how much crowding out of investment occurs? A) more than $2 billion B) some crowding out occurs, but less than $2 billion C) exactly equal to $2 billion dollars D) No crowding out occurs and investment does not change. E) No crowding out occurs because investment increases. Answer: B Topic: Crowding-out effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 37) According to the Ricardo-Barro effect, a government budget A) surplus increases private saving supply. B) deficit increases private saving supply. C) deficit decreases private saving supply. D) surplus decreases private investment demand. E) deficit decreases private investment demand. Answer: B Topic: Ricardo-Barro effect Skill: Level 1: Definition Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 38) According to the Ricardo-Barro effect, an increase in the government budget deficit A) does not change the real interest rate. B) lowers the real interest rate. C) shifts the supply of loanable funds curve leftward. D) has no effect on the nominal interest rate but does change the real interest rate. E) shifts the demand for loanable funds curve leftward. Answer: A Topic: Ricardo-Barro effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

39) The Ricardo-Barro effect refers to how ________ in response to a government budget ________. A) investment demand changes; surplus B) investment demand changes; deficit C) saving supply changes; deficit D) government budget changes; surplus or deficit E) investment demand and saving supply change; surplus Answer: C Topic: Ricardo-Barro effect Skill: Level 1: Definition Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 40) A prediction of the Ricardo-Barro effect is A) a larger increase in the real interest rate when the government runs a budget deficit. B) a larger decrease in the real interest rate when the government runs a budget surplus. C) no effect on the real interest rate when the government runs a budget deficit. D) a larger decrease in investment when the government runs a budget deficit. E) a larger decrease in investment when the government runs a budget surplus. Answer: C Topic: Ricardo-Barro effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 41) The Ricardo-Barro effect argues that the crowding-out effect A) is the result of a government budget surplus and higher interest rates. B) will not occur, because the private saving supply will change to offset any change in the government budget deficit. C) is the result of the government budget deficit and higher interest rates. D) will occur, because the private saving supply will change to offset any change in the government budget deficit. E) is stronger when the government runs a budget surplus than when it runs a budget deficit. Answer: B Topic: Ricardo-Barro effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

42) The Ricardo-Barro effect is based on the idea that ________ when the government has a budget deficit. A) people decrease their private saving B) people increase their private saving C) investment demand increases because expected future profits increase D) investment demand decreases because of the higher real interest rate E) people immediately increase their tax payments Answer: B Topic: Ricardo-Barro effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 43) Evidence to support the Ricardo-Barro effect would show that A) higher government budget deficits decrease investment. B) higher government budget surpluses decrease investment. C) government budget deficits increase household consumption. D) government budget deficits have no effect on the real interest rate or investment. E) higher government budget deficits raise the real interest rate. Answer: D Topic: Ricardo-Barro effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 44) Suppose the government has a budget deficit of $2 billion. If the Ricardo-Barro effect is correct, then how much crowding out of investment occurs? A) more than $2 billion B) some crowding out occurs, but less than $2 billion C) exactly equal to $2 billion dollars D) No crowding out occurs and investment does not change. E) No crowding out occurs because investment increases by $2 billion. Answer: D Topic: Ricardo-Barro effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Analytic skills

45) The above table has the private demand for loanable funds and the private supply of loanable funds schedules. If the government budget surplus is $200 billion, and there is no Ricardo-Barro effect, the equilibrium real interest rate is ________ and the equilibrium quantity of loanable funds is ________. A) 6 percent; $600 billion B) 4 percent; $700 billion C) 8 percent, $500 billion D) 8 percent; $700 billion E) 4 percent; $500 billion Answer: B Topic: Crowding-out effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills 46) The above table has the private demand for loanable funds and the private supply of loanable funds schedules. If the government budget deficit is $200 billion, and there is no Ricardo-Barro effect, the equilibrium real interest rate is ________ and the equilibrium quantity of investment is ________. A) 6 percent; $600 billion B) 4 percent; $700 billion C) 8 percent, $500 billion D) 8 percent; $700 billion E) 4 percent; $500 billion Answer: C Topic: Crowding-out effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills

47) The above table has the private demand for loanable funds and the private supply of loanable funds schedules. If the government budget surplus is $200 billion, and there is a Ricardo-Barro effect, the equilibrium real interest rate is ________ and the equilibrium quantity of loanable funds is ________. A) 6 percent; $600 billion B) 4 percent; $700 billion C) 8 percent, $500 billion D) 8 percent; $700 billion E) 4 percent; $500 billion Answer: A Topic: Ricardo-Barro effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills 48) The above table has the private demand for loanable funds and the private supply of loanable funds schedules. If the government budget deficit is $200 billion, and there is a Ricardo-Barro effect, the equilibrium real interest rate is ________ and the equilibrium quantity of investment is ________. A) 6 percent; $600 billion B) 4 percent; $700 billion C) 8 percent, $500 billion D) 8 percent; $700 billion E) 4 percent; $500 billion Answer: A Topic: Ricardo-Barro effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Revised AACSB: Analytic skills 49) With no Ricardo-Barro effect, a government budget surplus A) increases the supply of loanable funds. B) increases the demand for loanable funds. C) decreases the supply of loanable funds. D) decreases the demand for loanable funds. E) has no effect on either the supply or the demand for loanable funds. Answer: A Topic: Government saving Skill: Level 1: Definition Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

50) Suppose the government has a budget surplus. Then A) private saving is equal to investment. B) private saving is greater than investment and government saving is positive. C) private saving is less than investment and government saving is positive. D) private investment is greater than the sum of government saving and private saving. E) private saving is greater than investment and government saving is negative. Answer: C Topic: Government saving Skill: Level 1: Definition Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 51) When there is no Ricardo-Barro effect, a government budget surplus ________ the real interest rate because the ________ loanable funds increases. A) raises; demand for B) lowers; demand for C) raises; supply of D) lowers; supply of E) None of the above answers is correct because the real interest rate does not change. Answer: D Topic: Effect of a government budget surplus Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 52) The "crowding-out effect" refers to how a government budget deficit A) shifts only the supply of loanable funds curve leftward. B) shifts only the demand for loanable funds curve leftward. C) shifts both the demand for and the supply of loanable funds curves leftward. D) decreases the equilibrium quantity of investment. E) increases the equilibrium quantity of investment. Answer: D Topic: Crowding-out effect Skill: Level 1: Definition Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

53) If there is no Ricardo-Barro effect, a government budget deficit will ________ the equilibrium real interest rate and ________ the equilibrium quantity of investment. A) raise; increase B) raise; decrease C) lower; increase D) lower; decrease E) not change; not change Answer: B Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 54) The Ricardo-Barro effect says that a government budget deficit leads to A) a higher real interest rate. B) a lower real interest rate. C) no change in the real interest rate. D) an increase in demand for loanable funds. E) an increase in the quantity of investment. Answer: C Topic: Ricardo-Barro effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking

26.4 Chapter Figures

The figure above shows the demand for loanable funds curve. 1) In the figure above, a movement from point A to point C can be the result of A) an increase in expected profit. B) a decrease in expected profit. C) a rise in the real interest rate. D) a fall in the real interest rate. E) an increase in the government budget deficit. Answer: D Topic: Demand for loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

2) If the demand for loanable funds curve shifts rightward from the curve shown in the figure above, the shift could be the result of A) an increase in expected profit. B) a decrease in expected profit. C) a rise in the real interest rate. D) a fall in the real interest rate. E) a decrease in real GDP. Answer: A Topic: Demand for loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

The figure above shows the supply of loanable funds curve. 3) In the figure above, a movement from point A to point C can be the result of A) a fall in expected future income. B) an increase in disposable income. C) a rise in the real interest rate. D) a fall in the real interest rate. E) an increase in wealth. Answer: C Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 87 Copyright © 2023 Pearson Education Ltd.

4) If the supply of loanable funds curve shifts rightward from the curve shown in the figure above, the shift could be the result of A) a fall in expected future income. B) a decrease in disposable income. C) a decrease in the demand for loanable funds. D) a decrease in the supply of loanable funds. E) an increase in wealth. Answer: A Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 5) If the supply of loanable funds curve shifts rightward from the curve shown in the figure above, the shift could be the result of A) a rise in expected future income. B) an increase in disposable income. C) a decrease in the demand for loanable funds. D) a decrease in the supply of loanable funds. E) an increase in wealth. Answer: B Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills 6) If the supply of loanable funds curve shifts rightward from the curve shown in the figure above, the shift could be the result of A) a rise in expected future income. B) a decrease in disposable income. C) a decrease in the demand for loanable funds. D) a decrease in the supply of loanable funds. E) a decrease in wealth. Answer: E Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

26.5 Integrative Questions 1) If investment demand increases, the equilibrium real interest rate ________ and the equilibrium quantity of investment ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; does not change Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 2) If saving supply decreases, the equilibrium real interest rate ________ and the equilibrium quantity of investment ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; does not change Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 3) In the late 1990s, the U.S. federal government had a budget surplus. If there is no RicardoBarro effect, these surpluses ________ the supply of loanable funds and ________ the real interest rate. A) increased; raised B) increased; lowered C) decreased; raised D) decreased; lowered E) did not change; did not change Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

4) In 2020, the U.S. federal government budget had a budget deficit. If there is no Ricardo-Barro effect, this deficit ________ the demand for loanable funds and ________ the real interest rate. A) increased; raised B) increased; lowered C) decreased; raised D) decreased; lowered E) did not change; did not change Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Revised AACSB: Analytic skills 5) In the late 1990s, the U.S. federal government had a budget surplus. If there is no RicardoBarro effect, the budget surplus ________ the real interest rate and ________ the equilibrium quantity of investment. A) raised; increased B) raised; decreased C) lowered; increased D) lowered; decreased E) did not change; did not change Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 6) In 2016, the U.S. federal government had a budget deficit. If there is no Ricardo-Barro effect, the budget deficit ________ the real interest rate and ________ the equilibrium quantity of investment. A) raised; increased B) raised; decreased C) lowered; increased D) lowered; decreased E) did not change; did not change Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

7) Crowding out can occur when a government budget ________ raises the real interest rate and the equilibrium quantity of investment ________. A) surplus; increases B) surplus; decreases C) deficit; increases D) deficit; decreases E) surplus; does not change Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 8) What does the Ricardo-Barro Effect predict? A) The level of saving in a developed economy will be very low. B) There is no way to explain animal spirits or irrational exuberance. C) Private saving will offset the impact of government borrowing. D) Government budget deficits crowd out private investment. E) Net investment and gross investment will be equal. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 9) If the government runs a budget deficit to fight a war and there is no Ricardo-Barro effect, what is an impact of the deficit? A) The quantity of private saving decreases. B) Firms purchase more capital equipment. C) Animal spirits or irrational exuberance is created. D) The real interest rate rises. E) The quantity of investment increases. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

26.6 Essay: Financial Institutions and Markets 1) What is the difference, if any, between physical capital and financial capital? Answer: Physical capital refers to the actual tools, machinery, instruments, and buildings that have been produced in the past and are now being used to produce additional goods and services. Financial capital refers to the funds used to purchase the physical capital. Financial capital includes stocks and bonds. Topic: Physical capital and financial capital Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 2) Define gross investment and net investment. Discuss the relationship between gross investment and net investment. Answer: Gross investment is the total amount spent on new capital goods to increase the quantity of capital and replace the depreciated capital. Net investment is the amount spent on new capital that exceeds the value of the depreciated capital or, in other words, net investment equals gross investment minus depreciation. Net investment is equal to the change in the capital stock. Topic: Gross investment, net investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 3) What is the distinction between gross investment and net investment? Answer: Gross investment is the total spending on capital goods. Net investment equals gross investment minus depreciation. From one year to the next, the capital stock increases by the amount of net investment. Topic: Gross investment, net investment Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

4) "When a company's depreciation is larger than its gross investment, net investment becomes negative and the firm's capital stock decreases." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is correct. Net investment equals gross investment minus depreciation. If depreciation is larger than gross investment, net investment will be negative. Net investment is the change in the capital stock, and so the company's capital stock decreases. Essentially, because depreciation is larger than the company's gross investment, the company is not buying enough capital to replace the capital that depreciated. As a result, the total amount of the company's capital decreases. Topic: Net investment Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Written and oral communication 5) Is wealth the same thing as income? Answer: No, wealth is different from income. Wealth is the value of what people own. Income, however, is an amount that is received during a given time period. Topic: Wealth Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 6) Define wealth. What is the relationship between wealth and saving? Answer: Wealth is the value of all the things that are owned. The amount of saving is added to wealth. Topic: Wealth Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 7) If a firm wants to buy a piece of capital equipment, is this firm a demander or supplier in the financial market? Answer: A financial market is where firms get the funds to buy capital. So, if the firm wants to buy a piece of capital equipment, the firm will be looking for funds to borrow. Hence the firm is a demander in the financial market. Topic: Financial markets Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

8) In the nation's financial markets, what are the various ways a firm can obtain financial capital? Answer: A firm can obtain financial capital by issuing shares of stock, selling bonds, issuing a commercial bill, or borrowing funds from banks and other financial institutions. Topic: Financial markets Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking 9) List three different types of financial markets and discuss the type of financial instruments traded in the markets. Answer: Financial markets are the stock market, the bond market, and the loan market. The stock market is a market in which shares in the stocks of companies are traded. These shares give the stockholder partial ownership in the company and a claim on the company's profit. The bond market is a market in which bonds issued by companies and governments are traded. A bond is a promise to pay a specified sum of money on specified dates and is a debt for the issuer of the bond. The loan market is the market for loans from banks. Firms can borrow funds from banks. These loans are generally not traded. Topic: Financial markets Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Written and oral communication 10) Describe two main differences between bonds and stocks. Answer: Stocks represent ownership of the issuing company, whereas bonds are a debt of the issuing company. Because stocks represent ownership of a company, a stockholder has a claim on (part) of the company's profit. Bondholders, however, have no claim on the company's profit. Instead, they have a promise by the company to pay them specified amounts of money at specified dates in the future. Topic: Stocks and bonds Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Written and oral communication 11) Does a stock certificate or a bond represent ownership of a company and a claim on its profits? Answer: A stock certificate represents ownership of a company. A bond is a debt of the issuing company, not an ownership claim on the company. Topic: Stocks and bonds Skill: Level 1: Definition Section: Checkpoint 26.1 Status: Old AACSB: Reflective thinking

12) At the beginning of the year, Becky's wealth was $30,000. During the year, she earned $50,000 of income, paid $6,000 in taxes and consumed $43,000 of goods and services. What is Becky's wealth at the end of the year? Answer: Becky's wealth is $31,000, the sum of her initial wealth ($30,000) plus her new saving of $1,000. Topic: Wealth and saving Skill: Level 2: Using definitions Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 13) At the beginning of the year, United Delivery had trucks valued at $1.3 million. During the year, United Delivery purchased new trucks valued at $500,000. If the value of the trucks at the end of the year was $1.5 million, what is the amount of its net investment and its depreciation during the year? Answer: Net investment is the change in the capital stock from one period to the next. Hence for United Delivery, net investment equals $1.5 million - $1.3 million = $200,000. Net investment also equals gross investment minus depreciation. Thus depreciation equals gross investment minus net investment. Gross investment, the total amount spent on new capital equipment, was $500,000. Net investment was calculated to be $200,000. Therefore depreciation equals $500,000 - $200,000 = $300,000. Topic: Capital and investment Skill: Level 3: Using models Section: Checkpoint 26.1 Status: Old AACSB: Analytic skills 26.7 Essay: The Loanable Funds Market 1) "An increase in the real interest rate increases the quantity of investment." Is the previous statement correct or incorrect? Answer: The statement is false. The interest rate is the opportunity cost of the funds used to make an investment. Hence an increase in the interest rate decreases the quantity of investment demanded. Topic: Investment demand Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

2) Explain the relationship between the real interest rate and investment demand. Compare that relationship to the relationship between expected profit and investment demand. Answer: The real interest rate determines the quantity of investment demanded. There is an inverse relationship between the real interest rate and the quantity of investment demanded. Expected profit affects investment. An increase in the expected profit from investing increases investment. Hence there is a positive relationship between investment and expected profit. Topic: Investment demand, expected profit Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Written and oral communication 3) How does an increase in expected profit affect investment demand and the demand for loanable funds curve? Answer: An increase in expected profit increases investment and shifts the demand for loanable funds curve rightward. Topic: Investment demand, expected profit Skill: Level 2: Using definitions Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 4) Does a change in the real interest rate shift the supply of loanable funds curve? Explain your answer. Answer: A change in the real interest rate does not shift the supply of loanable funds curve. Instead, the change in the real interest rate results in a change in the quantity of loanable funds supplied and a movement along the supply of loanable funds curve. The supply of loanable funds curve shifts if some factor that influences the supply of loanable funds OTHER THAN the real interest rate changes. Topic: Supply of loanable funds Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Written and oral communication

5) What are the factors that change saving and shift the supply of loanable funds curve? Answer: There are three main factors that change saving and shift the supply of loanable funds curve: disposable income, wealth, and the expected future income. The higher the disposable income, the more people save, so an increase in disposable income shifts the supply of loanable funds curve rightward. The higher wealth, the less people save because households feel richer and do not see the need to save. Thus an increase in wealth shifts the supply of loanable funds curve leftward. Finally, the higher the expected future income, the less people save today. Thus an increase in the expected future income shifts the supply of loanable funds curve leftward. Topic: Supply of loanable funds Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Written and oral communication 6) Explain how each of the following events would affect the supply of loanable funds curve: a. The economy is in a recession so people's disposable income is lower. b. The stock market is booming so people's wealth is higher. c. The future looks a bit more grim, so expected future income is lower. d. The real interest rate increases. Answer: a. Disposable income is lower, so saving is decreased. The supply of loanable funds curve shifts leftward. b. People are wealthier, so they save less. The supply curve of loanable funds shifts leftward. c. Expected future income is lower, so people save more. The supply of loanable funds curve shifts rightward. d. The quantity of saving increases. There is an upward movement along the supply of loanable funds curve but no shift in the curve. Topic: Supply of loanable funds curve Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Written and oral communication 7) "A shortage in the loanable funds market occurs when the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded." Explain why this statement is correct or incorrect. Answer: The statement is incorrect because a shortage occurs when the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied. Topic: Loanable funds market equilibrium Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking

8) "In the loanable funds market, when there is a shortage of funds, the real interest rate will increase." Explain whether the previous statement is correct or not. Answer: The statement is correct. The shortage of loanable funds means that there are firms attempting to obtain loans who cannot do so. As a result, the real interest rate will rise until equilibrium is attained. Topic: Loanable funds market equilibrium Skill: Level 1: Definition Section: Checkpoint 26.2 Status: Old AACSB: Reflective thinking 9) In the loanable funds market, what will change to eliminate a shortage of loanable funds and how is the shortage eliminated? Answer: The real interest rate changes to eliminate the shortage of funds. A shortage of funds means that businesses want to borrow more than households are willing to loan. (Alternatively, the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied.) The shortage of funds means that some businesses are willing to pay a higher interest rate in order to secure a loan. The real interest rate rises, and as it does so, the quantity of loanable funds demanded decreases (that is, the quantity of investment demanded decreases) and the quantity of loanable funds supplied increases (that is, the quantity of savings increases). Both changes help eliminate the shortage of loanable funds, and so the real interest rate rises until it reaches its equilibrium value. Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Written and oral communication 10) How does each of the following shift the supply of loanable funds and the demand for loanable funds curves? What is the effect of each on the equilibrium real interest rate and equilibrium quantity of loanable funds? a. Households' disposable incomes increase b. An increase in expected profit Answer: a. Saving increases and the supply of loanable funds curve shifts rightward. The real interest rate falls and the quantity of loanable funds increases. b. Investment demand increases and the demand for loanable funds curve shifts rightward. The real interest rate rises and the quantity of loanable funds increases. Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

11) Suppose a government tax cut increases disposable income. If there is no change in the government deficit or surplus, what effect would this tax cut have on the supply of loanable funds and the demand for loanable funds? What will happen to the real interest rate? Answer: By increasing disposable income, the tax cut will increase saving. The supply curve of loanable funds will shift rightward. The real interest rate will decrease, the quantity of loanable funds will increase, and there will be no change in the demand for loanable funds curve. Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

12) The table above shows the supply of loanable funds and the demand for loanable funds schedules. a. What is the equilibrium real interest rate and the equilibrium quantity of loanable funds? b. If the real interest rate is 4 percent, is there a shortage or surplus? What will happen in the market? Answer: a. The equilibrium real interest rate is 6 percent and the equilibrium quantity of loanable funds is $11 billion. b. If the real interest rate is 4 percent, there is a shortage of loanable funds. The shortage means that the quantity of funds demanded for investment exceeds the quantity supplied, so the real interest rate will rise to its equilibrium of 6 percent. Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

13) Using the figure above, show the effect on the real interest rate and the quantity of loanable funds of an increase in expected profit. Answer:

The increase in expected profit increases investment and shifts the demand for loanable funds curve rightward. As the figure shows, the result is that the real interest rate rises (to 8 percent in the figure) and the equilibrium quantity of loanable funds increases (to $4 trillion in the figure). Topic: Loanable funds market equilibrium Skill: Level 3: Using models Section: Checkpoint 26.2 Status: Old AACSB: Analytic skills

26.8 Essay: Government in Loanable Funds Market 1) Ignoring the Ricardo-Barro effect, what impact does the government have in the loanable funds market? Answer: The government has two effects in the market for loanable funds. First, if the government has a budget surplus, it adds to private saving and increases the supply of loanable funds. Second, if a government has a budget deficit, it increases the demand for loanable funds. Topic: Government saving Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Reflective thinking 2) Explain how a government budget deficit might crowd out private investment. Answer: If there is no Ricardo-Barro effect, a government budget deficit increases the demand for loanable funds. As a result, the equilibrium real interest rate rises and the equilibrium quantity of loanable funds increases. But the rise in the real interest rate decreases investment. The government's budget deficit has thus "crowded out investment." Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Written and oral communication 3) "The crowding-out effect occurs when a government budget surplus reduces private savings." Is the previous statement true or false? Explain your answer. Answer: The statement is false. The crowding-out effect occurs when a government budget deficit reduces investment, not saving. Indeed, the crowding-out effect predicts that a government budget deficit results in a higher real interest rate, which increases the quantity of private savings. Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Written and oral communication 4) "A government surplus can decrease investment through the crowding-out effect because the surplus decreases the supply of loanable funds." Is the previous assertion right or wrong? Why? Answer: The assertion is wrong on two counts. First, the crowding-out effect asserts that a government budget deficit—not a surplus—decreases investment. Second, a government surplus increases—not decreases—the supply of loanable funds. Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 26.3 Status: Old AACSB: Analytic skills 101 Copyright © 2023 Pearson Education Ltd.

5) According to the crowding-out effect, if the government runs a budget deficit of $100 billion, what is the change in the equilibrium quantity of investment? Answer: Investment decreases. The government budget deficit increases the demand for loanable funds and, as a result, the real interest rate rises. The increase in the real interest rate decreases the quantity of investment. However, the decrease in investment is less than $100 billion because the higher real interest rate also increases the quantity of private saving. Topic: Crowding-out effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Analytic skills 6) What is the crowding-out effect and how does it operate? What is its relationship to the Ricardo-Barro effect? Answer: The crowding-out effect is the tendency for a government budget deficit to decrease investment. A government budget deficit increases the demand for loanable funds. If private savers do not change their saving, so that the private supply of saving does not change, a government budget deficit raises the equilibrium real interest rate and decreases the equilibrium quantity of investment. The Ricardo-Barro effect asserts that people change their private saving in response to a government budget deficit. In particular, when the government has a budget deficit, people increase their saving by the amount of the deficit. As a result, both the demand for loanable funds and the supply of loanable funds increase by the same amount so there is no impact on the equilibrium real interest rate or on the equilibrium quantity of investment. Topic: Crowding-out effect, Ricardo-Barro effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Analytic skills 7) Discuss why a budget deficit results in a different real interest rate under the Ricardo-Barro effect than under the crowding-out effect. Answer: The Ricardo-Barro effect holds that a budget deficit has no effect on real interest rates. A government budget deficit increases the demand for loanable funds. The Ricardo-Barro effect argues that rational taxpayers know that a budget deficit today means higher taxes tomorrow. As a result, taxpayers increase their savings today. The higher private saving increases the supply of loanable funds. Because both the demand for loanable funds and the supply of loanable funds increase by the same amount, there is no change in the real interest rate. The crowding-out effect holds that a budget deficit increases real interest rates. The crowding-out effect argues that a budget deficit has no effect on the supply of loanable funds. Hence only the demand for loanable funds increases so that the real interest rate rises. Topic: Crowding-out effect, Ricardo-Barro effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Written and oral communication

8) According to the Ricardo-Barro effect, if the government runs a budget deficit of $100 billion, by how much does the amount of equilibrium investment increase or decrease? Answer: Equilibrium investment does not increase or decrease. There is no change in the amount of investment because private saving changes to precisely offset the government budget deficit. In other words, the $100 billion deficit leads to an increase in private saving of $100 billion which exactly matches the increase in the demand for loanable funds. As a result, neither the equilibrium real interest rate nor the equilibrium amount of loanable funds changes. Topic: Ricardo-Barro effect Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Written and oral communication 9) According to the Ricardo-Barro effect, what is the effect on the real interest rate of a government budget surplus? Answer: The government budget surplus, by itself, increases the supply of loanable funds. However the Ricardo-Barro effect asserts that people DECREASE their private saving by the exactly same amount. This change precisely offsets the effect the government budget surplus has on the supply of loanable funds. Thus a government surplus has no effect on the equilibrium real interest rate. Topic: Ricardo-Barro effect Skill: Level 5: Critical thinking Section: Checkpoint 26.3 Status: Old AACSB: Analytic skills

10) The table above gives the demand for loanable funds and private supply of loanable funds schedules. a. What is the equilibrium real interest rate and quantity of loanable funds? b. Suppose that the government has a budget surplus of $2.5 billion. If there is no RicardoBarro effect, what is the equilibrium real interest rate and quantity of loanable funds? Answer: a. The equilibrium real interest rate is 8 percent and the quantity of loanable funds is $11.0 billion. b. Add $2.5 billion to each quantity of the supply of loanable funds schedule. The equilibrium real interest rate becomes 6 percent and the equilibrium quantity of loanable funds increases to $12.5 billion. Topic: Government saving Skill: Level 3: Using models Section: Checkpoint 26.3 Status: Old AACSB: Analytic skills

Foundations of Economics, 9e (Bade), GE Chapter 11 The Monetary System 27.1 What Is Money? 1) Which statement about money is most correct? A) Money is a new invention and only includes dollar bills and coins. B) Money is a new invention and can include anything that is accepted as a means of payment. C) Money has been around for a long time and can include anything that is accepted as a means of payment. D) Money has been around for a long time and only includes dollar bills and coins. E) Money has been around for a long time and only includes checking and savings accounts. Answer: C Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 2) For a commodity or token to be money it must A) be accepted in exchange for all other goods and services. B) have a double coincidence of wants. C) be backed by government precious metals, like gold. D) be paper. E) be issued by the government or a government agency. Answer: A Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 3) Money is any commodity or token that is A) backed by gold. B) generally accepted as a means of measurement. C) generally accepted as a means of payment. D) issued by the government. E) a store of value. Answer: C Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

4) Money is any commodity or token that A) is generally accepted as a means of payment. B) is backed up and controlled by the government. C) is naturally accepted by households to accumulate wealth. D) does not change in value over time. E) is backed by gold. Answer: A Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 5) In order for any given commodity to be considered money, it has to A) have some intrinsic value. B) be generally acceptable as a means of payment. C) be issued and controlled by some governmental institution. D) be convertible into gold or silver. E) be used in barter transactions. Answer: B Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 6) For anything to be considered money it must be A) a valuable commodity, such as gold. B) a token, such as a green piece of paper. C) either a commodity or a token, as long as it is generally accepted as a means of payment. D) a mystical token, such as whale teeth. E) used in barter transactions. Answer: C Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

7) A common trait of money through history and across cultures is that money A) always had mystical properties. B) was always issued by the local government. C) was always based on gold or some other precious commodity. D) was always generally accepted as a means of payment. E) was always fiat money. Answer: D Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 8) Money is best defined as A) anything that has value. B) anything accepted as a means of payment. C) anything that can be sold to pay for something. D) currency. E) anything that is backed by gold. Answer: B Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 9) Money must be ________ which includes the fact that is should ________. A) in physical form; not be transferable using electronic means B) accepted as a means of payment across countries' borders; not be fiat money C) generally accepted as a means of payment; be recognizable and divisible into small parts D) whatever is used in a barter system; transferable across countries' borders E) backed by gold; not decrease in value over time Answer: C Topic: What is money? Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

10) For an asset to be a "means of payment," the asset A) is valuable and backed by gold. B) is valuable and backed by the government. C) can be used to settle a debt. D) requires a double coincidence of wants. E) must be used when bartering. Answer: C Topic: What is money? Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 11) The functions of money are A) medium of exchange, unit of account, and store of value. B) medium of exchange, the ability to buy goods and services, and the ability to pay off debts. C) medium of exchange, the ability to buy goods and services, and checking accounts. D) credit cards, checking accounts, currency, and coins. E) store of value, use as a barter mechanism, and unit of account. Answer: A Topic: Functions of money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 12) Money serves as a A) means of payment, legal obligation, and public tax. B) medium of exchange, unit of account, and store of value. C) means of settling debts, transaction lubricant, and private commodity. D) means of worker exploitation and capitalist enrichment. E) means to conduct barter transactions. Answer: B Topic: Functions of money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

13) Which of the following is NOT among the primary functions of money? A) unit of account B) store of value C) indicator of supply D) medium of exchange E) an object that is generally accepted in return for goods and services Answer: C Topic: Functions of money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 14) Money performs all of the following functions EXCEPT serving as a i. medium of exchange. ii. unit of account. iii. barter mechanism. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: C Topic: Functions of money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 15) When you join the local organic food market and then buy produce each month, money is used as A) only a store of value. B) only a unit of account. C) a medium of exchange and a store of value. D) a medium of exchange and a unit of account. E) a store of value and a unit of account. Answer: D Topic: Functions of money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

16) Barter requires the A) use of commodity money as a medium of payment. B) use of fiat money as a medium of exchange. C) the triple non-coincidence of wants. D) exchange of goods and services directly for other goods and services. E) use of money as a unit of account. Answer: D Topic: Functions of money, medium of exchange Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 17) The medium of exchange is defined as A) barter. B) the exchange of goods and services directly for goods and services. C) an object that is accepted in return for goods and services. D) credit cards. E) an item that can be stored and hold its value over time. Answer: C Topic: Functions of money, medium of exchange Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 18) A barter system of payment is A) similar to a money system of payment because both require a double coincidence of wants. B) similar to a money system of payment because both use one asset as a unit of account. C) different from a money system of payment because the barter system is a better unit of account. D) different from a money system of payment because money does not require a double coincidence of wants. E) similar to a money system of payment because both are used as stores of value and units of account. Answer: D Topic: Barter Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

19) In performing which of its primary functions does money solve the problem of the double coincidence of wants? A) medium of exchange B) unit of account C) store of value D) barter system E) money supply Answer: A Topic: Barter Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 20) The "double coincidence of wants" is A) what is needed to use money. B) eliminated with the use of money. C) eliminated when we barter instead of using money. D) how value is stored when we transact with money. E) money's role as a unit of account. Answer: B Topic: Barter Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 21) When we use money to purchase goods and services, we are using money as a A) unit of account. B) reserve of wealth. C) medium of exchange. D) store of value. E) bartering tool. Answer: C Topic: Functions of money, medium of exchange Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

22) When you use currency to buy lunch, money is performing which function? A) medium of exchange B) unit of purchase C) store of value D) barter token E) unit of currency Answer: A Topic: Functions of money, medium of exchange Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 23) What is a problem with barter that makes it so difficult to use? A) Individuals have to produce something to trade with. B) Barter requires a double coincidence of wants. C) Barter is very efficient but illegal because it avoids taxation. D) Barter requires use of only fiat money. E) Barter omits the store of value role for money. Answer: B Topic: Functions of money, medium of exchange Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 24) Which of the following best describes a double coincidence of wants? A) Two buyers want the same good. B) Neither buyer wants a good. C) You have what another wants and you want what they have. D) A buyer and a seller rather than two buyers or two sellers must meet. E) None of the above answers is correct. Answer: C Topic: Functions of money, medium of exchange Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

25) The unit of account is defined as A) the exchange of goods and services directly for other goods and services. B) barter. C) an object that is accepted in return for goods and services. D) an agreed upon measure for stating prices of goods and services. E) the medium of exchange. Answer: D Topic: Functions of money, unit of account Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 26) If you shop for a car online and compare car prices across dealerships, money is functioning as a A) medium of exchange. B) unit of account. C) means of payment. D) store of value. E) barter mechanism. Answer: B Topic: Functions of money, unit of account Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 27) The function of money that helps assess the opportunity cost of an activity is money's use as a A) medium of exchange. B) store of value. C) unit of account. D) store of debt. E) barter tool. Answer: C Topic: Functions of money, unit of account Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

28) When we put a price tag on goods and services, we are using money as a A) store of value. B) medium of exchange. C) barter token. D) unit of account. E) means of payment. Answer: D Topic: Functions of money, unit of account Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 29) When you see a mansion and think to yourself that it must be worth a million dollars, you are using money to perform which function? A) medium of exchange B) unit of account C) store of value D) means of payment E) method of avoiding barter Answer: B Topic: Functions of money, unit of account Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 30) Money is used as a ________ when you visit the local farmers' market and compare prices across different vendors. A) means of payment B) unit of account C) store of value D) medium of exchange E) measure of barter Answer: B Topic: Functions of money, unit of account Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

31) When money is used to compare the relative price of a burrito and a taco, money is being used as a A) medium of exchange. B) store of value. C) measurement of inflation. D) unit of account. E) token of bartering. Answer: D Topic: Functions of money, unit of account Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 32) The store of value function is defined as the A) pricing of goods and services in one measure. B) exchange of goods and services directly for other goods and services. C) holding of money from one transaction to be used later in another transaction. D) double coincidence of wants that is used in the debate over barter versus money. E) use of money as a medium of exchange. Answer: C Topic: Functions of money, store of value Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 33) When we keep part of our wealth in a bank checking account, we are using money as a A) store of value. B) medium of exchange. C) barter token. D) unit of account. E) unit of currency. Answer: A Topic: Functions of money, store of value Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

34) When we keep part of our wealth in a bank checking account, we are using money as a ________ because ________. A) store of value; we are holding the money to exchange for goods at a later time B) medium of exchange; we are holding the money to gain interest earned C) barter token; we are holding the money to exchange for goods at a later time D) unit of account; we are holding the money to exchange for goods at a later time E) unit of currency; we have agreed upon the value of the money with bank Answer: A Topic: Functions of money, store of value Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 35) Keeping $20 in currency to be able to buy gasoline, money is performing which function? A) medium of exchange B) unit of account C) store of value D) barter mechanism E) symbol of fiat Answer: C Topic: Functions of money, store of value Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 36) The word "fiat" is A) used to describe today's money because it is money set by law. B) used to describe money from when Kings ruled by decree or fiat. C) the term used to define the concept of barter. D) another word to mean the "double coincidence of wants." E) Latin for "backed by gold." Answer: A Topic: Fiat money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

37) Money today A) is the demand for loanable funds. B) is the supply of loanable funds. C) is only currency inside banks. D) is fiat money. E) in the United States, is only dollar bills and coins. Answer: D Topic: Fiat money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 38) The U.S. dollar is called A) fiat money because the law decrees it is money. B) faith money. C) commodity money, because it is convertible into gold. D) frail money because wear and tear ruins paper bills. E) convertible money because the government stands ready to convert it into gold or silver. Answer: A Topic: Fiat money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 39) Fiat money means A) Italian currency. B) money's value does not change. C) the government has decreed that something is money. D) the money can be converted into gold. E) only currency counts as money. Answer: C Topic: Fiat money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

40) The objects that we use as money today are A) checks and credit cards. B) currency and checks. C) currency and deposits. D) deposits and checks. E) currency, deposits, and gold. Answer: C Topic: What is included in money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 41) Which statement most accurately captures the state of money today? A) Money today includes currency, bank deposits and checks. B) Money today includes currency and checks but not bank deposits. C) Money today includes bank deposits and currency but not checks. D) Money today includes bank deposits and checks but not currency. E) Money today includes checks and credit cards. Answer: C Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 42) Which of the following is an example of money? A) currency in your wallet B) currency inside the banks C) checks written as payment for a good or service D) credit card used as a payment for a good or service E) a debit card Answer: A Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

43) The objects we use as money today include A) currency inside banks and bank deposits. B) currency outside the banks and bank deposits. C) only currency outside the banks. D) only deposits inside the banks. E) credit cards and debit cards. Answer: B Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 44) Checkable deposits are money because A) they are protected by the Federal Reserve. B) they are guaranteed by banks. C) checks bounce when there are not enough funds to cash them. D) they can be converted into currency on demand and are used directly as a means of payment. E) only banks and other financial institutions can offer them. Answer: D Topic: What is included in money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 45) Which of the following is the best example of money? A) phone card B) checkable deposit C) credit card D) gold E) share of Intel stock Answer: B Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

46) Which of the following is money? A) credit card B) debit card C) e-checks D) checkable deposit E) checks Answer: D Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 47) Which of the following is money? A) a credit card with no credit left B) the check you write to pay tuition C) a credit card that still has credit available on it D) a checkable deposit in your bank E) the current credit available on a credit card Answer: D Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 48) Which of the following is money? A) debit cards B) e-checks C) credit cards D) checkable deposits E) checks Answer: D Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

49) Checks are NOT money because they A) are just instruments to transfer money between banks. B) are not guaranteed by banks. C) can bounce when there are not enough funds to cash them. D) are not issued by the government. E) are not always accepted when trying to purchase goods or services. Answer: A Topic: What is included in money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 50) If you use a check to pay your monthly rent A) the check is considered money because you received something in return. B) the check is not money because it is just an instruction to your bank to make a payment. C) you have used money because the landlord accepted it as a means of payment. D) the check becomes money when it arrives at the landlord's bank. E) the check is not money because it is not part of M1. Answer: B Topic: What is included in money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 51) A credit card is A) money. B) barter money. C) not money. D) fiat money. E) not money, but the card's credit line is money. Answer: C Topic: What is included in money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

52) Credit cards are A) a form of money used to make purchases. B) a special ID card that is not money. C) a special ID card that is the same as money. D) a form of money that is not generally accepted. E) included in the M1 measure of money. Answer: B Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 53) When you use a credit card to pay your tuition A) you've used the credit card as money because it is a means of payment. B) the credit card is not money but is an ID card for an instant loan. C) the credit card is not money because it involves an electronic transaction. D) the credit card is not money because it is not officially issued by the government. E) you've used the credit card as money because you received something in return. Answer: B Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 54) Credit cards are i. a generally accepted form of payment and therefore part of M1. ii. included in M1 because you write a check to pay your monthly bill. iii. a means of borrowing money. A) i only B) ii only C) iii only D) i and ii E) i and iii Answer: C Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

55) When Dale buys a new computer for $1,000 using a credit card A) he is taking out a loan for $1,000. B) his bank account decreases by $1,000. C) the credit card is acting as money. D) the money supply decreases by $1,000. E) the credit card is performing the function of an unit of account. Answer: A Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 56) Debit cards and e-checks are NOT money because A) they can be forged easily. B) they can fail their purpose of being mediums of exchange as a result of technical difficulties. C) they are just instruments to transfer money between people. D) not all banks offer them and not all businesses accept them. E) they are not regulated by the government. Answer: C Topic: What is included in money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 57) A debit card is A) money because it is a means of payment. B) not money but is used to transfer bank deposits which are money. C) money because it is generally accepted as a means of payment. D) not money because it is not officially issued by the government. E) part of the M2 money supply but not part of the M1 money supply. Answer: B Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

58) Which of the following are considered money? i. electronic checks ii. paper checks iii. the deposit transferred using an e-check A) i, ii and iii B) i and iii C) i and ii D) iii only E) ii and iii Answer: D Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 59) An official measure of money in the United States is M1, which includes the sum of A) checkable deposits plus small time deposits. B) currency plus checkable deposits. C) currency plus credit card transactions. D) currency plus traveler's checks plus time deposits. E) currency plus traveler's checks plus checkable deposits plus small time deposits plus money market funds and other deposits. Answer: B Topic: M1 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 60) M1 is composed of A) currency held by individuals and businesses, traveler's checks, and checkable deposits owned by individuals and businesses. B) checkable deposits owned by individuals and businesses, saving deposits, and certificates of deposit. C) currency inside of banks, traveler's checks, and government-issued checks. D) traveler's checks, credit cards, and e-cash. E) currency held by individuals and businesses, traveler's checks, and the credit line on credit cards. Answer: A Topic: M1 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

61) Which of the following are included in the M1 definition of money? A) currency and checkable deposits B) currency and savings deposits C) traveler's checks and money market mutual funds D) currency and small time deposits E) traveler's checks and savings deposits Answer: A Topic: M1 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 62) M1 is defined as a measure of money including, in part A) checkable deposits and currency. B) time deposits and currency. C) currency and savings deposits. D) time deposits and money market fund deposits. E) the lines of credit on credit cards and currency. Answer: A Topic: M1 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 63) Which of the following items is included in the M1 money supply? A) $10 bills in the Bank of America B) a $5,000 student loan granted to a U.S. citizen C) coins in a Pepsi vending machine, waiting to be used as change D) a $5,000 line of credit on a newly graduated student's credit card E) $1,500 in a student's saving account Answer: C Topic: M1 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

64) Which of the following is NOT a component of M1? A) demand deposits B) traveler's checks C) savings deposits D) currency E) Both answers C and D are correct. Answer: C Topic: Official measures of money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 65) If Rob deposits $300 in currency into his savings account at Bank of America A) M1 decreases. B) M1 does not change. C) M2 increases. D) M2 decreases. E) M1 and M2 both increase. Answer: A Topic: M1 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 66) Suppose you use your debit card to buy soda from a soda machine. Which of the following is TRUE regarding the transaction? A) The debit card is not money; it's only an instruction to make a loan. B) The debit card is money; your use reflects the exchange of a good. C) The debit card is not money; its use is only a tool to cause money to move from your account. D) Your use makes the debit card money, as funds are transferred between your account and the machine owner. E) Using the debit card is like using a check and is, therefore, money. Answer: C Topic: Money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

67) When Maria deposits $100 in currency in her checkable deposit at Bank of America, the immediate effect is that the quantity of M1 A) decreases. B) does not change. C) increases. D) changes, but the direction of the change depends on whether the deposit was accepted by a thrift institution or a commercial bank. E) changes only if Bank of America does not have excess reserves. Answer: B Topic: M1 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 68) When Maria deposits $100 in currency in her checkable deposit at Bank of America, the immediate effect is that the quantity of M1 ________ because ________. A) decreases; checkable deposits are included in M2 but are not included in M1 B) does not change; both currency and checkable deposits are included in M1 C) increases; both currency and checkable deposits are included in M1 D) changes, but the direction of the change cannot be determined; the direction of the change depends on what Bank of America does with the deposit E) changes only if Bank of America has excess reserves; if the bank does not have excess reserves, the overall effect to M1 is too small to notice Answer: B Topic: M1 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 69) When people make deposits of currency into a bank, the quantity of M1 A) immediately decreases by the amount of the deposit. B) immediately increases by the amount of the deposit. C) does not immediately change. D) immediately changes but whether it increases or decreases depends on whether the bank had excess reserves or did not have excess reserves. E) changes only if the deposit is an open market operation. Answer: C Topic: M1 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

70) If you deposit $1,000 in cash in your checkable deposit at your bank, the quantity of M1 immediately A) increases by $1,000. B) decreases by $1,000. C) increases by $2,000. D) does not change in size. E) changes, but more information about the required reserve ratio is necessary to determine the amount of the change. Answer: D Topic: M1 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 71) In December 2009, currency was $400 billion, traveler's checks were $5 billion; checkable deposits owned by individuals and businesses were $600 billion, saving deposits were $2,000 billion, time deposits were $1,500 billion; and money market funds were $1,200 billion. What was the M1 in December 2009? A) M1 = $405 billion B) M1 = $1,005 billion C) M1 = $3,005 billion D) M1 = $3,500 billion E) M1 = $3,505 billion Answer: B Topic: M1 Skill: Level 3: Using models Section: Checkpoint 27.1 Status: Old AACSB: Analytic skills 72) If Joe withdraws a $100 bill from his checking account and Jack deposits another $100 bill in his savings account, by how will M1 and M2 change? A) M1 will decrease, but M2 will remain the same. B) M1 will increase, and M2 will increase. C) M2 will decrease by $100. D) Both M1 and M2 will remain the same. E) M1 will remain the same, and M2 will increase. Answer: A Topic: M1, M2 Skill: Level 3: Using models Section: Checkpoint 27.1 Status: Old AACSB: Analytic skills

73) Susan just sold her text books for $200 cash and deposited the cash she received in her checking account. This transaction has A) increased the quantity of M1. B) decreased the quantity of M1. C) increased the quantity of M2. D) decreased the quantity of M2. E) not changed either M1 or M2. Answer: E Topic: M1, M2 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 74) M2 consists of A) M1 plus traveler's checks. B) M1 plus saving deposits, small time deposits, and money market funds. C) M1 plus checkable deposits. D) M1 plus currency at the banks. E) M1 plus Federal Reserve notes. Answer: B Topic: M2 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 75) Which of the following are included in the M2 definition of money? A) currency outside of banks and checkable deposits B) currency outside of banks and credit lines on credit cards C) time deposits and the value of prime grade bonds D) currency both inside and outside of banks E) currency inside of banks and banks' reserves Answer: A Topic: M2 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

76) If we look at the components of M2, we find that A) money market funds are the largest component. B) savings deposits are the largest component. C) currency is the largest component. D) banks' reserves are the largest component. E) loans are the largest component. Answer: B Topic: M2 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 77) In December 2009, currency outside of banks was $400 billion, traveler's checks were $5 billion; checkable deposits owned by individuals and businesses were $600 billion, saving deposits were $2,000 billion, time deposits were $1,500 billion; and money market funds were $1,200 billion. What was the M2 in December 2009? A) M2 = $5,705 billion B) M2 = $3705 billion C) M2 = $1,005 billion D) M2 = $2,505 billion E) M2 = $5,700 billion Answer: A Topic: M2 Skill: Level 3: Using models Section: Checkpoint 27.1 Status: Old AACSB: Analytic skills 78) If currency outside of banks is $800 billion; traveler's checks are $10 billion; checkable deposits owned by individuals and businesses are $700 billion; savings deposits are $4,000 billion; small time deposits are $1,000 billion; and money market funds and other deposits are $800 billion, then M2 equals ________ billion. A) $7,310 B) $5,800 C) $2,510 D) $1,510 E) $710 Answer: A Topic: M2 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

79) The above table has information about the hypothetical economy of Robotica. Based on the data, the size of M1 is A) $610 billion. B) $1,510 billion. C) $600 billion. D) $1,110 billion. E) $2,600 billion. Answer: A Topic: M1 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Analytic skills 80) The above table has information about the hypothetical economy of Robotica. Based on the data, the size of M2 is A) $2,600 billion. B) $2,610 billion. C) $610 billion. D) $600 billion. E) $1,710 billion. Answer: B Topic: M2 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Analytic skills

81) Physical currency is ________ popular than e-cash, ________. A) less; and both are portable and recognizable B) more; and both are portable and recognizable C) more; but only physical currency is portable and recognizable D) more; and both are portable, untraceable and anonymous E) less; but both are portable, untraceable and anonymous Answer: D Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 82) ________ like a check and ________ considered money. A) Debit cards work; are not B) Debit cards work; are C) E-checks work; are D) E-cash works; is not E) E-cash works; is Answer: A Topic: Money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 83) Which of the following best defines what money is now and what it has been in the past? A) currency B) currency plus checking deposits C) currency plus credit cards D) anything accepted as a means of payment E) anything used as a store of value Answer: D Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

84) Which of the following is NOT a function of money? i. unit of account ii. store of value iii. unit of debt A) i only B) ii only C) iii only D) ii and iii E) i and ii Answer: C Topic: Functions of money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 85) Barter is A) the exchange of goods and services for money. B) the pricing of goods and services with one agreed upon standard. C) the exchange of goods and services directly for other goods and services. D) a generally accepted means of payment. E) storing money for use at a later date. Answer: C Topic: Barter Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 86) If someone buries money in a tin can beneath a tree, the money is functioning as a A) medium of exchange. B) unit of account. C) means of payment. D) store of value. E) bartering tool. Answer: D Topic: Functions of money, store of value Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

87) Credit cards, debit cards, and e-checks are A) always counted as money. B) not money. C) sometimes counted as money, depending on how they are used. D) sometimes counted as money, depending on what is purchased. E) sometimes counted as money, depending on what measure of money is being used. Answer: B Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 88) Which of the following counts as part of M1? A) $5,000 worth of gold B) $5,000 worth of government bonds C) $5,000 in a checking account D) $5,000 credit line on a credit card E) $5,000 of real estate Answer: C Topic: M1 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 89) M2 equals A) M1 and is just another name for currency outside of banks. B) M1 plus savings deposits, small time deposits, and money market fund deposits. C) M1 minus traveler's checks because they are not really money. D) currency plus savings deposits, all time deposits, and money market funds and other deposits. E) M1 plus savings deposits and small time deposits minus money market fund deposits. Answer: B Topic: M2 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

90) If currency outside of banks is $800 billion; traveler's checks are $10 billion; checkable deposits owned by individuals and businesses are $700 billion; savings deposits are $4,000 billion; small time deposits are $1,000 billion; and money market funds and other deposits are $800 billion, then M1 equals ________ billion. A) $7,310 B) $5,800 C) $2,510 D) $1,510 E) $710 Answer: D Topic: M1 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 91) Mobile wallets are A) always counted as money. B) not money. C) sometimes counted as money, depending on how they are used. D) sometimes counted as money, depending on what is purchased. E) sometimes counted as money, depending on what measure of money is being used. Answer: B Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 92) E-cash A) always has counted as money. B) is not yet counted as money. C) is an electronic version of a physical wallet. D) is a debit card. E) sometimes counts as money, depending on what measure of money is being used. Answer: B Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

27.2 The Banking System 1) A commercial bank is defined as A) any institution that accepts deposits. B) a firm that is chartered to accept deposits and make loans. C) the institution that sets regulations for commercial activities. D) a firm that obtains funds by selling shares and then buys U.S. Treasury bills. E) any institution that makes loans. Answer: B Topic: Commercial banks Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 2) Which statement is most correct about the types of deposits a commercial bank can accept? A) A commercial bank accepts checking, savings and time deposits. B) A commercial bank can only accept checking deposits from commercial enterprises. C) A commercial bank accepts savings and time deposits, but not checking deposits. D) A commercial bank does not accept deposits but sells shares. E) A commercial bank can accept loan deposits, reserve deposits, and checkable deposits. Answer: A Topic: Commercial banks Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 3) The goal of a commercial bank is to A) establish good regulations for commercial activities. B) make only safe, no-risk loans. C) maximize its stockholders' wealth. D) minimize its taxes paid to state governments. E) accept only deposits made in money. Answer: C Topic: Banks' profit Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking

4) Banks earn a profit by A) keeping as many reserves on hand as possible. B) making loans at a lower interest rate than the rate that they offer on their deposits. C) charging an interest rate on their depositors' accounts. D) making loans at a higher interest rate than the rates that they offer on their deposits. E) not paying interest on their reserves. Answer: D Topic: Banks' profit Skill: Level 3: Using models Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 5) Which of the following are assets of commercial banks? i. reserves ii. loans iii. deposits A) i only B) ii only C) i and ii D) ii and iii E) i, ii, and iii Answer: C Topic: Banks' assets Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 6) Banks generally earn the highest interest rate A) on service charges on individuals' checking accounts. B) by making loans to business firms. C) by making mortgage loans to individuals. D) by making credit card loans. E) by buying government securities. Answer: D Topic: Banks' assets Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking

7) The largest category of commercial banks' assets is A) loans. B) reserves. C) currency. D) securities. E) checkable deposits. Answer: A Topic: Banks' assets Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 8) Which of the following is NOT held as an asset by banks? A) reserves B) loans C) securities D) currency in the banks' vaults E) checkable deposits Answer: E Topic: Banks' assets Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 9) Which of the following describes the "invention" of banking? A) The British Empire created a banking system to fund its exploration of the New World. B) Members of the New York Stock Exchange founded the Bank of America in the 1700s. C) Goldsmiths in the sixteenth century issued gold receipts which entitled its owners to reclaim their gold on demand. D) Clergy in the Renaissance created the banking system to help further the growth of the church. E) The United States government founded the Federal Reserve in 1913. Answer: C Topic: Eye on the Past: The "Invention" of Banking Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking

10) When goldsmiths issued receipts to gold owners, and those gold receipts circulated while gold stayed in the goldsmiths' safes A) the gold receipts were considered money because they were used as a means of payment. B) an infant banking system developed in sixteenth century Europe. C) fiat money was created. D) money was invented. E) Both A and B are correct. Answer: E Topic: Eye on the Past: The "Invention" of Banking Skill: Level 5: Critical thinking Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 11) A commercial bank's reserves are equal to the amount of A) the bank's deposits. B) the bank's government securities. C) the bank's loans. D) currency in the bank's vault plus the balance on its reserve account at a Federal Reserve Bank. E) only the currency in its vault. Answer: D Topic: Banks' reserves Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 12) In 2019 banks kept reserves equal to about ________ of their assets. A) 75 percent B) 25 percent C) 11 percent D) 50 percent E) 31 percent Answer: C Topic: Banks' reserves Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Revised AACSB: Reflective thinking

13) Commercial bank reserves are typically less than 1 percent of total assets, however in 2019 bank reserves ________ because of ________. A) rose to around 88 percent; the financial crisis of 2008-2009 B) dropped drastically to near zero; the financial crisis of 2008-2009 C) rose to around 11 percent; the financial crisis of 2008-2009 D) dropped drastically to near zero; the wave of natural disasters experienced in the nation and around the world E) rose drastically to around 22 percent; the wave of natural disasters experienced in the nation and around the world Answer: C Topic: Banks' reserves Skill: Level 3: Using models Section: Checkpoint 27.2 Status: Revised AACSB: Reflective thinking 14) When a commercial bank receives a deposit, it must keep part of the deposit as cash reserves to satisfy its A) securities and loans. B) required reserves. C) excess reserves. D) interbank loans. E) loan requirements. Answer: B Topic: Banks' reserves Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 15) A bank has checkable deposits of $1,000,000, loans of $600,000, and government securities of $400,000. If the required reserve ratio is 5 percent, the amount of required reserves is A) $100,000. B) $30,000. C) $50,000. D) $80,000. E) $20,000. Answer: C Topic: Required reserve ratio Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Analytic skills

16) A bank has $250 in checking deposits, $1,000 in savings deposits, $1,200 in time deposits, $1,000 in loans to businesses, $400 in outstanding credit card balances, $800 in government securities, $25 in currency in its vault, and $25 in deposits at the Fed. Of these, ________ are part of M2. A) $3,450 B) $2,450 C) $2,850 D) $2,200 E) $2,600 Answer: B Topic: Banks' deposits Skill: Level 3: Using models Section: Checkpoint 27.2 Status: Old AACSB: Analytic skills 17) A bank has $250 in checking deposits, $1,000 in savings deposits, $1,200 in time deposits, $1,000 in loans to businesses, $400 in outstanding credit card balances, $800 in government securities, $25 in currency in its vault, and $25 in deposits at the Fed. The bank's reserves are equal to A) $25. B) $275. C) $2,225. D) $50. E) $350. Answer: D Topic: Banks' reserves Skill: Level 3: Using models Section: Checkpoint 27.2 Status: Old AACSB: Analytic skills

18) The above table gives assets and deposits for a (small) bank. The bank's deposits that are part of M1 are equal to A) $1,600. B) $600. C) $3,100. D) $3,130. E) $30. Answer: B Topic: Banks' deposits Skill: Level 3: Using models Section: Checkpoint 27.2 Status: Old AACSB: Analytic skills 19) The above table gives assets and deposits for a (small) bank. The bank's deposits that are part of M2 are equal to A) $600. B) $1600. C) $3,100. D) $30. E) $5,100. Answer: C Topic: Banks' deposits Skill: Level 3: Using models Section: Checkpoint 27.2 Status: Old AACSB: Analytic skills

20) The above table gives assets and deposits for a (small) bank. The bank's reserves are equal to A) $20. B) $30. C) $600. D) $630. E) $620. Answer: B Topic: Banks' reserves Skill: Level 3: Using models Section: Checkpoint 27.2 Status: Old AACSB: Analytic skills 21) Cisco's employees are considering opening a financial institution that accepts savings deposits from only Cisco employees and makes loans to only Cisco employees. The best description of this financial institution is that it is a A) credit union. B) commercial bank. C) savings and loan association. D) savings bank. E) federal government chartered credit bank. Answer: A Topic: Credit union Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Revised AACSB: Reflective thinking 22) Which of the following is a thrift institution? i. a credit union ii. the Fed iii. a savings bank A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Thrift institutions Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking

23) A commercial bank's main goal is to A) provide loans to its customers. B) maximize the wealth of its stockholders. C) help the government when it needs money. D) lend money to the Federal Reserve Banks. E) open checking accounts. Answer: B Topic: Banks' profit Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 24) Which of the following lists includes only banks' assets? A) liquid assets, loans, securities, and reserves B) reserves, savings deposits, securities, and loans C) reserves, securities, liquid assets, and savings deposits D) securities, reserves, checkable deposits, and liquid assets E) reserves, checkable deposits, securities, and loans Answer: A Topic: Banks' assets Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 25) A commercial bank's reserves are A) bonds issued by the U.S. government that are very safe. B) the provision of funds to businesses and individuals. C) currency in its vault plus the balance on its reserve account at a Federal Reserve Bank. D) savings and time deposits. E) its loans. Answer: C Topic: Banks' reserves Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking

26) A bank has $400 in checkable deposits, $800 in savings deposits, $700 in time deposits, $900 in loans to businesses, $300 in outstanding credit card balances, $500 in government securities, $10 in currency in its vault, and $20 in deposits at the Fed. The bank's deposits that are part of M1 are equal to A) $1,900. B) $400. C) $1,210. D) $530. E) $410. Answer: B Topic: Banks' deposits Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Analytic skills 27) Which of the following accept deposits from or sell shares to the general public? i. money market funds ii. thrift institutions iii. commercial banks A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: Depository institutions Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 28) Which of the following is a thrift institution? A) a savings and loan association B) a money market fund C) a commercial bank D) a loan institution E) the Federal Reserve Answer: A Topic: Thrift institutions Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking

29) Before the financial crisis that started in 2007, commercial banks' reserves were typically less than ________ percent of total assets but more recently reserves have been about ________ percent of assets. A) 5; 22 B) 10; 40 C) 1; 8 D) 17; 22 E) 10; 22 Answer: C Topic: Eye on the U.S. economy Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 27.3 The Federal Reserve System 1) A public authority that provides banking services to commercial banks and regulates financial institutions and markets is called a A) commercial bank. B) thrift institution. C) central bank. D) money market fund. E) mint. Answer: C Topic: Central banks Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 2) All of the following are financial institutions that accept deposits and make loans to people and businesses EXCEPT A) commercial banks. B) savings and loans. C) credit unions. D) central banks. E) savings banks. Answer: D Topic: Central banks Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

3) As the central bank, the Federal Reserve System provides banking services to A) individuals and controls the quantity of money. B) the government and the stock market. C) foreign corporations and determines the exchange rate. D) banks and regulates financial institutions and markets. E) banks and determines how much the U.S. government will borrow. Answer: D Topic: Central banks Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 4) Because the Federal Reserve System is a central bank, it provides banking services to A) businesses only. B) consumers and business. C) commercial banks. D) no one. E) the government only. Answer: C Topic: Central banks Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 5) The Federal Reserve System provides banking services to ________ because ________. A) consumers and businesses; it is a central bank with responsibilities to the entire U.S. population B) banks and businesses; it is a central bank with the primary purpose of regulating financial institutions and markets C) commercial banks; it is a central bank with the primary purpose of regulating financial institutions and markets D) no one; it is a central bank with the primary purpose of regulating financial markets E) FDIC insured banks; they are the ones that have paid their membership fees and the only ones the U.S. central bank guarantees Answer: C Topic: Central banks Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

6) The Fed is a central bank and as such A) does business only with the federal government. B) provides banking services to banks but not individuals. C) provides banking services to individuals and firms. D) does business with international organizations such as the United Nations. E) is where the Federal Government turns when it needs to borrow. Answer: B Topic: Central banks Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 7) What is the central bank of the United States? A) There is no central bank in the United States. B) The Department of Treasury C) The Federal Reserve System D) Each state has its own central bank, which, when all taken together, constitute the central bank of the United States. E) The U.S. Mint Answer: C Topic: Federal Reserve System Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 8) ________ the quantity of money in the United States. A) The State Department regulates B) The Department of Treasury regulates C) The Federal Reserve System regulates D) Commercial banks regulate E) The President of the United States regulates Answer: C Topic: Federal Reserve System Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

9) The Federal Reserve System is organized into A) one large district covering the entire United States. B) three districts, one for each of the countries in North America. C) 12 districts, dividing up the United States. D) 12 districts, dividing up the countries in North America. E) 50 districts, one per state. Answer: C Topic: Federal Reserve System Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 10) Conducting the nation's monetary policy is the duty of the A) Department of Commerce. B) U.S. Treasury department. C) Federal Reserve System. D) Federation of Banks. E) Federal Bank Supervisor. Answer: C Topic: Federal Reserve System Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 11) Who regulates the quantity of money circulating in the economy? A) the Federal Reserve B) the banking system C) the U.S. Congress D) the President of the United States E) The U.S. Congress and the President share the control. Answer: A Topic: Federal Reserve Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

12) All of the following are elements in the structure of the Fed EXCEPT the A) Federal Open Market Committee. B) Executive Council to the Governor. C) 12 Federal Reserve Banks. D) Board of Governors. E) presidents of the 12 Federal Reserve Banks. Answer: B Topic: Federal Reserve System Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 13) The Board of Governors of the Federal Reserve is A) the collection of the 12 presidents of the Federal Reserve Banks. B) a seven-member board, each one serving a 14-year term. C) a 14-member board, each one serving a seven-year term. D) the main policy-making body of the Fed. E) a seven-member board, each one serving a one-year term. Answer: B Topic: Federal Reserve System, Board of Governors Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 14) The Board of Governors of the Federal Reserve System has A) seven members serving for 12-year terms. B) 12 members serving for seven-year terms. C) seven members serving for seven-year terms. D) seven members serving for 14-year terms. E) seven members serving life terms. Answer: D Topic: Federal Reserve System, Board of Governors Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

15) The Board of Governors of the Federal Reserve has A) seven members appointed to 14-year terms. B) 14 members appointed to 10-year terms. C) four members appointed to seven-year terms. D) 14 members appointed to four-year terms. E) seven members appointed for life. Answer: A Topic: Federal Reserve System, Board of Governors Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Revised AACSB: Reflective thinking 16) The Federal Open Market Committee is A) the main policy making body of the Fed. B) a seven-member board, each serving a 14-year term. C) comprised of the presidents of the 12 Federal Reserve Banks. D) another name for the Board of Governors. E) the government committee charged with determining income tax rates. Answer: A Topic: FOMC Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 17) The main policy making body of the Federal Reserve System is the A) Board of Governors of the Federal Reserve System. B) Board of Presidents of the Federal Reserve Banks. C) Federal Open Market Committee. D) Board of Advisors. E) Federal Monetary Conditions Board. Answer: C Topic: FOMC Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

18) Which of the following Federal Reserve Banks carries out the decisions of the FOMC? A) the Kansas City Federal Reserve Bank B) the New York Federal Reserve Bank C) the Dallas Federal Reserve Bank D) the San Francisco Federal Reserve Bank E) the Atlanta Federal Reserve Bank Answer: B Topic: FOMC Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 19) The voting members of the Federal Open Market Committee consists of the A) seven Board of Governor members and the 12 Federal Reserve Bank presidents. B) seven Board of Governor members and five Federal Reserve Bank presidents. C) 12 Board of Governor members and the seven Federal Reserve Bank presidents. D) 12 Board of Governor members and the five Federal Reserve Bank presidents. E) six Board of Governor members and six Federal Reserve Bank presidents. Answer: B Topic: FOMC Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 20) The Federal Open Market Committee consists of A) 12 members, all of whom are the presidents of Federal Reserve Banks. B) 12 members, seven of whom are the members of the Board of Governors, four of whom are presidents of Federal Reserve Banks, and the president of the United States. C) 12 members, seven of whom are the members of the Board of Governors and five of whom are presidents of Federal Reserve Banks. D) 12 committees, all serving on the Board of Governors. E) 12 members, split evenly so that six of whom are members of the Board of Governors and six of whom are presidents of Federal Reserve Banks. Answer: C Topic: FOMC Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

21) In order to influence the interest rate, the Federal Reserve System can immediately adjust the A) reserves of the banking system. B) inflation level. C) unemployment rate. D) taxes that citizens must pay. E) amount the government borrows. Answer: A Topic: Monetary policy Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 22) The four main policy tools the Federal Reserve System uses to influence the interest rate are setting A) the prime rate, open market operations, extraordinary crisis management and setting the excess reserve ratio. B) quantitative easing, market interest rate and the discount rate, as well as open market operations. C) the discount rate, open market operations, extraordinary crisis measures and setting the required reserve ratio. D) credit easing, the discount rate, setting tax rates, and setting the required reserve ratio. E) quantitative easing, open market operations, setting tax rates, and setting the required reserve ratio. Answer: C Topic: Fed policy tools Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 23) Which of the following is NOT one of the Fed's monetary policy tools? A) changing the discount rate B) conducting open market purchases of government securities C) changing the coupon rate D) changing the required reserve ratio E) conducting open market sales of government securities Answer: C Topic: Fed policy tools Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

24) Which of the following is a tool the Federal Reserve System can use to regulate the quantity of money? i. changing the discount rate ii. conducting open market operations iii. changing the required reserve ratio A) i only B) ii only C) ii and iii D) i and ii E) i, ii, and iii Answer: E Topic: Fed policy tools Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 25) Which of the following is a policy tool of the Fed? i. setting the required reserve ratios ii. conducting open market operations iii. quantitative easing A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Fed policy tools Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

26) The Fed influences the interest rate by using which of the following tools? i. open market operations ii. taxes on bank accounts iii. changes in required reserve ratios A) i only B) ii only C) iii only D) i and iii E) i, ii and iii Answer: D Topic: Fed policy tools Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 27) Which of the following are policy tools used by the Federal Reserve? i. the federal personal income tax ii. open market operations iii. changing the required reserve ratio A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: D Topic: Fed policy tools Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 28) Which of the following is a tool the Fed uses to adjust the quantity of money? i. The Fed can change the interest rate banks charge for loans to their prime customers. ii. The Fed can change the discount rate on loans to banks. iii. The Fed can buy or sell government securities. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: E Topic: Fed policy tools Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 51 Copyright © 2023 Pearson Education Ltd.

29) Required reserve ratios are the minimum amount of A) deposits any one bank is allowed to accept as percentage of its capital. B) reserves any one bank must hold as a percentage of its loans. C) reserves any one bank must hold as a percentage of its deposits. D) deposits any one bank must hold as a percentage of its reserves. E) reserves any one bank must hold as a percentage of its total assets. Answer: C Topic: Fed policy tools, required reserve ratio Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 30) The required reserve ratio is 10 percent and Charlie deposits $3,000 in her checking account. The bank must A) increase reserves by $3,000. B) increase reserves by $300. C) decrease reserves by $3,000. D) decrease reserves by $300. E) not change its reserves until Charlie decides to withdraw her funds. Answer: B Topic: Fed policy tools, required reserve ratio Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Analytic skills 31) The required reserve ratio is the A) amount of excess reserves the bank holds just in case. B) total amount of reserves the bank holds in its vaults. C) total amount of reserves the bank holds at the Fed. D) amount of reserves banks are required by the Fed to be held as a percentage of the bank's deposits. E) amount of reserves banks are required by the Fed to be held as a percentage of the bank's loans. Answer: D Topic: Fed policy tools, required reserve ratio Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

32) Which of the following statements is correct? A) required reserves = (total deposits) × (excess reserve ratio) B) required reserves = (total reserves) × (excess reserve ratio) C) required reserves = (total deposits) × (required reserve ratio) D) required reserves = (total deposits) ÷ (required reserve ratio) E) required reserves = (total deposits) × (required reserve ratio) - excess reserves Answer: C Topic: Fed policy tools, required reserve ratio Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Analytic skills 33) The interest rate the Federal Reserve charges a bank when it borrows reserves from the Fed is called the A) market interest rate. B) federal funds rate. C) discount rate. D) prime rate. E) borrowing rate. Answer: C Topic: Fed policy tools, discount rate Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 34) The discount rate is the A) banks' real interest rate. B) interest rate at which the Fed will loan reserves to commercial banks. C) interest rate banks charge the Fed when the Fed borrows from the banks. D) name of the interest rate banks charge their most credit-worthy borrowers. E) interest rate paid on U.S. government securities. Answer: B Topic: Fed policy tools, discount rate Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

35) The discount rate is A) the interest rate paid when a bank borrows reserves from another bank. B) the interest rate paid when a commercial bank borrows reserves from the Fed. C) the reduction in the interest rate given to the bank's best customers. D) another name for the long-term interest rate. E) the interest rate the Fed pays banks for the reserves the banks keep at the Fed. Answer: B Topic: Fed policy tools, discount rate Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 36) The discount rate is A) the interest rate that commercial banks have to pay for any reserves that they borrow from the non-bank public. B) the interest rate that commercial banks have to pay to the owners of bank deposits. C) equal to the nominal interest rate minus the inflation rate. D) the interest rate that commercial banks pay for reserves that they borrow from the Fed. E) the interest rate that commercial banks receive for the reserves that they have on reserve at the Fed. Answer: D Topic: Fed policy tools, discount rate Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 37) If the Fed increases the discount rate A) commercial banks pay a higher interest rate if they borrow from the Fed. B) commercial banks pay a lower interest rate if they borrow from the Fed. C) commercial banks' assets increase. D) commercial banks find it more profitable to increase their loans to businesses. E) commercial banks increase their lending to the Fed. Answer: A Topic: Fed policy tools, discount rate Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

38) If the Fed increases the discount rate, commercial banks pay a ________ interest rate if they borrow money from the Fed and will therefore ________. A) higher; borrow less money from the Fed and make fewer loans to consumers B) higher; borrow more money from the Fed and make more loans to consumers C) lower; borrow more money from the Fed and make more loans to consumers D) lower; borrow less money from the Fed and make fewer loans to consumers E) higher; deposit more money into their reserves at the Fed Answer: A Topic: Fed policy tools, discount rate Skill: Level 3: Using models Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 39) Open market operations are the A) purchase or sale of government securities by the Fed. B) lending of reserves to the banking system by the Fed. C) borrowing of reserves by the Fed from the banking system. D) minimum percentage of loans that banks must retain as reserves in the open market. E) purchase or sale of gold by the Fed. Answer: A Topic: Fed policy tools, open market operations Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 40) Open market operations are when the Fed buys or sells A) government securities from the government. B) corporate securities from banks or some other business. C) government securities from banks or some other business. D) corporate securities from the government. E) gold. Answer: C Topic: Fed policy tools, open market operations Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

41) When the Fed engages in open market operations, it is buying or selling A) capital equipment. B) U.S. government securities newly issued by the U.S. Treasury. C) U.S. government securities. D) loans made to banks to meet the legal reserve requirement ratio. E) gold. Answer: C Topic: Fed policy tools, open market operations Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 42) In response to the financial crisis in 2008, the Fed created which of the following policy tools? A) quantitative easing B) the required reserve ratio C) the discount rate D) the federal funds rate E) open market operations Answer: A Topic: Fed policy tools, crisis measures Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 43) Which of the following policy tools did the Fed create in 2008 to address the financial crisis? i. quantitative easing ii. credit easing iii. open market operations A) i and ii B) i only C) ii only D) i and iii E) ii and iii Answer: A Topic: Fed policy tools, crisis measures Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

44) Quantitative easing by the Fed refers to A) the creation of bank reserves by engaging in large-scale open market operation at very low interest rates. B) selling private securities issued by the Fed. C) decreasing the money supply during a recession to prevent inflation. D) lowering the federal funds rate while increasing the discount rate. E) lowering the required reserve ratio to zero percent. Answer: A Topic: Quantitative easing Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 45) If the Fed engages in quantitative easing, it has likely A) decreased the federal funds rate to almost zero by buying large sums of securities. B) increased the discount rate to prevent inflation. C) decreased the discount rate by selling its own securities. D) increased the federal funds rate by selling private securities. E) started paying interest on required reserves. Answer: A Topic: Quantitative easing Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 46) In 2008, the Fed created a new policy tool called A) quantitative easing, which allowed the Fed to buy private securities as well as government securities. B) quantitative easing, which required the Fed to pay interest on required reserves. C) open market operations, which required the Fed to buy securities from only the federal government. D) federal funds zero-rate, which required the Fed to lower the rate to near zero percent. E) interest rate reductions, which allowed the Fed to lower interest rates paid to banks. Answer: A Topic: Quantitative easing Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

47) ________ by the Fed means that the Fed ________. A) Credit easing; bought private securities from financial institutions B) Credit easing; made loans directly to home buyers C) Credit easing; tried to lower long-term interest rates D) Quantitative easing; required private banks to increase their lending to home buyers E) Quantitative easing; decreased in the required reserve ratio Answer: A Topic: Credit easing Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 48) The policy tool of "credit easing" refers to the A) Fed's purchase of private securities to stimulate banks' lending. B) Fed's requirement that the federal government must lend to directly to home buyers. C) federal government's requirement that the Fed must lend directly to home buyers. D) Fed's lowering of the federal funds rate to zero. E) Treasury's issuance of federal debt to finance home buying. Answer: A Topic: Credit easing Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 49) The monetary base is the sum of A) Federal Reserve notes and banks' reserves at the Fed. B) coins, Federal Reserve notes, and individuals' deposits at the Fed. C) Federal Reserve notes, Treasury deposits at the Fed, banks' reserves at the Fed, and coins. D) coins, Federal Reserve notes, and banks' reserves at the Fed. E) coins, Federal Reserve notes, and gold at the Fed. Answer: D Topic: Monetary base Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

50) The monetary base is equal to A) banks' assets plus liabilities. B) Federal Reserve notes plus coins plus banks' reserves at the Fed. C) checkable deposits plus coins plus traveler's checks. D) checkable deposits plus coins plus banks' assets. E) M2 minus M1. Answer: B Topic: Monetary base Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 51) The monetary base is equal to A) M1. B) M2. C) currency and coins in circulation plus checkable deposits. D) the sum of coins, Federal Reserve notes, and banks' reserves at the Fed. E) the sum of coins, Federal Reserve notes, and gold at the Fed. Answer: D Topic: Monetary base Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 52) The monetary base is equal to the sum of coins A) currency and banks' reserves at the Federal Reserve. B) currency and checkable deposits at banks. C) currency, banks' reserves at the Federal Reserve and checkable deposits at banks. D) and checkable deposits at banks. E) U.S. government securities owned by the Federal Reserve and Federal Reserve notes. Answer: A Topic: Monetary base Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

53) The monetary base does NOT include which of the following items? i. Federal Reserve notes ii. banks' reserves at the Federal Reserve iii. U.S. government securities owned by the Federal Reserve A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: C Topic: Monetary base Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 54) Regulating the amount of money in the United States is one of the most important responsibilities of the A) State Department. B) state governments. C) Treasury Department. D) Federal Reserve. E) U.S. Mint. Answer: D Topic: Federal Reserve System Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 55) The Board of Governors of the Federal Reserve System has A) 12 members appointed by the president of the United States. B) 12 members elected by the public. C) seven members appointed by the president of the United States. D) seven members elected by the public. E) seven members appointed to life terms. Answer: C Topic: Federal Reserve System, Board of Governors Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

56) The Board of Governors of the Federal Reserve System has seven members appointed by the ________ that serve a term of ________ in order to ________. A) U.S. congress; 4 years; fulfill a mandate within the U.S. constitution B) U.S. senate; 14 years; provide continuity in the governing of the U.S. economy C) U.S. president and confirmed by the U.S. senate; 14 years; provide continuity in the governing of the U.S. economy D) U.S. president and confirmed by the U.S. congress; 14 years; provide continuity in the governing of the U.S. economy E) U.S. president and confirmed by the U.S. senate; 4 years; fulfill a mandate within the U.S. constitution Answer: C Topic: Federal Reserve System, Board of Governors Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 57) The Fed's policy is determined by the A) Federal Open Market Committee. B) Executive Council to the Governor. C) Regional Federal Reserve Banks. D) Board of Governors. E) Federal Monetary Policy Committee. Answer: A Topic: FOMC Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 58) The Fed's policy tools include A) required reserve ratios, the discount rate, open market operations, and extraordinary crisis measures. B) holding deposits for the U.S. government, reserve requirements, and the discount rate. C) setting regulations for lending standards and extraordinary crisis measures. D) supervision of the banking system and buying and selling commercial banks. E) required reserve ratios, income tax rates, and open market operations. Answer: A Topic: Fed policy tools Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

59) The minimum percent of deposits that banks must hold and cannot loan is determined by the A) interest rate. B) discount rate. C) required reserve ratio. D) federal funds rate. E) ratio of M2 to M1. Answer: C Topic: Fed policy tools, required reserve ratio Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 60) The discount rate is the interest rate that A) commercial banks charge their customers. B) commercial banks charge each other for the loan of reserves. C) the Fed charges the government for loans. D) the Fed charges commercial banks when it loans reserves to the banks. E) the Fed pays commercial banks on their reserves held at the Fed. Answer: D Topic: Fed policy tools, discount rate Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 61) The monetary base is the A) minimum reserve banks must hold to cover any losses from unpaid loans. B) sum of coins, Federal Reserve notes, and banks' reserves at the Fed. C) sum of gold and foreign exchange held by the Fed. D) sum of government securities and loans to banks held by the Fed. E) sum of coins, required reserves, and banks' loans. Answer: B Topic: Monetary base Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

62) If Federal Reserve notes and coins are $765 billion, and banks' reserves at the Fed are $8 billion, the gold stock is $11 billion, and the Fed owns $725 billion of government securities, what does the monetary base equal? A) $765 billion B) $773 billion C) $776 billion D) $744 billion E) $1,509 billion Answer: B Topic: Monetary base Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 63) If the Federal Reserve ________ the required reserve ratio, the interest rate ________. A) lowers; rises B) lowers; falls C) raises; does not change D) raises; falls E) Not enough information is given because the effect depends also on the size of the monetary base. Answer: B Topic: Required reserve ratio Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 64) If the Federal Reserve lowers the required reserve ratio, people will end up taking out ________ because the interest rates ________. A) fewer loans; will rise B) more loans; will fall C) the same number of loans; will not change D) more loans; will rise E) fewer loans; are controlled by the economic conditions alone Answer: B Topic: Required reserve ratio Skill: Level 3: Using models Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

65) "Operation twist" refers to the A) Fed's purchase of private securities to stimulate banks' lending. B) Fed's purchase of long-term government securities and sale of short-term government securities. C) Fed's purchase of short-term government securities and sale of long-term government securities. D) federal government's requirement that the Fed must lend directly to home buyers. E) Treasury's issuance of federal debt to finance home buying. Answer: B Topic: Operation twist Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 66) The idea of "operation twist" is to A) lower long-term interest rates and thereby stimulate investment expenditure. B) lower short-term interest rates and thereby stimulate investment expenditure. C) raise long-term interest rates and thereby stimulate saving. D) increase the amount of gold the Fed holds. E) make the monetary base obsolete. Answer: A Topic: Operation twist Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 27.4 Regulating the Quantity of Money 1) New money is created in the U.S. economy by A) increased federal government expenditures. B) banks that create checkable deposits. C) the U.S. Treasury. D) U.S. Department of Mint. E) the U.S. Congress. Answer: B Topic: How banks create money Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

2) Banks create money by A) printing dollar bills without limit. B) creating deposits without limit. C) printing money up to their required reserve limit. D) making loans and creating deposits, a process that is limited by the size of banks' excess reserves. E) buying U.S. government securities with cash. Answer: D Topic: How banks create money Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 3) Banks create money by A) printing paper money. B) minting coins. C) making loans. D) buying government securities. E) None of the above because banks cannot create money; only the Federal Reserve can create money. Answer: C Topic: How banks create money Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 4) When a bank receives deposits A) it must hold the entire amount as reserves in case of withdrawal. B) the Fed requires it to hold only a small percentage as reserves. C) it and it alone decides how much it will hold as reserves. D) its liabilities increase in amount but its assets do not change. E) its assets increase in amount but its liabilities do not change. Answer: B Topic: How banks create money Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

5) Banks create money by A) printing currency. B) asking the Fed to print more currency. C) lending to the Fed. D) making loans. E) buying government securities. Answer: D Topic: How banks create money Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 6) The amount of loans that a bank can create is limited by A) a law enacted by Congress. B) the bank's excess reserves. C) a directive from the Federal Reserve System, which takes into account the bank's financial stability. D) the real interest rate. E) the bank's government securities. Answer: B Topic: How banks create money Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 7) The process of money creation by the banking system is limited, in part, by the A) number of banks. B) desired reserve ratio. C) number of depositors. D) Comptroller of the Currency. E) laws passed each year by the U.S. Congress. Answer: B Topic: How banks create money Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

8) Assume the First Bank of Townsville makes a loan of $2,500. This loan will A) increase the quantity of money initially by $2,500. B) decrease the quantity of money initially by $2,500. C) have no change on the quantity of money, just its composition. D) increase the First Bank of Townville's liabilities at the Fed. E) increase the First Bank of Townville's reserves. Answer: A Topic: How banks create money Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 9) When the First Bank of Townsville makes a loan, it A) prints money. B) borrows the money from the Fed. C) creates a checkable deposit. D) decreases the quantity of money. E) increases its reserves. Answer: C Topic: How banks create money Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 10) If the desired reserve ratio is 15 percent, then for every dollar that is deposited in the bank, the bank will A) keep 15 cents as reserves. B) keep 85 cents as reserves. C) keep 85 cents as reserves and loan 85 cents. D) loan 15 cents. E) keep 15 cents as reserves and loan 15 cents. Answer: A Topic: Desired reserve ratio Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

11) Riley deposits $4,000 cash in her checkable deposit at Fershur Bank. If the desired reserve ratio is 5 percent, Fershur Bank's A) desired reserves increase by $4,000. B) assets and its liabilities change in opposite directions. C) desired reserves increase by $200 and its excess reserves increase by $3,800. D) excess reserves increase by $4,000. E) liabilities do not change but its assets increase. Answer: C Topic: Desired reserve ratio Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 12) Suppose the desired reserve ratio is 10 percent. If Urban Bank has total deposits of $1,000 and total assets of $10,000, the amount of desired reserves is A) $100. B) $900. C) $1,000. D) $9,000. E) $1,100. Answer: A Topic: Desired reserve ratio Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 13) A bank has $200 of reserves and $4,000 of deposits. It is just meeting its desired reserves and has no excess reserves. Thus the desired reserve ratio is A) 10 percent. B) 20 percent. C) 25 percent. D) 5 percent. E) $200. Answer: D Topic: Desired reserve ratio Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

14) If the desired reserve ratio is 7 percent and a bank has $10,000 of deposits, then its desired reserves are A) $7. B) $700. C) $9,300. D) $930. E) $7,000. Answer: B Topic: Desired reserve ratio Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 15) When Zane deposits $20,000 cash in his checkable deposit at the Citicorp and the Citicorp's desired reserves increase by $5,000, the desired reserve ratio is A) 5 percent. B) 75 percent. C) 25 percent. D) 20 percent. E) $5,000. Answer: C Topic: Desired reserve ratio Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 16) A bank reports reserves of $500,000, physical capital of $200,000, loans of $1,000,000, deposits of $1,000,000, and owners' equity of $500,000. If the desired reserve ratio is 5 percent, the bank's desired reserves are A) $10,000. B) $25,000. C) $50,000. D) $1,000,000. E) $500,000. Answer: C Topic: Desired reserve ratio Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

17) The Banks of the Mississippi has excess reserves of $20,000, desired reserves of $80,000 and the desired reserve ratio is 5 percent. What is the total amount of deposits in this bank? A) $5,000 B) $1,000,000 C) $1,600,000 D) $100,000 E) $180,000 Answer: C Topic: Desired reserve ratio Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 18) The part of a commercial bank's reserves that are larger than desired are called A) additional reserves. B) required reserves. C) excess reserves. D) nonrequired reserves. E) unnecessary reserves. Answer: C Topic: Excess reserves Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 19) Banks can make loans as long as they have A) deposits. B) reserves. C) required reserves. D) excess reserves. E) excess government securities. Answer: D Topic: Excess reserves Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

20) Actual reserves are equal to A) minimum balances plus desired reserves. B) required reserves plus fractional deposits. C) excess reserves plus liabilities. D) desired reserves plus excess reserves. E) government securities plus cash in the bank's vault. Answer: D Topic: Excess reserves Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 21) When Grayce deposits $4,000 cash in her checkable deposit at the Beach Bank and the Beach Bank's excess reserves increase by $3,600, the desired reserve ratio is A) 5 percent. B) 10 percent. C) 15 percent. D) 90 percent. E) $400. Answer: B Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 22) If Bulge Bank has a desired reserve ratio of 10 percent, loans of $25,000, deposits of $100,000, vault cash of $10,000, and reserves at the Fed of $65,000, then the bank A) has no remaining capacity to make loans. B) does not have enough reserves to meet its requirement. C) has excess reserves of $65,000. D) has excess reserves of $55,000. E) has excess reserves of $75,000. Answer: C Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

23) The Commerce Bank of Beverly Hills has total deposits of $1,000,000 and total reserves of $220,000. The desired reserve ratio is 10 percent. The bank's excess reserves are A) $22,000. B) $120,000. C) $100,000. D) $80,000. E) $1,000,000. Answer: B Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 24) A bank has deposits of $400, reserves of $50, and the desired reserve ratio is 7 percent. The bank's excess reserves are A) $0. B) $22. C) $28. D) $3.50 E) $50. Answer: B Topic: Excess reserves Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 25) Suppose the desired reserve ratio is 10 percent. If the Commerce Bank has total deposits of $20,000, total assets of $10,000, and actual reserves of $8,000, the amount of excess reserves is A) $2,000. B) $6,000. C) $800. D) $100. E) $0. Answer: B Topic: Excess reserves Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

26) A bank has deposits of $100,000, reserves of $20,000, and loans of $80,000. If the desired reserve ratio is 10 percent, then its excess reserves are A) 0. B) $8,000. C) $10,000. D) $2,000. E) $12,000. Answer: C Topic: Excess reserves Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 27) The desired reserve ratio is 20 percent and banks have no excess reserves. Katie deposits $300 in her bank. What are the bank's excess reserves immediately after Katie makes her deposit? A) $30 B) $90 C) $240 D) $60 E) $300 Answer: C Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Revised AACSB: Analytic skills 28) If Jose deposits $2,000 in his bank and the desired reserve ratio is 10 percent, what is the amount of new loans that the bank can make? A) $2,000 B) $200 C) $1,800 D) $1,900 E) $2,200 Answer: C Topic: Excess reserves Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

29) Suppose a bank has $1,000 in deposits and $100 in reserves. If the desired reserve ratio is 5 percent, how much can this bank increase its loans? A) $0 B) $400 C) $80 D) $50 E) $100 Answer: D Topic: Excess reserves Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 30) The desired reserve ratio is 10 percent and banks have no excess reserves. Juliet deposits $300 in her bank. What is the maximum that Juliet's bank can now loan? A) $3,000 B) $270 C) $30 D) $330 E) $300 Answer: B Topic: Money creation process Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 31) The desired reserve ratio is 3 percent. Robert deposits $3,000 in Bank America. Bank America keeps its minimum desired reserves and lends the excess to Fredrica. How much does Bank America lend to Fredrica? A) $3,000 B) $2,910 C) $300 D) $2,700 E) $900 Answer: B Topic: Money creation process Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

32) The desired reserve ratio is 10 percent. Joe deposits $1,000 in Bank A. Bank A keeps its minimum desired reserves and lends the excess to Fred. Fred spends his loan at J.C. Penney. J.C. Penney deposits the check it receives from Fred in Bank B. Bank B keeps its minimum desired reserves and lends the excess to Mary. How much can Bank B lend to Mary? A) $900 B) $90 C) $810 D) $100 E) $1,000 Answer: C Topic: Money creation process Skill: Level 4: Applying models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 33) Whenever somebody deposits a check from bank A into a checkable deposit at bank B, bank A's reserves ________ and bank B's reserves ________. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase E) do not change; do not change Answer: D Topic: Clearing checks Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 34) When the Fed buys or sells securities, it is conducting ________ operation. A) a government debt B) an open market C) a money multiplier D) a deposit E) a currency Answer: B Topic: Open market operation Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

35) Open market operations are defined as A) a bank borrowing from the Fed. B) the Fed buying or selling securities. C) one bank buying or selling securities to another bank. D) the amount banks can lend on each deposit. E) a bank making a loan to the Fed. Answer: B Topic: Open market operation Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Revised AACSB: Reflective thinking 36) If the Fed makes an open market purchase of $1 million of government securities, the monetary base A) is decreased by $1 million. B) is unchanged in size, though its composition changes. C) is increased by $1 million. D) will decrease by a multiple of $1 million over time. E) will increase by a multiple of $1 million over time. Answer: C Topic: Open market operation and the monetary base Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 37) Assume the desired reserve ratio is 10 percent, banks loan all excess reserves and the currency drain is zero. If the Fed sells $100 million of U.S. government securities to Boise Bank, the monetary base increases by A) $1 million. B) $10 million. C) $100 million. D) $1,000 million. E) $90 million. Answer: C Topic: Open market operation and the monetary base Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

38) When the Fed buys securities from the public, banks' reserves ________ and the quantity of money ________. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases E) do not change; increases Answer: A Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 39) When the Fed ________, the quantity of banks' reserves decreases. A) hikes taxes B) buys government securities C) sells government securities D) lowers the required reserve ratio E) raises the required reserve ratio Answer: C Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 40) When the Fed buys government securities, the immediate effect of the purchase is that banks' A) reserves increase. B) deposits increase. C) assets increase. D) reserves decrease. E) loans decrease. Answer: A Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

41) When the Fed buys $100 million of securities from a commercial bank the A) monetary base increases. B) money supply decreases. C) bank's reserves decrease. D) required reserve ratio decreases. E) bank is risking its depositors' money. Answer: A Topic: Open market operation and the monetary base Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 42) If the desired reserve ratio is 20 percent and the Fed buys $10,000 worth of Treasury bonds, what is the change in the banks' total reserves? A) $2,000 B) $10,000 C) $20,000 D) $8,000 E) $100,000 Answer: B Topic: Open market operation and the monetary base Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Revised AACSB: Analytic skills 43) When the Fed sells $100 million of securities to a commercial bank, the A) monetary base increases. B) money supply increases. C) bank's reserves decrease. D) required reserve ratio decreases. E) bank's reserves do not change. Answer: C Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

44) When the Fed purchases government securities A) excess reserves in the banking system increase, leading to more loans being made. B) required reserves in the banking system increase, leading to more loans being made. C) excess reserves in the banking system decrease, leading to fewer loans being made. D) required reserves in the banking system decrease, leading to fewer loans being made. E) the monetary base does not change. Answer: A Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 45) When the Fed purchases government securities ________ loans end up being made because ________. A) more; excess reserves in the banking system increase B) more; excess reserves in the banking system decrease C) fewer; excess reserves in the banking system increase D) fewer; excess reserves in the banking system decrease E) fewer; required reserves in the banking system increase but desired reserves decrease Answer: A Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 46) To increase the quantity of money in the economy, the Federal Reserve can A) print more money and give it to the banks. B) increase the required reserve ratio. C) buy government bonds in an open market operation. D) sell government bonds in an open market operation. E) cut taxes. Answer: C Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

47) When the Fed ________ securities in an open market operation, banks' reserves ________, and therefore lending ________. A) sells; increase; increases B) buys; increase; increases C) sells; decrease; increases D) buys; decrease; decreases E) buys; do not change; does not change Answer: B Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 48) The Fed buys $100 million U.S. government securities from Bank of America. Bank of America's balance sheet shows this transaction as ________ in total assets and ________ in reserves. A) no change; a $100 million decrease B) no change; a $100 million increase C) a $100 million increase; no change D) a $100 million increase; a $100 million increase E) a $100 million decrease; a $100 million decrease Answer: B Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 49) If the Fed purchases securities in the amount of $100,000 from First Union Bank, then the A) assets of First Union Bank decrease by $100,000. B) assets of the Fed decrease by $100,000. C) assets of First Union Bank change in composition but not in amount. D) liabilities of the Fed change in composition but not in amount. E) liabilities of First Union decrease by $100,000. Answer: C Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

50) The Fed purchases $100 million of U.S. government securities from First National Bank. The balance sheet for First National Bank shows ________ in its total assets and ________ in its total liabilities. A) a $100 million increase; a $100 million increase B) a $100 million decrease; a $100 million increase C) a $100 million increase; a $100 million decrease D) no change; no change E) a $100 million increase; no change Answer: D Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 51) Suppose the Fed buys $1 million of government securities from Bank One, a large commercial bank. Bank One's reserves ________ and its deposits ________. A) increase by $1 million; do not change B) increase by $1 million; increase by $1 million C) do not change; increase by $1 million D) do not change; do not change E) decrease by $1 million; do not change Answer: A Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 52) The Fed sells $300 million U.S. government securities to commercial banks. This action leads to ________ in Fed assets and ________ in Fed liabilities. A) a $300 million increase; a $300 million increase B) a $300 million increase; a $300 million decrease C) no change; no change D) a $300 million decrease; a $300 million decrease in E) a $300 million decrease; a $300 million increase Answer: D Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

53) When the Fed sells government securities to banks, the sale A) increases banks' reserves. B) increases the quantity of money. C) creates more excess reserves. D) decreases banks' reserves. E) increases the monetary base. Answer: D Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 54) An open market purchase of securities by the Fed leads to all of the following EXCEPT A) an initial increase in excess reserves. B) an increase in bank lending. C) a decrease in the quantity of money. D) an increase in banks' reserves. E) an increase in the monetary base. Answer: C Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 55) If the Fed sells government securities to a member of the nonbank public, then the resulting effect on the quantity of money is A) much larger than if the securities were sold to a bank. B) much smaller than if the securities were sold to a bank. C) the same as if the securities were sold to a bank. D) that there is no change in the quantity of money. E) None of the above answers is correct. Answer: C Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

56) Comparing the effect on the monetary base between an open market purchase of government securities from a bank and the same open market operation conducted with the general public, the monetary base A) increases by a larger amount if the general public sells the securities than if a bank sells the securities. B) increases by a larger amount if a bank sells the securities than if the general public sells the securities. C) does not change if it is the general public that sells the securities. D) increases by the same amount if the general public sells the securities or if a bank sells the securities. E) decreases by the same amount if the general public sells the securities or if a bank sells the securities. Answer: D Topic: Open market operation Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 57) If the Fed buys government securities from the non-bank public, then A) reserves at banks decrease. B) loans at banks decrease. C) deposits at banks increase and banks' reserves decrease. D) deposits at banks increase and banks' reserves increase. E) deposits at banks decrease and banks' reserves increase. Answer: D Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 58) The Fed purchases $1 million of U.S. government securities from First Bank. The desired reserve ratio is 10 percent, the currency drain ratio is zero, and banks loan all excess reserves. The Fed's purchase increases First Bank's excess reserves by how much? A) $900,000 B) $1,000,000 C) $1,100,000 D) $10,000,000 E) $100,000 Answer: B Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 83 Copyright © 2023 Pearson Education Ltd.

59) When the desired reserve ratio is 10 percent, suppose the Fed buys $1,000,000 of government securities from banks. As a result, the banks' excess reserves A) increase by $900,000. B) increase by $1,000,000. C) increase by $10,000. D) decrease by $10,000. E) decrease by $1,000,000. Answer: B Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 60) The FUN Bank has no excess reserves when a new deposit of $20,000 is made. The desired reserve ratio is 5 percent. After the deposit, but before making any loans, how much does The FUN Bank have in excess reserves? A) $1,000 B) $20,000 C) $9,000 D) $19,000 E) $21,000 Answer: D Topic: Money creation process Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 61) When a bank receives $100,000 in new deposits, the amount of loans the bank can make is limited by A) federal law. B) the annual federal budget. C) the Treasury Department. D) its desired reserve ratio. E) state law, with banks in different states being able to make different amounts of loans. Answer: D Topic: Money creation process Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

62) At any point in time, a single bank can loan an amount equal to A) its excess reserves. B) its required reserves. C) its government securities. D) the amount of loans the bank made in the past. E) its total reserves. Answer: A Topic: Money creation process Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 63) Assume First Central Bank has a desired reserve ratio of 15 percent; $80,000 in total deposits, loans equal to $60,000, and has $20,000 in actual reserves. First Central can make additional loans totaling A) $8,000. B) $12,000. C) $20,000. D) $60,000. E) $80,000. Answer: A Topic: Money creation process Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 64) Bank One has reserves of $100,000, government securities of $200,000, loans of $700,000, and checkable deposits of $800,000. If the desired reserve ratio is 10 percent, Bank One can make additional loans totaling A) $0.00. B) $10,000. C) $20,000. D) $80,000. E) $100,000. Answer: C Topic: Money creation process Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

65) A new bank has reserves of $600,000, checkable deposits of $500,000, and government securities of $100,000. If the desired reserve ratio is 10 percent, the amount of loans this bank can make is A) $50,000. B) $60,000. C) $540,000. D) $550,000. E) $600,000. Answer: D Topic: Money creation process Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 66) If a single bank has $25,000 in excess reserves and the desired reserve ratio is 20 percent, what is the maximum this bank can loan? A) $5,000 B) $20,000 C) $25,000 D) $125,000 E) $30,000 Answer: C Topic: Money creation process Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 67) A-1 bank initially has no excess reserves. If the desired reserve ratio is 10 percent and a new deposit of $10,000 is made in A-1, then A-1 A) is required to hold the deposit in its reserves. B) can immediately loan a multiple of the $10,000. C) can immediately loan $9,000. D) can immediately loan $100,000. E) can immediately loan $10,000. Answer: C Topic: Money creation process Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

68) A currency drain is A) an increase in currency held outside banks. B) when the Fed buys securities, but it is not when the Fed sells securities. C) when the Fed sells securities, but it is not when the Fed buys securities. D) when the Fed either buys or sells securities. E) when the Fed raises the required reserve ratio. Answer: A Topic: Currency drain Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 69) A currency drain occurs when the A) Fed increases the required reserve ratio. B) Fed sells U.S. government securities. C) non-bank public increases its holdings of currency outside the banking system. D) banks reduce the number of loans they create with their excess reserves. E) Fed buys U.S. government securities. Answer: C Topic: Currency drain Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 70) The currency drain reduces the amount of A) reserves available to banks to make loans. B) currency the Fed has outstanding in the economy. C) currency available for banks to borrow from the Fed. D) the monetary base. E) open market operations the Fed can make. Answer: A Topic: Currency drain Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

71) A currency drain ________ the amount of bank reserves available to banks to make loans because ________. A) reduces; people are holding more money outside of the banks B) increases; people are holding less money outside of the banks C) reduces; people are holding less money outside of the banks D) reduces the monetary base; people are holding more money outside of the banks E) reduces; people are holding onto the money the banks could have borrowed from the Fed Answer: A Topic: Currency drain Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 72) Suppose the Federal Reserve buys $50 million worth of securities from a commercial bank. As a result, the monetary base ________, and the quantity of money will ________ $50 million due to the ________. A) increases; increase by more than; money multiplier B) decreases; decrease by more than; money multiplier C) increases; increase by more than; expenditure multiplier D) decreases; decrease by less than; expenditure multiplier E) increases; decrease by; currency drain Answer: A Topic: Money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 73) The money multiplier is the A) fraction of the monetary base that is kept in currency. B) factor by which a change in the monetary base is multiplied to give the change in the quantity of money. C) factor by which a change in the deposits base is multiplied to give the change in the monetary base. D) proportion by which a change in the quantity of money changes the monetary base. E) number of times that the Fed conducts open market operations in a month. Answer: B Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

74) The number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money is called the A) desired reserve ratio. B) money multiplier. C) currency multiplier. D) currency drain. E) open market operation. Answer: B Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 75) If the money multiplier is 3.0, a $1,000 increase in the monetary base A) increases quantity of money by $3,000. B) decreases quantity of money by $3,000. C) increases the monetary base by $300. D) increases the money multiplier by 3 percent. E) decreases the quantity of money by 3 percent. Answer: A Topic: Money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 76) C/D is the currency drain ratio and R/D is the desired reserve ratio. The money multiplier equals A) . B) C) D) E)

. . . .

Answer: A Topic: Money multiplier Skill: Level 4: Applying models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

77) The Fed purchases $1 million of U.S. government securities from First Bank. The desired reserve ratio is 10 percent, the currency drain ratio is zero, and banks loan all excess reserves. The money multiplier is equal to A) 0.10. B) 1.0. C) 10.0. D) 100.0. E) $1 million. Answer: C Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 78) Suppose the currency drain ratio is 33.33 percent and the desired reserve ratio is 10 percent. The money multiplier equals A) 4.27. B) 3.00. C) 3.08. D) 2.50. E) 6.67. Answer: C Topic: Money multiplier Skill: Level 5: Critical thinking Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 79) If the currency drain ratio is 0.2 and the desired reserve ratio is 0.03, the money multiplier is A) 0.76. B) 6.67. C) 3.23. D) 4.46. E) 5.22. Answer: E Topic: Money multiplier Skill: Level 5: Critical thinking Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

80) Suppose the currency drain ratio is 25 percent and the desired reserve ratio is 20 percent. The money multiplier equals A) 4.00. B) 3.00. C) 2.78. D) 2.00. E) 5.42. Answer: C Topic: Money multiplier Skill: Level 5: Critical thinking Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 81) If the currency drain ratio is 30 percent and the desired reserve ratio is 10 percent, the money multiplier is A) 0.80. B) 1.25. C) 3.25. D) 5.00. E) 10.0. Answer: C Topic: Money multiplier Skill: Level 5: Critical thinking Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 82) The monetary multiplier is 3 and the change in the monetary base is $100,000. How much will the quantity of money increase? A) $300,000 B) $200,000 C) $100,000 D) $70,000 E) $33,333 Answer: A Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

83) If the currency drain ratio is zero, which of the following situations leads to the greatest total increase in the quantity of money? A) an increase in the monetary base of $100,000 when the desired reserve ratio is 5 percent B) an increase in the monetary base of $120,000 when the desired reserve ratio is 10 percent C) an increase in the monetary base of $200,000 when the desired reserve ratio is 20 percent D) an increase in the monetary base of $250,000 when the desired reserve ratio is 15 percent E) an increase in the monetary base of $100,000 when the desired reserve ratio is 50 percent Answer: A Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 84) The Fed buys $50,000 of government securities. The desired reserve ratio is 10 percent and the currency drain ratio is zero. What will be the change in the quantity of money? A) $5,000 B) $50,000 C) $500,000 D) $5,000,000 E) $0 Answer: C Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 85) The Fed buys $25,000 of government securities. The desired reserve ratio is 20 percent and the currency drain ratio is zero. What will be the change in the quantity of money? A) $5,000 B) $20,000 C) $25,000 D) $125,000 E) $50,000 Answer: D Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

86) If the desired reserve ratio is 10 percent and there is no currency drain, then a $100 increase in the monetary base leads the banking system to increase the quantity of money by A) $1,000. B) $400. C) $900. D) $110. E) $1,100. Answer: A Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 87) Suppose the desired reserve ratio is 20 percent and there is no currency drain. Then a $1 increase in the monetary base leads to the banking system to increase the quantity of money by A) $0.02. B) $4. C) $5. D) $20. E) $2. Answer: C Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 88) Suppose the desired reserve ratio is 10 percent and there is no currency drain. Then a $200 increase in the monetary base results in the banking system increasing the quantity of money by A) $200. B) $2,000. C) $20. D) $10. E) $2,190. Answer: B Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

89) If the desired reserve ratio is 15 percent, there is no currency drain, and banks loan all of their excess reserves, an increase in the monetary base of $20,000 leads to a total increase in the quantity of money of A) $3,000. B) $20,000. C) $133,333. D) $200,000. E) $300,000. Answer: C Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Revised AACSB: Reflective thinking 90) The Fed conducts an open market purchase of securities of $5,000. If the currency drain ratio is 0 percent and the desired reserve ratio is 10 percent, then the total increase in the quantity of money is A) $5,000. B) $20,000. C) $50,000. D) $10,000. E) $4,000. Answer: C Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 91) Suppose the Fed sells $100 of government securities. If the desired reserve ratio is 20 percent and there is no currency drain, then the quantity of money A) decreases by $100. B) decreases by $500. C) decreases by $400. D) increases by $100. E) decreases by $80. Answer: B Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

92) The Fed buys $20,000 of government securities. The desired reserve ratio is 5 percent and the currency drain ratio is zero. What will be the change in the quantity of money? A) $20,000 B) $400,000 C) $399,980 D) $19,000 E) $5,000 Answer: B Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 93) If the Fed buys $10 million of government securities when the desired reserve ratio is 20 percent and the currency drain ratio is 5 percent, the quantity of money A) increases by $42 million. B) increases by $50 million. C) decreases by $42 million. D) decreases by $50 million. E) increases by $7.5 million. Answer: A Topic: Money multiplier Skill: Level 5: Critical thinking Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 94) Which of the following reduces the money multiplier? A) Banks loan all their excess reserves. B) Bank customers hold some of the loan proceeds as currency outside the banking system. C) The Fed reduces the required reserve ratio. D) Banks impose a currency drain on bank customers. E) The Fed sells U.S. government securities. Answer: B Topic: Size of money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

95) The quantity of money decreases if A) the currency drain ratio increases. B) the desired reserve ratio decreases. C) banks loan all excess reserves. D) the Treasury Department issues fewer government securities. E) the Fed buys U.S. government securities. Answer: A Topic: Size of money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 96) ________ in the currency drain ratio and ________ in the desired reserve ratio ________ the money multiplier. A) An increase; an increase; increase B) An increase; a decrease; decrease C) A decrease; an increase; decrease D) A decrease; a decrease; increase E) An increase; a decrease; increase Answer: D Topic: Size of money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 97) An increase in the currency drain ratio A) increases the size of the money multiplier. B) decreases the size of the money multiplier. C) increases the deposits in all banks. D) decreases the size of the monetary base. E) increases the size of the monetary base. Answer: B Topic: Size of money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

98) An increase in the currency drain ratio A) decreases the size of the money multiplier. B) increases the size of the money multiplier. C) increases the money supply. D) decreases the required reserve ratio. E) increases the desired reserve ratio. Answer: A Topic: Size of money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 99) If there is an increase in the amount of currency held outside banks, then the A) monetary base will decrease. B) quantity of money will increase. C) quantity of money and the monetary base will decrease. D) quantity of money will decrease. E) quantity of money will not change. Answer: D Topic: Size of money multiplier Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 100) An increase in the currency drain ratio A) decreases the monetary base. B) increases the quantity of money. C) increases bank reserves. D) does not change the amount of the monetary base. E) does not change the quantity of money. Answer: D Topic: Size of money multiplier Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

101) An increase in the currency drain ratio A) decreases the quantity of money. B) decreases the monetary base. C) increases banks' reserves. D) increases banks' deposits. E) has no effect on the amount of the monetary base or the quantity of money. Answer: A Topic: Size of money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 102) ________ increases the size of the money multiplier. A) An increase in the currency drain ratio B) An open market purchase of government securities by the Fed C) A reduction in the desired reserve ratio D) An open market sale of government securities by the Fed E) An increase in the size of open market operations Answer: C Topic: Size of money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 103) If the monetary base does not change and the desired reserve ratio increases, the money multiplier ________ and the quantity of money ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) decreases; does not change Answer: D Topic: Size of money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

104) The ________ the desired reserve ratio, the ________ the ________ in the quantity of money created from an initial increase of $100,000 in the monetary base. A) larger; larger; decrease B) larger; larger; increase C) larger; smaller; decrease D) smaller; larger; decrease E) smaller; larger; increase Answer: E Topic: Size of money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 105) When part of a bank loan does not return to the banking system but rather remains outside the banking system as currency, then the money multiplier ________ in size and the amount of money created by an open market operation ________. A) increases; decreases B) does not change; increases C) decreases; decreases D) increases; increases E) decreases; does not change Answer: C Topic: Size of money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 106) Decisions of ________ determine the magnitude of the monetary multiplier. A) only the Fed B) only the public C) both the Fed and the public D) neither the Fed nor the public E) the Fed and the U.S. Congress Answer: C Topic: Size of money multiplier Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

107) As a result of the Fed's actions during the 2008 financial crisis and banks' lending policies A) the M2 money multiplier has fallen from about 9 to about 4. B) the M2 money multiplier more than doubled. C) the monetary base decreased by 50 percent. D) the ratio of currency to M2 deposits more than doubled. E) the reserve requirement ratio increased. Answer: A Topic: Eye on creating money Skill: Level 4: Applying models Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 108) As a result of the Fed's actions during the 2008 financial crisis and banks' lending policies, the money multiplier ________ as a direct result of the ________. A) fell from about 9 to about 4; surge in banks' desired reserve ratios as they took on less risk B) rose from about 4 to about 9; surge in banks' desired reserve ratios as they took on less risk C) fell from about 9 to about 4; low risk experienced by banks because of the FDIC increasing their default coverage amounts D) rose drastically; consistent decrease in banks' desired reserve ratios as they took on less risk E) decreased drastically; consistent decrease in banks' desired reserve ratios as they took on less risk Answer: A Topic: Eye on creating money Skill: Level 4: Applying models Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 109) The M2 multiplier in the United States is currently about A) 1. B) 4. C) 16. D) 50. E) 23. Answer: B Topic: Eye on creating money Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

110) During the 2008 financial crisis, banks restricted ________, and the M2 money multiplier ________. A) lending; decreased B) lending; increased C) deposits; increased D) buying securities; increased E) deposits; decreased Answer: A Topic: Eye on creating money Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 111) Excess reserves are the A) same as the required reserves. B) amount of reserves the Fed requires banks to hold. C) amount of reserves held over what is desired. D) amount of reserves a bank holds at the Fed. E) amount of reserves banks keep in their vaults. Answer: C Topic: Excess reserves Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 112) Banks can make loans up to an amount equal to their A) total deposits. B) total reserves. C) required reserves. D) excess reserves. E) total government securities. Answer: D Topic: Excess reserves Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

113) If the Fed buys government securities, then A) the quantity of money is not changed, just its composition. B) new bank reserves are created. C) the quantity of money decreases. D) bank reserves are destroyed. E) banks' excess reserves decrease. Answer: B Topic: Open market operation Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 114) The Citizens First Bank sells $100,000 of government securities to the Fed. This sale immediately A) decreases the quantity of money. B) decreases the bank's checkable deposits. C) increases the bank's reserves. D) decreases the bank's assets. E) increases the bank's required reserves. Answer: C Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 115) When the Fed conducts an open market purchase, the first round changes in the money creation process are that excess reserves ________, bank deposits ________, and the quantity of money ________. A) decrease; decrease; decreases B) increase; do not change; increases C) decrease; increase; does not change D) do not change; increase; increases E) increase; increase; increases Answer: E Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

116) A currency drain is cash ________ and has ________ effect on the money multiplier. A) draining into the banks; no B) draining into the banks; an C) held outside the banks; an D) held at the Fed; an E) held as reserves; no Answer: C Topic: Currency drain Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 117) The money multiplier is used to determine how much the A) monetary base increases when the Fed purchases government securities. B) quantity of money increases when the monetary base increases. C) monetary base increases when the quantity of money increases. D) quantity of money increases when the required reserve ratio increases. E) monetary base increases when the Fed sells government securities. Answer: B Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 118) The Fed makes an open market operation purchase of $200,000. The currency drain ratio is 33.33 percent and the desired reserve ratio is 10 percent. By how much does the quantity of money increase? A) $800,000 B) $333,333 C) $2,000,000 D) $615,416 E) $465,116 Answer: D Topic: Money multiplier Skill: Level 5: Critical thinking Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

119) In 2008 the M2 money multiplier collapsed from near 9.0 to about 4.5 because of A) a surge in banks' desired reserve ratio. B) an increase in the currency drain ratio. C) a decrease in the currency drain ratio. D) a decrease in banks' desired reserve ratio. E) none of the above. Answer: A Topic: Eye on creating money Skill: Level 5: Critical thinking Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 120) The extraordinary ________ the money multiplier is primary explained by ________. A) fall in 2008 of; tenfold increase in the desired reserve ratio B) fluctuations in; an increasingly volatile currency drain ratio C) fluctuation in; a massive decrease in the desired reserve ratio D) rise in 2008 of; a huge decrease in the desired reserve ratio E) fall in 2008 of; a volatile currency drain ratio Answer: A Topic: Eye on creating money Skill: Level 5: Critical thinking Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 27.5 Integrative Questions 1) Money market mutual funds A) are included in M2 but not M1. B) are included in M1 but not M2. C) are included in M1 and M2. D) are the largest part of the monetary base. E) None of the above is correct. Answer: A Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

2) Which of the following financial institutions does NOT have to meet minimum reserve ratios? i. the Fed ii. commercial banks iii. credit unions A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 3) If the desired reserve ratio increases, then A) banks' desired reserves increase and their excess reserves decrease. B) bank customers become more willing to make deposits in banks. C) banks are able to make more loans. D) banks can buy more government securities. E) the Fed has supplied banks with more reserves. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 4) If the desired reserve ratio decreases, then A) banks' desired reserves increase and their excess reserves decrease. B) bank customers become more willing to make deposits in banks. C) banks are able to make more loans. D) banks are forced to buy fewer government securities. E) banks' desired reserves decrease and their excess reserves do not change. Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

5) If the Fed buys a $100,000 government security from a bank when the desired reserve ratio is 20 percent and the currency drain ratio is 5 percent, the bank can loan a maximum of A) $75,000. B) $80,000. C) $100,000. D) $95,000. E) $85,000. Answer: B Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytic skills 6) If the Fed buys a $100,000 government security from a bank when the desired reserve ratio is 10 percent and the currency drain ratio is 50 percent, the bank can loan a maximum of A) $50,000. B) $40,000. C) $100,000. D) $90,000. E) $60,000. Answer: D Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytic skills 27.6 Essay: What Is Money? 1) Define money and list its functions. Answer: Money is any commodity or token that is generally accepted as a means of payment. It has three main functions. It serves as a medium of exchange, a unit of account, and a store of value. Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

2) List and define the three functions of money. Answer: The three functions of money are a medium of exchange, a unit of account, and a store of value. A medium of exchange is an object that is generally accepted in exchange for goods and services. A unit of account is an agreed upon measure for stating the prices of goods and services. A store of value is anything that can be held and later exchanged for goods and services. Money serves all three of these functions. Topic: Functions of money Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Written and oral communication 3) What is barter? What is a double coincidence of wants? How does the existence of money affect barter? Answer: Barter is the direct exchange of one good or service for another. Barter is inefficient because it requires a "double coincidence of wants," that is, the good one person offers for exchange must be the good the trading partner wants and the trading partner's good must be what the first person wants. The existence of money means that we do not need to engage in barter. Instead, we can sell a good or service for money and then use the money to purchase another good or service we desire. There is no necessity for the "double coincidence of wants" because the seller is willing to accept money from any buyer. Topic: Barter Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Written and oral communication 4) Explain which of the following count as money. a. a check in Ann's checkbook b. currency in Ann's bank c. currency in Ann's purse d. Ann's checking deposit Answer: Only parts (c), currency in Ann's purse, and (d), Ann's checking deposit, are money. Ann's check, given in part (a), is a method of transferring money from Ann to someone else. Thus the check (itself) is not money. Part (b), the currency in Ann's bank, is not money until someone withdraws it because currency inside a bank does not count as money. Topic: Money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Written and oral communication

5) What is fiat money? Answer: Fiat money is objects that are money because the law declares them to be money. Today's money is fiat money. In past times, money used to be items, such as salt or gold, that had an intrinsic value, that is, a value of their own outside of their role as money. Topic: Fiat money Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Written and oral communication 6) "Even though we can convert them into money, deposits at banks are not money." Is the previous statement correct or not? Answer: The statement is incorrect. Some deposits at banks, such as checkable deposits, are a means of payment and fulfill all the functions of money. These deposits are therefore money. Topic: Deposits Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 7) Are checks money? Answer: Checks are instructions to transfer funds from one person's checking account to another person's checking account. Checks are not money, but the checking account deposits that the check transfers are money. Topic: Checks Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 8) "Credit cards are considered money because they serve to purchase goods and services." Is the previous statement true or false? Answer: The statement is false. Credit cards are an ID card that, when presented, allow the owner to get an immediate loan. A loan is not money because a loan needs to be repaid with money. Thus a credit card is not money. Topic: Credit card Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking

9) Are credit cards or debit cards money? Explain your answer. Answer: Neither credit cards nor debit cards are money. Credit cards are a type of ID card that, when presented, allow the owner to get an immediate loan. The loan is not money; indeed, it must be repaid using money. A debit card allows the customer to pay immediately for his or her purchase by transferring money from the customer's checking account to the seller's account. Debit cards are similar to checks insofar as they are essentially instructions to move money from one person to another. The funds transferred are money, the debit card is not money. Topic: Credit card, debit card Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Written and oral communication 10) What makes up M1? Is M1 larger or smaller than real GDP? Answer: M1 is the sum of currency held by individuals and businesses plus checkable deposits owned by individuals and businesses plus traveler's checks. All the assets in M1 are accepted as means of payment and so all the assets are money. M1 is much smaller than real GDP. Real GDP is about 6 times larger than M1. Topic: M1 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Written and oral communication 11) What assets are included in M1? In M2? Is all of M1 and M2 money? If some assets of M1 or M2 are not money, why are they included in M1 or M2? Answer: M1 is the sum of currency held by individuals and businesses plus checkable deposits owned by individuals and businesses plus traveler's checks. All the assets in M1 are accepted as means of payment and so all the assets are money. M2 includes all of M1 plus savings deposits, small time deposits, and money market funds. Some components of M2, such as time deposits, are not money because they are not a means of payment. But they are easily convertible into money, which is why they are included in M2. Topic: M1, M2 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Written and oral communication

12) Explain what is included in M1 and M2. Is all of M1 money? Is all of M2 money? Answer: M1 is equal to the sum of currency held by individuals and businesses plus traveler's checks plus checking deposits owned by individuals and businesses. These assets are all money because they are all a means of payment. M2 is equal to M1 plus saving deposits plus small time deposits plus money market funds. Not all of M2 is money because not all of M2 are a means of payment. In other words, some parts of M2, such as time deposits, cannot be used directly to make a purchase. Topic: M1, M2 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Written and oral communication 13) What is larger: M1 or M2? Why? Answer: M2 is larger than M1. M2 includes M1 plus additional assets, so M2 must be larger than M1. In August, 2019, M1 was approximately $3,840 billion and M2 was about 5 times larger at approximately $14,953 billion. Topic: M1, M2 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Revised AACSB: Analytic skills 14) "By definition, all parts of M2 are money." Is the previous statement correct or not? Explain your answer. Answer: The statement is incorrect. Many of the assets in M2 are money. But not all the assets are money. Some of the savings deposits, time deposits, and money market funds are not means of payment and hence are not money. But they are included in M2 because they are easily converted into money. Topic: M2 Skill: Level 1: Definition Section: Checkpoint 27.1 Status: Old AACSB: Reflective thinking 15) If you have assets that include $50 in cash, a checking account with $135, a savings account with $500, and a jar of coins for laundry of $15.75, how much M1 do you have? Answer: You have $200.75 of M1, comprised of the $50 in cash, plus the $135 in the checking account, plus the $15.75 jar of coins. Topic: M1 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Analytic skills

16) If you hold $25 in cash, have $150 in a checking account, and have $250 in a savings account, how much of M2 do you have? Answer: All of the assets mentioned are included in M2, so you have $25 + $150 + $250 = $425 of M2. Topic: M2 Skill: Level 2: Using definitions Section: Checkpoint 27.1 Status: Old AACSB: Analytic skills 27.7 Essay: The Banking System 1) What are the institutions that make up the nation's banking system? Answer: Part of the nation's banking system is the Federal Reserve System. The other part consists of the banks and other institutions that accept deposits and that provide the services that enable people and businesses to make and receive payments. There are three general types of financial institutions: commercial banks, thrift institutions, and money market funds. Topic: Monetary institutions Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 2) What are the three types of financial institutions that accept deposits that are part of the U.S. money supply? Briefly describe each of the three types of financial institutions. Answer: The three institutions are commercial banks, thrift institutions, and money market funds. Commercial banks are financial firms that accept deposits and make loans. There are about 8,600 commercial banks in the United States. Thrift institutions include savings and loan associations, savings banks, and credit unions. These firms also accept deposits and make loans. The last type of financial institution is money market funds. Money market funds obtain funds by selling shares and using the proceeds to buy assets such as U.S. Treasury bills. Topic: Monetary institutions Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Written and oral communication

3) Explain what is meant by the phrase a bank's "balancing act." Answer: Banks accept deposits and make loans with the funds they receive from the deposits. Banks profit if the interest rate they charge on their loans exceeds the interest rate they pay on their deposits. Loans are made for a specified length of time and cannot be called in before they are due. However, deposits can be withdrawn at any time by the depositors. Therefore a bank must perform a balancing act: It is risky to lend too much of the deposits and run the risk of mass withdrawals that would create a crisis for the bank. However, it is by making loans that the bank earns a profit. Topic: Bank profit Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Written and oral communication 4) "Banks make a profit by paying depositors a high rate to attract funds and making loans at a low rate to encourage borrowing." Is the previous statement correct or not? Answer: The statement is incorrect. Banks make a profit if the interest rate they collect on the loans they make exceeds the interest rate they must pay on the deposits they attract. Topic: Bank profit Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 5) "Banks hold about 50 percent of their assets as reserves." Is the previous statement correct or not? Answer: The statement is incorrect. In 2019 banks kept an average of 8 percent of their assets as reserves. Topic: Banks' reserves Skill: Level 2: Using definitions Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking 6) "To count as required reserves, the reserves must be on deposit at the bank's district Federal Reserve Bank." Is the previous statement correct or incorrect? Answer: The statement is incorrect. Currency held in the bank's vault also counts as reserves. Topic: Banks' reserves Skill: Level 1: Definition Section: Checkpoint 27.2 Status: Old AACSB: Reflective thinking

7) The First National Bank of Townville has $125,000 in U.S. government securities, $200,000 in savings accounts, $300,000 in checking accounts, $50,000 in its reserve account at the Fed, $10,000 of currency in its vault, and loans of $250,000. What is the amount of its reserves? Answer: Reserves include the bank's deposit in its reserve account at the Fed and the currency in its vault. Therefore, the First National Bank of Townville has $50,000 + $10,000 = $60,000 in reserves. Topic: Banks' reserves Skill: Level 3: Using models Section: Checkpoint 27.2 Status: Old AACSB: Analytic skills 8) The Second National Bank of Townville has $400,000 in checking deposits, $125,000 in savings deposits, $500,000 in loans, $20,000 in its reserve account at the Fed, and $5,000 of currency in its vault. What is the amount of its reserves? Answer: Reserves include the bank's deposit in its reserve account at the Fed and the currency in its vault. Therefore the Second National Bank of Townville has $20,000 + $5,000 = $25,000 in reserves. Topic: Banks' reserves Skill: Level 3: Using models Section: Checkpoint 27.2 Status: Old AACSB: Analytic skills 9) The Second National Bank of Townville has $400,000 in checking deposits, $125,000 in savings deposits, $500,000 in loans, $20,000 in its reserve account at the Fed, and $5,000 of currency in its vault. What is the amount of these assets and liabilities that is in M1? Answer: The only deposit that is in M1 is the checking deposits, so the amount that is in M1 is checking deposits of $400,000. Topic: Bank's balance sheet Skill: Level 3: Using models Section: Checkpoint 27.2 Status: Old AACSB: Analytic skills

10) A bank has checking deposits of $400, saving deposits of $900, time deposits of $900, loans of $950, government securities of $900, outstanding credit card balances of $400, currency in its vault of $40, and deposits in its reserve account at the Fed of $40. a. What is the amount of this bank's deposits that are in M1? b. What is the amount of this bank's deposits that are in M2? c. What is the amount of this bank's reserves? Answer: a. The only deposit that is in M1 is the checking deposits, so the amount of this bank's deposits that are in M1 is $400. b. Deposits in M2 include checking deposits, saving deposits, and time deposits. Therefore the amount of this bank's deposits that are in M2 equals $400 + $900 + $900 = $2,200. c. Reserves are the sum of the currency in the bank's vault plus its deposits in its reserve account at the Fed. Therefore the bank's reserves are $40 + $40 = $80. Topic: Bank's balance sheet Skill: Level 3: Using models Section: Checkpoint 27.2 Status: Old AACSB: Analytic skills 27.8 Essay: The Federal Reserve System 1) The Federal Reserve is the nation's central bank. Therefore, does it provide banking services to individual citizens? Answer: No, because it is the nation's central bank, the Federal Reserve provides banking services to the nation's banks but not to individual citizens. Topic: Central banks Skill: Level 1: Definition Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 2) Does the Federal Reserve conduct both the nation's monetary policy and its fiscal policy? Answer: The Federal Reserve does not conduct both fiscal and monetary policy. The Federal Reserve is responsible for only the nation's monetary policy but it does not conduct the nation's fiscal policy. Topic: Structure of the Federal Reserve Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

3) Are the members of the Board of Governors of the Federal Reserve System elected officials? Answer: No, the members are not elected. They are appointed by the president of the United States (for 14-year terms) and confirmed by the U.S. Senate. Topic: Structure of the Federal Reserve Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 4) The president of which Federal Reserve Bank is always a voting member of the FOMC? Why? Answer: The president of the New York Federal Reserve Bank is always a voting member of the FOMC. The presidents of the other Federal Reserve Banks rotate on and off as voting members. The president of the New York Federal Reserve Bank is always a voting member because the New York Federal Reserve Bank implements the Fed's policy decisions. Topic: FOMC Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking 5) What is the FOMC? Who are the members of the FOMC? What policy does the FOMC decide? Answer: The FOMC is the Federal Open Market Committee. All seven members of the Board of Governors and the 12 Federal Reserve Bank presidents attend and discuss the economy at the FOMC meeting. The voting members of the FOMC, however, are only the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents of the remaining Federal Reserve Banks who serve on an annual rotating basis. The FOMC meets approximately every six weeks to review the state of the economy and decide the monetary policy actions to be carried out by the Federal Reserve Bank of New York. Topic: FOMC Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Written and oral communication

6) "Because monetary policy must be approved by the president of the United States, the president is chair of the Federal Open Market Committee." Analyze the previous statement—is it correct or incorrect? Answer: The statement is incorrect on several dimensions. First, monetary policy does not need to be approved by the President of the United States. Second, the president of the United States is not chair of the Federal Open Market Committee, FOMC. Third, the president of the United States is not even a member of the FOMC! The chair of the FOMC is the chair of the Federal Reserve's Board of Governors. Topic: FOMC Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Written and oral communication 7) What is the interaction between the Federal Reserve districts and the Board of Governors of the Federal Reserve System? Answer: The Federal Reserve System divides the nation into 12 regions, each with a Federal Reserve Bank. Each Federal Reserve Bank has a nine-member board of directors. Of the nine members, six are elected by the commercial banks within the Federal Reserve district and three are appointed by the Board of Governors. The directors of each Federal Reserve Bank appoint the president of the bank, subject to approval from the Board of Governors. Topic: Structure of the Federal Reserve Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Written and oral communication 8) What is the structure of the Federal Reserve Bank System? Answer: The key elements in the structure of the Fed are: a. The Board of Governors. The Board of Governors has seven members who are appointed by the President of the United States and confirmed by the Senate, each for a 14-year term. b. The Regional Federal Reserve Banks. There are 12 regional banks, one for each of the 12 Federal Reserve districts. Each of these 12 banks has nine directors who appoint the bank's president, which is subject to approval by the Board of Governors. c. The Federal Open Market committee or FOMC. The FOMC is the Fed's main policy-making committee. It has 12 voting members. Seven of the members are on the Board of Governors. One of the members is the president of the Federal Reserve Bank in New York. The other four members are presidents of other Federal Reserve Banks. Which four presidents are members changes on an annual rotating basis. Topic: Structure of the Federal Reserve Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Written and oral communication

9) Briefly describe the Federal Reserve System, how it is governed, and its roles in the economy. Answer: The Federal Reserve, or Fed, is the U.S. central bank. The Fed consists of twelve regional Federal Reserve Banks scattered across the United States. These banks are overseen by the Board of Governors, a seven member board located in Washington D.C., whose members are appointed by the President of the United States and confirmed by the Senate. The Federal Open Market Committee, or FOMC, is the group within the Fed that sets the nation's monetary policy. The voting members of the FOMC consist of the chair and other six members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents of the other regional Federal Reserve Banks, on a yearly rotating basis. The Fed's primarily role in the economy is to set and conduct the nation's monetary policy. The Fed also provides banking services to banks and helps regulate the nation's financial institutions and markets. Topic: Federal Reserve System Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Written and oral communication 10) List the Fed's main policy tools and briefly explain each one. Answer: The Fed's main policy tools are: required reserve ratios, the discount rate, open market operations, and extraordinary crisis measures. Banks and thrifts are required to hold a minimum percentage of deposits as reserves. This minimum percentage is determined by the Fed and is known as a required reserve ratio. The discount rate is the rate that the Fed charges commercial banks that borrow reserves from it. An open market operation is the buying and selling of government bonds by the Fed in the open market. Extraordinary crisis measures have been undertaken since the financial crisis of 2008. They consist of quantitative easing, when the Fed creates a massive amount of reserves at a very low—possibly zero—federal funds rate, credit easing, when the Fed buys private securities or makes loans to financial institutions to stimulate their lending, and operation twist, when the Fed buys long-term securities and sells short-term securities to lower long-term interest rates. Topic: Fed policy tools Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Written and oral communication 11) What is the discount rate? Answer: The discount rate is the interest rate that the Fed charges banks when the banks borrow reserves from the Fed. Topic: Fed policy tools, discount rate Skill: Level 2: Using definitions Section: Checkpoint 27.3 Status: Old AACSB: Reflective thinking

12) The Federal Reserve reports that it has coins valued at $10 billion, bank reserves at the Fed of $15 billion, gold valued at $10 billion, Federal Reserves notes of $400 billion, and U.S. government securities of $300 billion. What is the size of the monetary base? Answer: The monetary base is the sum of coins, Federal Reserve notes, and banks' reserves at the Federal Reserve. Therefore the monetary base equals $10 billion + $400 billion + $15 billion = $425 billion. Topic: Monetary base Skill: Level 3: Using models Section: Checkpoint 27.3 Status: Old AACSB: Analytic skills 27.9 Essay: Regulating the Quantity of Money 1) Describe how actual reserves are calculated. Explain the difference between required reserves and excess reserves. How do reserves affect the amount of loans a bank can make? Answer: Actual reserves are equal to the bank's reserves it keeps on deposit at the Federal Reserve plus the currency in the bank's vault. Required reserves are equal to the required reserve ratio multiplied by the bank's deposits. Banks might want to keep reserves over and above their required reserves. The amount of reserves banks want to keep is their desired reserves. Excess reserves equal actual reserves minus desired reserves. A bank can make loans equal to the amount of its excess reserves. Topic: Required reserves Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Written and oral communication 2) "A bank can only use its excess reserves to make loans, while required reserves can only be used to buy U.S. government securities." Explain whether the previous statement is correct or incorrect. Answer: The statement is incorrect on two dimensions. First, a bank can use excess reserves to buy government securities as well as make loans. Second, a bank is not allowed to use its required reserve to buy U.S. government securities. Required reserves must be kept in the form of reserves, which are either reserve deposits the bank has made at the Federal Reserve or cash in the bank's vault. Topic: Required reserves Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Written and oral communication

3) A bank reports reserves of $100,000, government securities of $250,000, loans of $750,000, checkable deposits of $900,000, and owners' equity of $200,000. The desired reserve ratio is 10 percent and the bank wants to hold as reserves only the amount it is required to hold. What is the amount of excess reserves for this bank? Show your work. Answer: Excess reserves equal the actual reserves minus the desired reserves. The actual reserves are $100,000. The bank desires to keep 10 percent of its checkable deposits as reserves, so the desired reserves are ($900,000) × 0.10 = $90,000. Thus excess reserves equal $100,000 $90,000 = $10,000. Topic: Required reserves Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 4) The desired reserve ratio is 10 percent. Fly By Night Bank has deposits of $250,000 and reserves of $25,000. What is the amount of its excess reserves? Answer: The bank has no excess reserves. It desires to have ($250,000) × (0.10) = $25,000 as desired reserves. Its actual reserves equal $25,000. Therefore its excess reserves equal $25,000 $25,000, or $0. Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 5) A bank has reserves of $50, deposits of $100, loans of $20, and government securities of $30. Assume the desired reserve ratio is 20 percent. a. What are the bank's assets and what are its liabilities? b. How much does the bank have in excess reserves? c. What can the bank do with its excess reserves that will affect the quantity of money? Answer: a. Assets are reserves, loans, and securities. Liabilities are deposits. b. The excess reserves are $30, equal to the actual reserves of $50 minus the desired reserves of $20 (= 20 percent of $100 of deposits). c. The bank can use its excess reserves to make loans. When it makes the loan, it will increase the quantity of money. Topic: Money creation Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

6) Explain the process by which the banking system creates money. Answer: When a bank gains excess reserves, it uses the excess reserves to make a loan. The person or a business receiving the loan receives a deposit—money! The borrower then generally spends the loan and it ends up as a deposit—money—in another company's account. That company's bank then gains some excess reserves, which it loans, and so more money is created. Thus the banking system creates money by making loans. Topic: Money creation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Written and oral communication 7) Does an open market operation in which the Fed buys securities from the general public decrease or increase the banking system's reserves? Answer: An open market purchase of government securities by the Fed increases the banking system's reserves. Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking 8) The Fed conducts an open market operation and buys $50,000 of government securities from Commerce Bank. The desired reserve ratio is 25 percent. What is the change in Commerce Bank's total reserves and its excess reserves? Answer: When the Fed buys $50,000 of government securities from Commerce Bank, Commerce Bank's total reserves increase by $50,000. None of these reserves are desired reserves, so Commerce Bank's excess reserves also increase by $50,000. Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 9) If the Fed sells $100 million of U.S. government securities, what happens to the quantity of money? Answer: If the Fed sells $100 million of U.S. government securities, the monetary base decreases and, along with it, the quantity of money decreases. The money multiplier shows that the quantity of money decreases by more than $100 million. Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Written and oral communication

10) When the Fed buys a government security, what happens to the monetary base and the quantity of money? Which changes by more or do both change by the same amount? Answer: When the Fed buys a government security, both the monetary base and the quantity of money increase. As reflected by the money multiplier, the increase in the quantity of money exceeds the increase in the monetary base. Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Written and oral communication 11) "When the Fed makes an open market purchase of government securities, the quantity of money will eventually decrease by a fraction of the initial change in the monetary base." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is wrong on two counts. First, if the Fed makes an open market purchase of government securities, the quantity of money will increase rather than decrease. Second, the money multiplier points out that the change in the quantity of money will be greater than, not less than, the initial change in the monetary base. Topic: Open market operation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Written and oral communication 12) If a bank receives an additional deposit of $50,000 and the desired reserve ratio is 20 percent, what is the amount of new loans the bank can make? Answer: The bank can make loans equal to its excess reserves. With the $50,000 deposit, the bank's desired reserves are ($50,000 × 0.20) = $10,000, so the bank has excess reserves of $40,000. Therefore the bank can make $40,000 of loans. Topic: The rounds of money creation Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

13) How can a new deposit of $10,000 at one bank create other new deposits at other banks? Suppose the desired reserve ratio is 10 percent and people keep no currency outside of the banks. What will be the new amount of deposits in the second and third rounds? Answer: When the bank receives a new deposit of $10,000, it will loan some of the deposit. The proceeds of the loan will be deposited in another bank, which will then loan some of its new deposits. Hence an initial deposit at one bank leads to deposits at other banks. With the desired reserve ratio of 10 percent, the first bank keeps $1,000 as reserves (10 percent of $10,000) and it can loan the remainder, $9,000. Thus the deposit at the second round bank will be $9,000. The second round bank keeps $900 as reserves (10 percent of $9,000) and can loan the remainder, $8,100. The deposit in the third round bank will be $8,100. Topic: The rounds of money creation Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 14) The Fed conducts an open market operation and increases a bank's excess reserves by $2,000. Explain the first five rounds of the money creation process if the desired reserve ratio is 25 percent and if people keep no currency outside of the banking system. Answer: In round one, the bank gains $2,000 of reserves which it lends. The next bank receives as a deposit the amount of the loan. The bank keeps $500 as desired reserves and lends $1,500. In round three, the third bank receives the $1,500 in a deposit. It keeps 25 percent, or $375, as desired reserves and lends the rest, $1,125. In round four, the fourth bank receives the $1,125 in a deposit. It keeps 25 percent, $281.25, as desired reserves and lends the remainder, $843.75. Finally in round five, the next bank receives the $843.75 in a deposit. It keeps $210.94 as desired reserves and lends the rest, $632.81. Topic: The rounds of money creation Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 15) "If the currency drain ratio increases, the monetary base decreases." Explain whether the previous statement is correct or incorrect. Answer: The statement is false. If the currency drain ratio increases, the money multiplier (and the quantity of money) decreases but the monetary base itself is unaffected. Topic: Currency drain Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Reflective thinking

16) What is a "currency drain"? How and why does it affect the money multiplier? Answer: An increase in currency held outside the banks is a currency drain. A currency drain decreases the size of the money multiplier. The money multiplier exists because when banks loan their excess reserves, the funds wind up in other banks as excess reserves, where they are loaned once again. As a result, an initial increase in reserves and the monetary base wind up increasing the quantity of money by a magnified amount. A currency drain means that when banks make loans, some of the funds are taken out as cash and not deposited back in another bank. Thus the other banks' excess reserves do not increase as much, so the amount that they can loan is decreased. The decrease in loans means that the ultimate increase in the quantity of money is less, so that the money multiplier is smaller. Topic: Currency drain Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Written and oral communication 17) How does a currency drain affect the money multiplier? Answer: If the currency drain is zero so that all money created is deposited in bank accounts, the money multiplier is equal to one divided by the desired reserve ratio. If the currency drain is positive, then some newly created money is held in cash and is not deposited in bank accounts. In this case, the money multiplier is smaller so that a change in the monetary base leads to a smaller change in the quantity of money. Topic: Currency drain Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Written and oral communication

18) Explain how the currency drain ratio affects the size of the money multiplier. In your explanation, suppose that in one round of the money creation process a bank gains $1 million in new deposits and reserves. Further suppose that the desired reserve ratio is 10 percent and the currency drain ratio is 50 percent. Answer: The currency drain ratio decreases the size of the money multiplier. The money multiplier reflects the fact that the banking system has a magnified effect on any change in reserves because the reserves are loaned by many banks. A currency drain decreases the amount of reserves that stay within the banking system. For example, take the bank that gains $1 million in new deposits and reserves. With the desired reserve ratio equal to 10 percent, start by assuming there is no currency drain. In this case, the desired reserve ratio of 10 percent means that the bank keeps $100,000 as reserves and so it will loan $900,000. The ENTIRE $900,000 will be deposited in a second bank. The entire $900,000 deposit adds to the initial $1 million deposit to create $1.9 million of new money. That bank will then keep $90,000 as reserves and loan $810,000. In this stage, the ENTIRE $810,000 will be deposited in a third bank and so the total new money (so far) created will become $2.71 million. Now, suppose that there is a currency drain, say the currency drain ratio is 50 percent. In this case, of the $900,000 first loan, only $600,000 is deposited in the second bank because $300,000 (50 percent of the $600,000 of deposits) is kept outside the banks as currency. Hence the second bank, which keeps $60,000 as reserves, can loan only $540,000. And of this loan and ensuing deposit, 50 percent or $180,000 is kept as currency and only $360,000 is left deposited in the third bank. Therefore the amount that each bank can loan is reduced and so the ultimate effect on the quantity of money is decreased. Topic: Currency drain Skill: Level 2: Using definitions Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 19) If the currency drain ratio increases, how can the Fed adjust the monetary base to offset the effect on the quantity of money? Answer: If the currency drain ratio increases, the size of the money multiplier decreases, which decreases the quantity of money. To maintain the quantity of money at its initial amount by changing the monetary base, the Fed must increase the monetary base. Topic: Currency drain Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Written and oral communication

20) Suppose the Fed conducts an open market operation in which it buys government securities from a commercial bank. Why is there a multiplier effect on the quantity of money? Answer: When the Fed buys government securities from a bank, the payment to the bank is in the form of reserves. Hence the bank gains excess reserves. The bank can loan these excess reserves. When the loan is spent, the recipients deposit some or all of the funds in their banks. These banks gain deposits (which increase the quantity of money) as well as excess reserves. The "second round" banks then loan their excess reserves. And when these loans are spent, once again the recipients deposit some or all of the funds in their banks. These third-round banks thereby gain deposits (which further increases the quantity of money) as well as excess reserves. These reserves are loaned, spent, and then deposited in a fourth round of banks, which still further increases the quantity of money. Hence the process of loaning and depositing the proceeds increases the quantity of money by a multiple of the initial amount of the open market operation. Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Written and oral communication 21) If the currency drain ratio is 40 percent and the desired reserve ratio is 15 percent, what does the money multiplier equal? Answer: The money multiplier is 2.55. The money multiplier equals with C/D = 0.40 and

. Therefore, the money multiplier equals

= 2.55.

Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 22) Suppose the currency drain is 20 ratio percent and the desired reserve ratio is 10 percent. a. What does the money multiplier equal? b. If the Fed purchases $10 million of U.S. government securities, by how much will the quantity of money increase or decrease? Answer: a. The money multiplier is 4.00. The money multiplier equals with C/D = 0.20 and . Therefore, the money multiplier equals

= 4.00.

b. If the Fed purchases $10 million of U.S. government securities, the quantity of money increases by ($10 million × 4.00) = $40.0 million. Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills 125 Copyright © 2023 Pearson Education Ltd.

23) The Fed purchases $100,000 of U.S. government securities from One Bank. Assuming the desired reserve ratio is 10 percent, banks loan all excess reserves, and the currency drain is 20 percent, how much does the quantity of money increase? Answer: The quantity of money increases by (money multiplier × $100,000). The money multiplier equals with C/D = 0.20 and R/D = 0.10. Therefore, the money multiplier equals

. So the quantity of money increases by (4.00) × ($100,000) =

$400,000. Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 27.4 Status: Old AACSB: Analytic skills

Foundations of Economics, 9e (Bade), GE Chapter 12 Money, Interest, and Inflation 28.1 Money and the Interest Rate 1) The quantity of money demanded is the A) average daily volume of bank account withdrawals. B) amount that people and businesses choose to hold. C) fraction of cash holdings in an average investment portfolio. D) income and volume of profits that people and businesses would like to receive. E) sum of checkable and savings deposits at banks. Answer: B Topic: Money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 2) The quantity of money demanded A) is the total currency in circulation. B) is the same as the money supply. C) is equal to real GDP. D) is the money that people choose to hold. E) changes only when real GDP changes. Answer: D Topic: Money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 3) When you accumulate more money A) the marginal benefit of holding money decreases. B) the opportunity cost of holding money decreases. C) your marginal tax rate falls. D) you earn a lower rate of interest on your checkable deposit. E) the interest rate you are paid on your currency increases. Answer: A Topic: Benefit of holding money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

4) When the opportunity cost of holding money increases, then A) people want to hold more money. B) the real interest rate falls. C) the nominal interest rate falls. D) people want to hold less money. E) the quantity of money supplied increases. Answer: D Topic: Opportunity cost of holding money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 5) As opportunity cost of holding money increases, people can A) do nothing. B) try to maximize marginal benefit. C) find a better job. D) seek substitutes for money. E) increase the demand for money but not the quantity of money they hold. Answer: D Topic: Opportunity cost of holding money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 6) The opportunity cost of holding money is that you A) run a greater risk of being robbed. B) pay a higher tax rate. C) forego interest on an alternative asset. D) have trouble balancing your check book. E) must make more trips to the bank to manage the money. Answer: C Topic: Opportunity cost of holding money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

7) The opportunity cost of holding money instead of an interest earning asset is the A) real interest rate. B) nominal interest rate. C) inflation rate minus the nominal interest rate. D) inflation rate. E) inflation rate minus the real interest rate. Answer: B Topic: Opportunity cost of holding money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 8) The opportunity cost of holding money is the A) nominal interest rate. B) real interest rate. C) inflation rate. D) time it takes to go to the ATM or bank. E) growth rate of real GDP. Answer: A Topic: Opportunity cost of holding money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 9) When the nominal interest rate falls, the opportunity cost of holding money A) decreases and the demand for money curve shifts leftward. B) decreases and there is a movement downward along the demand for money curve. C) increases and there is a movement upward along the demand for money curve. D) decreases and the demand for money curve shifts rightward. E) increases and the demand for money curve shifts rightward. Answer: B Topic: Opportunity cost of holding money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

10) The quantity of money demanded will decrease if the A) inflation rate decreases. B) nominal interest rate decreases. C) real interest rate decreases. D) nominal interest rate increases. E) price level rises. Answer: D Topic: Opportunity cost of holding money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 11) The lower the nominal interest rate, the A) greater the demand for money. B) greater the quantity of money demanded. C) greater the quantity of money supplied. D) smaller the demand for goods and services. E) smaller the quantity of money demanded. Answer: B Topic: Opportunity cost of holding money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 12) The ________ the nominal interest rate, the ________ is the quantity of money demanded. A) lower; greater B) lower; smaller C) higher; greater D) more variable; smaller E) None of the above because the nominal interest rate does not influence the quantity of money demanded. Answer: A Topic: Opportunity cost of holding money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

13) Mary has $1,000 and is considering purchasing a $1,000 bond that pays 7 percent interest per year. Mary decides not to buy the bond and holds the $1,000 as cash. If the inflation rate is 4 percent, the opportunity cost of holding the $1,000 as money is A) $30.00. B) $40.00. C) $70.00. D) $110.00. E) $100.00. Answer: C Topic: Opportunity cost of holding money Skill: Level 4: Applying models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 14) Suppose you can earn 5 percent on your savings account if you deposit $500 in it. The inflation rate is 3 percent. The opportunity cost of holding the $500 as money rather than in your savings account is A) $25. B) $100. C) $80. D) $525. E) $30. Answer: A Topic: Opportunity cost of holding money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Revised AACSB: Analytic skills 15) The relationship between the nominal interest rate, the real interest rate, and the inflation rate is that the A) real interest rate is equal to the nominal interest rate plus the inflation rate. B) nominal interest rate is equal to the real interest rate plus the inflation rate. C) real interest rate is equal to the nominal interest rate multiplied by the inflation rate. D) nominal interest rate is equal to the real interest rate divided by the inflation rate. E) nominal interest rate is equal to the real interest rate minus the inflation rate. Answer: B Topic: Interest rates Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

16) The real interest rate equals the A) nominal interest rate - inflation rate. B) (nominal interest rate ÷ inflation rate) × 100. C) inflation rate - nominal interest rate. D) (nominal interest rate × inflation rate)/100. E) nominal interest rate ÷ inflation rate. Answer: A Topic: Interest rates Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 17) The difference between the nominal interest rate and the real interest rate is the A) inflation rate. B) unemployment rate. C) GDP growth rate. D) money growth rate minus the growth rate of real GDP. E) price level. Answer: A Topic: Interest rates Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 18) In the long run, the nominal interest rate is A) negatively related to the price level. B) positively related to the price level. C) negatively related to the inflation rate. D) positively related to the inflation rate. E) not related to the price level or the inflation rate. Answer: D Topic: Interest rates Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

19) You have a $500 saving bond. The nominal interest rate is 10 percent, and the inflation rate is 4 percent. After a year, in real terms you have earned A) $70. B) $40. C) $50. D) $30. E) $510. Answer: D Topic: Interest rates Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 20) You have a $500 saving bond. If the nominal interest rate is 10 percent, then the inflation rate must be A) zero, otherwise you would sell the bond. B) 10 percent if in real terms you earned $200. C) 4 percent if in real terms you earned $70. D) 4 percent if in real terms you earned $30. E) 10 percent if in real terms you earned $100. Answer: D Topic: Interest rates Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 21) Suppose the nominal interest rate on a savings bond is 7 percent a year and the inflation rate is 4.5 percent a year. How much is the real interest rate? A) 1.56 percent B) 11.5 percent C) 2.5 percent D) 7 percent E) 4.5 percent Answer: C Topic: Interest rates Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

22) If the inflation rate is 2.5 percent and the nominal interest rate is 10 percent, then the real interest rate is A) 2.5 percent. B) 7.5 percent. C) -7.5 percent. D) -2.5 percent. E) 12.5 percent. Answer: B Topic: Interest rates Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 23) If the inflation rate is 5 percent and the real interest rate is 2.5 percent, then the nominal interest rate is A) -2.5 percent. B) 2 percent. C) 7.5 percent. D) 2.5 percent. E) 10 percent. Answer: C Topic: Interest rates Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 24) If the real interest rate is 8 percent and the inflation rate is 2.5 percent, then the nominal interest rate is A) 10.5 percent. B) 2.5 percent. C) 5.5 percent. D) 8 percent. E) 3.2 percent. Answer: A Topic: Interest rates Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

25) Barbara is willing to loan $10,000 if she can earn a real interest rate of 6 percent. Everything else the same, if the inflation rate is 2 percent, she would agree to loan the $10,000 if the nominal interest rate is A) 4 percent. B) 10 percent. C) 3 percent. D) 8 percent. E) 12 percent. Answer: D Topic: Interest rates Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 26) Barbara is willing to loan $10,000 if she can earn a real interest rate of 6 percent. Everything else the same, if the inflation rate is 2 percent, she would agree to loan the $10,000 if the nominal interest rate is ________ because ________. A) 8 percent; she would earn more than her desired amount of 6 percent B) 4 percent or higher; she would not earn her desired amount of 6 percent if the nominal interest rate was any lower C) 4 percent or lower; she would not earn her desired amount of 6 percent if the nominal interest rate was any higher D) 8 percent or higher; she would not earn her desired amount of 6 percent if the nominal interest rate was any lower E) 8 percent or lower; she would not earn her desired amount of 6 percent if the nominal interest rate was any higher Answer: D Topic: Interest rates Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 27) Assume you have a credit card balance of $2,000 at 15 percent and the inflation rate is 3 percent. What are the nominal and real interest rates? A) 15 percent nominal and 3 percent real B) 3 percent nominal and 12 percent real C) 15 percent nominal and 12 percent real D) 15 percent nominal and 18 percent real E) 12 percent nominal and 15 percent real Answer: C Topic: Interest rates Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 9 Copyright © 2023 Pearson Education Ltd.

28) The nominal interest rate is 12 percent and the inflation rate is 4 percent. The opportunity cost of holding a dollar of money for a year is A) 12 cents. B) 16 cents. C) 88 cents. D) 8 cents. E) 48 cents. Answer: A Topic: Opportunity cost of holding money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Revised AACSB: Analytic skills 29) The opportunity cost of holding money A) increases as the nominal interest rate increases. B) decreases as the nominal interest rate increases. C) does not change with the changes in the nominal interest rate. D) is fixed at all interest rates. E) is the price level. Answer: A Topic: Demand for money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 30) The demand for money curve shows the relationship between the quantity of money demanded and A) the nominal interest rate. B) the real interest rate. C) the inflation rate. D) the price level. E) real GDP. Answer: A Topic: Demand for money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

31) Which of the following increases the quantity of money demanded? A) a rise in the nominal interest rate B) a rise in the inflation rate C) a rise in the real interest rate D) a fall in the nominal interest rate E) an increase in real GDP Answer: D Topic: Demand for money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 32) When the nominal interest rate falls, there is A) an upward movement along the demand for money curve. B) a downward movement along the demand for money curve. C) a rightward shift of the demand for money curve. D) a leftward shift of the demand for money curve. E) no movement along the demand for money curve and the curve does not shift. Answer: B Topic: Demand for money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 33) An increase in the nominal interest rate leads to A) a rightward shift in the demand for money curve. B) a movement upward along the demand for money curve. C) a leftward shift in the demand for money curve. D) a movement downward along the demand for money curve. E) neither a shift in nor a movement along the demand for money curve. Answer: B Topic: Demand for money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

34) The demand for money curve slopes downward because a rise in the nominal interest rate ________ the opportunity cost of holding money and therefore ________ the quantity of money demanded. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: B Topic: Demand for money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 35) The demand for money schedule shows the ________ relationship between money demand and the nominal interest rate which means that as the ________. A) negative; nominal interest rate increases, the opportunity cost of holding money increases B) negative; nominal interest rate increases, the opportunity cost of holding money decreases C) positive; nominal interest rate increases, the opportunity cost of holding money increases D) positive; nominal interest rate increases, the opportunity cost of holding money decreases E) negative; opportunity cost of holding money increases, the nominal interest rate increases Answer: A Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 36) When the nominal interest rate increases, the A) quantity of money demanded increases and there is a movement upward along the demand for money curve. B) quantity of money demanded decreases and there is a movement upward along the demand for money curve. C) demand for money increases and the demand for money curve shifts rightward. D) demand for money decreases and the demand for money curve shifts leftward. E) supply of money curve shifts rightward. Answer: B Topic: Demand for money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

37) As the nominal interest rate increases, the opportunity cost of holding money ________ and the quantity of money demanded ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change because people need money Answer: B Topic: Demand for money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 38) If the interest rate rises from 1 percent to 3 percent, the ________ decreases and the opportunity cost of holding money ________. A) quantity of money demanded; rises B) quantity of money demanded; falls C) quantity of money supplied; rises D) quantity of money supplied; falls E) demand for money; rises Answer: A Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 39) In 2020, the interest rate fell below 1 percent in the United States. As a result, there was a A) leftward shift in the supply of money curve. B) rightward shift in the demand for money curve. C) movement downward along the demand for money curve. D) movement upward along the demand for money curve. E) movement upward along the money supply curve. Answer: C Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Revised AACSB: Reflective thinking

40) As the economy enters a strong expansion in which real GDP increases, which of the following occurs? A) The demand for money curve shifts rightward. B) The demand for money curve shifts leftward. C) The demand for money decreases and there is a movement upward along the demand for money curve. D) The demand for money increases and there is a movement downward along the demand for money curve. E) The nominal interest rate falls as the demand for money curve shifts leftward. Answer: A Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 41) The quantity of money demanded is proportional to A) the inflation rate. B) real GDP. C) the price level. D) the real interest rate. E) the nominal interest rate. Answer: C Topic: Demand for money, price level Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 42) The demand for money is A) positively related to the price level. B) positively related to the nominal interest rate. C) negatively related to the price level. D) negatively related to real GDP. E) positively related to the real interest rate. Answer: A Topic: Demand for money, price level Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

43) If the price level increases, the A) demand for money increases. B) demand for money decreases. C) quantity of money demanded increases. D) quantity of money demanded decreases. E) demand for money does not change and the quantity of money demanded does not change. Answer: A Topic: Demand for money, price level Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 44) Suppose that the price level does not change while real GDP decreases. As a result A) the demand for money increases and the demand for money curve shifts rightward. B) the supply of money curve shifts leftward. C) the supply of money curve shifts rightward. D) the quantity of money demanded decreases and there is a movement downward along the demand for money curve. E) the demand for money decreases so that households and firms hold smaller amounts of money. Answer: E Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 45) When the price level increases, people demand ________ money and the demand for money curve ________. A) more; shifts rightward B) more; shifts leftward C) less; shifts rightward D) less; shifts leftward E) the same amount of; does not shift Answer: A Topic: Demand for money, price level Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

46) The demand for money increases and the demand for money curve shifts rightward if A) the real interest rate increase. B) the nominal interest rate increases. C) the price level increases. D) the inflation rate increases. E) real GDP decreases. Answer: C Topic: Demand for money, price level Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 47) If the price level rises, there is A) an upward movement along the demand for money curve and the curve does not shift. B) a downward movement along the demand for money curve and the curve does not shift. C) a rightward shift of the demand for money curve. D) a leftward shift of the demand for money curve. E) no movement along the demand curve for money and the curve does not shift. Answer: C Topic: Demand for money, price level Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 48) If the price level falls, the A) demand for money increases. B) demand for money decreases. C) quantity of money demanded increases. D) quantity of money demanded decreases. E) demand for money does not change and the quantity of money demanded does not change. Answer: B Topic: Demand for money, price level Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

49) The ________ the price level, the ________. A) higher; greater the demand for money B) higher; smaller the demand for money C) lower; greater the demand for money D) higher; greater the supply of money E) higher; smaller the supply of money Answer: A Topic: Demand for money, price level Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 50) An increase in the price level leads to a A) rightward shift in the demand for money curve. B) movement upward along the demand for money curve and no shift of the curve. C) leftward shift in the demand for money curve. D) movement downward along the demand for money curve and no shift of the curve. E) rightward shift of the supply of money curve. Answer: A Topic: Demand for money, price level Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 51) An increase in the price level leads to ________ in the demand for money, and an increase in real GDP leads to ________ in the demand for money. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease E) no change; an increase Answer: A Topic: Demand for money, price level and real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

52) If real GDP decreases, the A) demand for money increases. B) demand for money decreases. C) quantity of money demanded increases. D) supply of money decreases. E) supply of money increases. Answer: B Topic: Demand for money, real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 53) An increase in real GDP affects the demand for money because A) when real GDP increases, more money is needed to make expenditures. B) at the higher price level, it takes more dollars to make expenditures. C) tax payments rise because more income is earned. D) there is an inverse relationship between the quantity money demanded and nominal GDP. E) the larger real GDP, the higher the real interest rate. Answer: A Topic: Demand for money, real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 54) The ________ real GDP, the ________. A) larger; larger the demand for money B) larger; smaller the demand for money C) smaller; larger the demand for money D) larger; larger the supply of money E) larger; smaller the supply of money Answer: A Topic: Demand for money, real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

55) All else the same, when real GDP increases, the A) demand for money decreases. B) demand for money increases. C) supply of money decreases. D) supply of money increases. E) supply of money does not change, and the demand for money does not change. Answer: B Topic: Demand for money, real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 56) The demand for money increases and the demand curve for money shifts rightward as a result of A) an increase in real GDP. B) a decrease in the real interest rate. C) an increase in the use of credit cards. D) a decrease in the price level. E) a decrease in the nominal interest rate. Answer: A Topic: Demand for money, real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 57) If real GDP decreases, there is A) an upward movement along the demand for money curve and no shift of the curve. B) a downward movement along the demand for money curve and no shift of the curve. C) a rightward shift of the demand for money curve. D) a leftward shift of the demand for money curve. E) no movement along the demand for money curve and the curve does not shift. Answer: D Topic: Demand for money, real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

58) When real GDP increases, the demand for money ________ and the demand for money curve ________. A) increases; shifts rightward B) increases; shifts leftward C) decreases; shifts rightward D) decreases; shifts leftward E) does not change; does not shift Answer: A Topic: Demand for money, real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 59) The demand for money increases and the demand for money curve shifts rightward if A) the real interest rate increases. B) the nominal interest rate increases. C) real GDP increases. D) the inflation rate increases. E) the price level falls. Answer: C Topic: Demand for money, real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 60) An increase in real GDP leads to A) a rightward shift in the demand for money curve. B) a movement upward along the demand for money curve but no shift of the curve. C) a leftward shift in the demand for money curve. D) a movement downward along the demand for money curve but no shift of the curve. E) neither a shift in the demand for money curve nor a movement along the curve. Answer: A Topic: Demand for money, real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

61) During an economic expansion when real GDP increases, the A) demand for money increases. B) demand for money decreases. C) supply of money decreases. D) nominal interest rate is constant. E) real interest rate is constant. Answer: A Topic: Demand for money, real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 62) During an economic expansion, the demand for money ________ because ________. A) increases; real GDP increases B) increases; nominal GDP does not change C) decreases; real GDP increases D) decreases; nominal GDP increases E) does not change; people make more purchases with credit cards Answer: A Topic: Demand for money, real GDP Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 63) During a(n) ________ the demand for money decreases because ________. A) recession; real GDP decreases B) expansion; real GDP decreases C) recession; nominal GDP increases D) recession; the price level rises E) equilibrium; real GDP decreases Answer: A Topic: Demand for money, real GDP Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

64) Which of the following SHIFTS the demand for money curve? i. change in the nominal interest rate ii. change in real GDP iii. change in the price level A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: D Topic: Demand for money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 65) Which statement most accurately describes the effect financial technology has had on the demand for money in the United States? A) Advances in financial technology have all decreased the demand for money. B) Advances in financial technology have all increased the demand for money. C) Some advances in financial technology have increased the demand for money while others have decreased it. D) Advances in financial technology have had no effect on the demand for money. E) It is not possible to tell what would be the effect because financial technology has not changed over the past three decades. Answer: C Topic: Demand for money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 66) Advances in financial technology A) must increase the demand for money. B) must decrease the demand for money. C) have no effect on the demand for money or on the supply of money. D) might increase or decrease the demand for money. E) affect only the supply of money. Answer: D Topic: Demand for money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

67) The increased use of credit cards leads to A) a rightward shift in the demand for money curve. B) a movement upward along the demand for money curve. C) a leftward shift in the demand for money curve. D) a movement downward along the demand for money curve. E) no movement along the demand curve for money nor a shift in the demand curve. Answer: C Topic: Demand for money, credit cards Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 68) As more and more businesses accept credit cards, the A) demand for money increases. B) demand for money decreases. C) quantity of money demanded increases. D) supply of money decreases. E) quantity of money demanded decreases. Answer: B Topic: Demand for money, credit cards Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 69) If credit card usage exhibits a sharp increase, there is A) an upward movement along the demand for money curve. B) a downward movement along the demand for money curve. C) a rightward shift of the demand for money curve. D) a leftward shift of the demand for money curve. E) a leftward shift of the supply of money curve. Answer: D Topic: Demand for money, credit cards Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

70) All of the following shift the demand for money curve EXCEPT A) an improvement in financial technology. B) an increase in real GDP. C) a rise in the nominal interest rate. D) a decrease in real GDP. E) an increase in the price level. Answer: C Topic: Demand for money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

71) In the above figure, a movement from point A to point B represents A) an increase in the demand for money that might be the result of an increase in real GDP. B) a decrease in the demand for money that might be the result of a fall in the price level. C) a decrease in the quantity of money demanded. D) an increase in the quantity of money demanded. E) an increase in the demand for money that might be the result of a fall in the price level. Answer: D Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

72) In the above figure, a movement from point B to point C represents A) an increase in the demand for money that might be the result of an increase in real GDP. B) a decrease in the demand for money that might be the result of an increase in real GDP. C) a decrease in the quantity of money demanded. D) an increase in the quantity of money demanded. E) an increase in the demand for money that might be the result of a fall in the price level. Answer: A Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 73) Between 1970 and 2014, M1 as a percent of GDP decreased. Which of the following could primary account for this fact? A) Real GDP has increased since 1970. B) The price level has risen since 1970. C) Credit cards have become more widely available since 1970. D) The nominal interest rate has steadily risen since 1970. E) The nominal interest rate has steadily fallen since 1970. Answer: C Topic: Eye on the U.S. economy, money and credit cards Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Written and oral communication 74) As a result of increased use of credit cards A) the demand for money has decreased and the demand for money curve has shifted leftward. B) the quantity of money demanded has decreased and there has been a movement up along the demand for money curve. C) the quantity of money demanded has decreased and there has been a movement down along the demand for money curve. D) the equilibrium nominal interest rate has increased and bond prices have decreased. E) the equilibrium nominal interest rate has decreased and bond prices have fallen. Answer: A Topic: Eye on the U.S. economy, money and credit cards Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

75) From 1970 to 2007 the quantity of M1 fell from 20 percent of GDP to less than 10 percent. This change is because the ownership of credit cards ________ during this time period since ________. A) expanded from 18 percent to 80 percent; credit cards became more widely available and utilized B) fell from 80 percent to 18 percent; credit cards became less widely available and utilized C) remained unchanged; credit cards do not affect the quantity of money D) fell from 80 percent to 18 percent; there were several recessions during that period E) expanded from 18 percent to 80 percent; there were several recessions during that period Answer: A Topic: Eye on the U.S. economy, money and credit cards Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 76) From 1970 to 2007 households held ________ because ________. A) less money relative to income; people began using credit cards more often B) less money relative to income; people began using credit cards less often C) less money relative to income; the price level began to rise D) more money relative to income; people began using credit cards more often E) more money relative to income; people began using credit cards less often Answer: A Topic: Eye on the U.S. economy, money and credit cards Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 77) The supply of money curve is A) upward sloping, showing the influence of the interest rate. B) horizontal because interest rates are fixed at any one moment. C) vertical because the quantity of money is fixed at any one moment. D) downward sloping, showing the negative influence of the interest rate. E) horizontal because the Fed controls the quantity of money supplied. Answer: C Topic: Supply of money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

78) In the demand and supply model of the money market, the i. supply of money curve is a vertical straight line. ii. supply of money is the quantity that must be held by households and firms. iii. quantity of money is determined by Fed actions. A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: Supply of money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 79) On any given day, ________ changes to achieve equilibrium in the money market. A) real GDP B) the price level C) the inflation rate D) the nominal interest rate E) the real interest rate Answer: D Topic: Money market equilibrium Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 80) Every day, ________ changes to make the quantity of money demanded equal the quantity of money supplied. A) real GDP B) the money supply C) the price level D) the nominal interest rate E) the inflation rate Answer: D Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

81) In the money market, if the nominal interest rate is below the equilibrium level A) the quantity of money demanded exceeds the quantity of money supplied. B) the quantity of money supplied exceeds the quantity of money demanded. C) asset prices will rise. D) the demand for money curve will shift leftward. E) the supply of money curve will shift leftward. Answer: A Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 82) Suppose that the equilibrium nominal interest rate is 4 percent and the equilibrium quantity of money is $1 trillion. At any interest rate above 4 percent A) less than $1 trillion will be demanded and bond prices will increase. B) less than $1 trillion will be demanded and bond prices will fall. C) more than $1 trillion will be supplied and bond prices will fall. D) more than $1 trillion will be supplied and the interest rate will rise. E) there is a shortage of money and the interest rate will rise. Answer: A Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 83) Suppose that the equilibrium nominal interest rate is 5 percent and the equilibrium quantity of money is $1 trillion. At any interest rate below 5 percent A) the interest rate will rise and bond prices will fall. B) the interest rate will fall and bond prices will fall. C) there will be a surplus of money and bond prices will fall. D) there will be a surplus of money and bond prices will increase. E) the supply of money will decrease. Answer: A Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

84) If the quantity of money demanded is greater than the quantity supplied, then in the short run the A) demand for financial assets increases. B) nominal interest rate falls. C) nominal interest rate rises. D) price of financial assets rises. E) price level rises. Answer: C Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 85) If the nominal interest rate is less than the equilibrium nominal interest rate determined in the money market, then households and firms A) are holding more money than they prefer. B) are holding less money than they prefer. C) expect the nominal interest rate to decrease. D) expect the price level to increase. E) expect real GDP to increase. Answer: B Topic: Money market equilibrium Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 86) If the nominal interest rate is less than the equilibrium nominal interest rate determined in the money market, then in the short run households and firms A) sell financial assets. B) buy financial assets. C) raise the price level. D) lower the price level. E) increase real GDP. Answer: A Topic: Money market equilibrium Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

87) When households and firms sell financial assets, such as government securities, the A) nominal interest rate falls. B) market price of the securities increases. C) nominal interest rate rises. D) demand for money curve shifts leftward. E) supply of money curve shifts leftward. Answer: C Topic: Money market equilibrium Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 88) When the nominal interest rate is ________ the equilibrium interest rate, the quantity of money demanded is less than the quantity of money supplied; when the nominal interest rate is ________ the equilibrium interest rate, the quantity of money demanded exceeds the quantity of money supplied. A) less than; greater than B) equal to; less than C) greater than; equal to D) greater than; less than E) equal to; greater than Answer: D Topic: Money market equilibrium Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 89) In the money market, if the quantity of money supplied exceeds the quantity of money demanded, the nominal interest rate will ________ and the prices of assets will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease E) fall; not change Answer: C Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

90) If the quantity of money supplied is greater than the quantity of money demanded, then the A) nominal interest rate rises. B) nominal interest rate falls. C) price of financial assets falls. D) money supply decreases. E) price level falls. Answer: B Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 91) When the Fed changes the quantity of money, there is an immediate effect on A) the nominal interest rate. B) real GDP. C) the price level but not the inflation rate. D) the inflation rate but not the price level. E) the price level and the inflation rate. Answer: A Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 92) If the Fed wants to raise the interest rate, in the short run in the money market the Fed A) decreases the quantity of money. B) increases the quantity of money. C) shifts the demand for money curve leftward. D) shifts the demand for money curve rightward. E) directly raises the interest rate and does nothing to either the supply of money or the demand for money. Answer: A Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

93) If the Fed is worried about inflation and wants to raise the interest rate, in the short run it can A) increase the demand for money. B) increase the quantity of money. C) decrease the demand for money. D) decrease the quantity of money. E) directly raise the interest rate without affecting either the demand for money or the supply of money. Answer: D Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 94) In the money market, in the short run if the quantity of money exceeds the quantity of money demanded, then to achieve equilibrium the A) supply of money increases. B) nominal interest rate falls. C) inflation rate increases. D) demand for money increases. E) price level rises. Answer: B Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 95) In the money market, in the short run in order to decrease the nominal interest rate, the Fed must A) increase the quantity of money. B) increase the discount rate. C) decrease the demand for money. D) decrease the quantity of money. E) directly lower the interest rate and not change either the demand for money or the supply of money. Answer: A Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

96) In the short run, when the Fed increases the quantity of money, the A) demand for money increases. B) price level decreases. C) nominal interest rate falls. D) quantity demanded of money decreases. E) demand for money decreases. Answer: C Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 97) Other things the same, if the Fed increases the quantity of money, the supply of money curve shifts A) rightward and the nominal interest rate decreases. B) leftward and the nominal interest rate increases. C) rightward and the real interest rate increases. D) leftward and the real interest rate increases. E) leftward and the nominal interest rate decreases. Answer: A Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 98) Other things the same, if the Fed increases the quantity of money, the ________ because ________. A) nominal interest rate decreases; the supply of money curve shifts rightward B) nominal interest rate decreases; the supply of money curve shifts leftward C) nominal interest rate does not change; only the real interest rate is effected D) nominal interest rate increases; the supply of money curve shifts rightward E) nominal interest rate increases; the supply of money curve shifts leftward Answer: A Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

99) In the money market, if real GDP increases, then the demand for money ________ and the equilibrium nominal interest rate ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) increases; does not change Answer: A Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 100) In the money market, if the price level rises, then the demand for money ________ and the equilibrium nominal interest rate ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) increases; does not change Answer: A Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 101) A change in financial technology that reduces the need to hold cash balances ________ the demand for money and ________ the equilibrium nominal interest rate. A) increases; raises B) increases; lowers C) decreases; raises D) decreases; lowers E) decreases; does not change Answer: D Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

102) In the above figure, if the interest rate is 8 percent per year, the quantity of money demanded is A) less than the quantity of money supplied, and the interest rate will change. B) greater than the quantity of money supplied, and the interest rate will change. C) less than the quantity of money supplied, and the demand curve for money will shift. D) greater than the quantity of money supplied, and the demand curve for money will shift. E) greater than the quantity of money supplied, and the supply curve of money will shift. Answer: A Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 103) In the above figure, the equilibrium interest rate is ________ and the equilibrium quantity of money is ________ trillion. A) 8 percent; $1.2 B) 4 percent; $0.6 C) 4 percent; $1.2 D) 8 percent; $0.6 E) 0 percent; $1.2 Answer: B Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

104) In the above figure, if the interest rate is 3 percent per year, the quantity of money demanded is A) less than the quantity of money supplied, and the interest rate will change. B) greater than the quantity of money supplied, and the interest rate will change. C) less than the quantity of money supplied, and the demand for money curve will shift. D) greater than the quantity of money supplied, and the demand for money curve will shift. E) greater than the quantity of money supplied, and the supply of money curve will shift. Answer: B Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 105) In the above figure, if the interest rate is 2 percent per year, the quantity of money demanded is A) less than the quantity of money supplied, and the interest rate will change. B) greater than the quantity of money supplied, and the interest rate will change. C) less than the quantity of money supplied, and the demand for money curve will shift. D) greater than the quantity of money supplied, and the demand for money curve will shift. E) greater than the quantity of money supplied, and the supply of money curve will shift. Answer: B Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 106) In the above figure, if the interest rate is 2 percent per year, the ________ because ________. A) interest rate will change; the quantity of money demanded is less than the quantity of money supplied B) interest rate will change; the quantity of money demanded is greater than the quantity of money supplied C) demand for money curve will shift; the quantity of money demanded is less than the quantity of money supplied D) demand for money curve will shift; the quantity of money demanded is greater than the quantity of money supplied E) supply of money curve will shift; the quantity of money demanded is greater than the quantity of money supplied Answer: B Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 36 Copyright © 2023 Pearson Education Ltd.

107) The above table has the demand and supply schedules for money. What is the equilibrium nominal interest rate? A) 5 percent B) 9 percent C) 8 percent D) 7 percent E) 6 percent Answer: B Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 108) The above table has the demand and supply schedules for money. If the Fed increases the quantity of money by $0.1 trillion, the new equilibrium nominal interest rate is A) 8 percent. B) 9 percent. C) 7 percent. D) 5 percent. E) 6 percent. Answer: A Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

109) The above table has the demand and supply schedules for money. Real GDP increases and, as a result, the demand for money increases by $0.1 trillion at each level of the nominal interest rate. The new equilibrium interest rate is A) 3 percent. B) 7 percent. C) 10 percent. D) 5 percent. E) 2 percent. Answer: C Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 110) The quantity of money demanded A) is infinite. B) has no opportunity cost. C) is the quantity that balances the benefit of holding an additional dollar of money against the opportunity cost of doing so. D) is directly controlled by the Fed. E) changes very infrequently. Answer: C Topic: Real money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 111) Which of the following statements is correct? A) Nominal interest rate = Real interest rate - Inflation rate B) Nominal interest rate = Real interest rate + Inflation rate C) Nominal interest rate = Inflation rate - Real interest rate D) Nominal interest rate = Inflation rate + Price index E) Nominal interest rate = Inflation rate ÷ Real interest rate Answer: B Topic: Real money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

112) The demand for money ________ when the ________. A) increases; price level increases B) decreases; price level increases C) remains constant; price level increases D) increases; nominal interest rate increases E) increases; supply of money decreases Answer: A Topic: Demand for money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 113) If the nominal interest rate is above its equilibrium value, then A) people sell financial assets and the interest rate falls. B) people buy financial assets and the interest rate falls. C) the demand curve for money shifts rightward and the interest rate rises. D) the supply curve of money shifts leftward and the interest rate rises. E) the demand curve for money shifts leftward and the interest rate falls. Answer: B Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 114) When the Fed increases the quantity of money, the A) equilibrium nominal interest rate falls. B) equilibrium nominal interest rate rises. C) demand for money curve shifts rightward. D) supply of money curve shifts leftward. E) demand for money curve shifts leftward. Answer: A Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

115) In the above figure, a movement from point B to point A represents A) an increase in the demand for money that might be the result of a rise in the price level. B) a decrease in the demand for money that might be the result of a fall in the price level. C) a decrease in the quantity of money demanded. D) an increase in the quantity of money demanded. E) an increase in the demand for money that might be the result of a fall in the price level. Answer: C Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 116) In the above figure, a movement from point B to point C represents A) an increase in the demand for money that might be the result of an increase in the price level. B) a decrease in the demand for money that might be the result of an increase in real GDP. C) a decrease in the quantity of money demanded. D) an increase in the quantity of money demanded. E) an increase in the demand for money that might be the result of a fall in the price level. Answer: A Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

117) In the above figure, a movement from point B to point C represents A) an increase in the demand for money that might be the result of an advance in financial technology that lowers the opportunity cost of holding money. B) a decrease in the demand for money that might be the result of an increase in real GDP. C) a decrease in the quantity of money demanded. D) an increase in the quantity of money demanded. E) an increase in the demand for money that might be the result of a fall in the price level. Answer: A Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 118) In the above figure, a movement from point C to point A represents A) an decrease in the demand for money that might be the result of an advance in financial technology that lowers the opportunity cost of holding money. B) a decrease in the demand for money that might be the result of a decrease in real GDP. C) a decrease in the quantity of money demanded. D) an increase in the quantity of money demanded. E) an decrease in the demand for money that might be the result of an increase in the price level. Answer: B Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 119) In the above figure, a movement from point C to point A represents A) an decrease in the demand for money that might be the result of an advance in financial technology that lowers the opportunity cost of holding money. B) a decrease in the demand for money that might be the result of a fall in a price level. C) a decrease in the quantity of money demanded. D) an increase in the quantity of money demanded. E) an decrease in the demand for money that might be the result of an increase in the price level. Answer: B Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

120) In the above figure, a movement from point C to point A represents A) an decrease in the demand for money that might be the result of an advance in financial technology that lowers the opportunity cost of holding money. B) a decrease in the demand for money that might be the result of an advance in financial technology that creates a substitute for money. C) a decrease in the quantity of money demanded. D) an increase in the quantity of money demanded. E) an decrease in the demand for money that might be the result of an increase in the price level. Answer: B Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 28.2 Money, the Price Level, and Inflation 1) In the long-run, money market equilibrium determines A) the value of money. B) the nominal interest rate. C) the real interest rate. D) real GDP. E) velocity. Answer: A Topic: Money market in the long run Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 2) The "value of money" A) is the quantity of goods and services that a unit of money can buy. B) is determined by Fed regulations. C) increases during inflationary periods. D) increases during economic expansions. E) is directly related to the price level. Answer: A Topic: Value of money Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking

3) Which of the following applies to the "value of money"? i. It is the inverse of the price level. ii. The value of money falls during economic expansions. iii. It is the quantity of goods and services that a unit of money will buy. A) i and iii B) i, ii and iii C) iii only D) ii and iii E) i and ii Answer: A Topic: Value of money Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 4) In the long run, what determines the value of money? A) the government budget balance B) international trade C) money market equilibrium D) equilibrium in the loanable funds market E) real GDP Answer: C Topic: Value of money Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 5) If the quantity of money supplied ________ the quantity demanded, in the long run the value of money ________. A) exceeds; falls as people spend their surplus money B) exceeds; rises as people buy bonds C) is less than; falls as people spend their surplus money D) is less than; does not change unless the Fed increases the money supply E) equals; equals zero Answer: A Topic: Value of money Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking

6) The long-run money demand curve shows A) that the value of money influences the quantity of money that households and firms plan to hold. B) that the value of money is directly related to the quantity of money demanded. C) the relationship between real GDP and money demand. D) the relationship between potential GDP and money demand. E) how the Fed determines the appropriate interest rate. Answer: A Topic: Long-run money demand Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 7) If the Fed increases the quantity of money, in the short run the ________ and in the long run the ________. A) price level rises; the nominal interest rate falls B) nominal interest rate falls; the price level falls C) nominal interest rate rises; the price level falls D) nominal interest rate falls; the price level rises E) nominal interest rate rises; the price level rises Answer: D Topic: Long-run money demand Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking

8) In the figure above, in the long run what happens if the Fed increases the quantity of money by 5 percent? A) The value of money falls by 5 percent and there will be a movement down along the LRMD curve. B) The real interest rate falls and the LRMD curve shifts rightward. C) The nominal interest rate rises by 5 percent. D) The price level rises by 5 percent and the LRMD shifts leftward. E) The value of money rises by 5 percent. Answer: A Topic: Long-run money demand Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 9) In the figure above, what happens if the Fed increases the quantity of money by 8 percent? A) The LRMD curve shifts rightward to restore equilibrium. B) The value of money falls to 0.92 and there is a movement downward along the LRMD. C) The price level falls to 1.08. D) The interest rate rises to 1.08. E) The value of money rises to 1.08. Answer: B Topic: Long-run money demand Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

10) In the long run, an increase in the quantity of money ________ the value of money and ________ the price level. A) raises; raises B) raises; does not change C) lowers; lowers D) lowers; does not change E) lowers; raises Answer: E Topic: Money market in the long run Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 11) In the long run, when the Fed increases the quantity of money, the A) price level rises. B) nominal interest rate falls. C) demand for money decreases. D) price level falls. E) real interest rate rises. Answer: A Topic: Money and the price level Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 12) In the long run, an increase in the quantity of money leads to A) an equal percentage increase in the real interest rate. B) a smaller percentage increase in the real interest rate. C) an equal percentage increase in the price level. D) a smaller percentage increase in the price level. E) no effect on the price level or on real GDP. Answer: C Topic: Money and the price level Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking

13) In the long run, an increase in the quantity of money, other things remaining the same A) increases the price level. B) decreases the price level. C) increases real GDP. D) decreases real GDP. E) has no effect on the price level or real GDP. Answer: A Topic: Money and the price level Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 14) Other things remaining the same, in the long run ________ in the quantity of money brings an equal percentage ________. A) an increase; decrease in the price level B) a decrease; decrease in the price level C) a decrease; increase in the price level D) a decrease; increase in the nominal interest rate E) an increase; increase in the real interest rate Answer: B Topic: Money and the price level Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 15) The proposition that in the long run when real GDP equals potential GDP, an increase in the quantity of money leads to an equal percentage increase in the price level is the called the quantity theory of A) constant velocity. B) inflation. C) money. D) equal change. E) the long run. Answer: C Topic: Quantity theory of money Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking

16) When real GDP equals potential GDP, the quantity theory of money says that an increase in the quantity of money brings an equal percentage A) increase in the price level. B) increase in real GDP. C) decrease in the price level. D) decrease in velocity. E) decrease in real GDP. Answer: A Topic: Quantity theory of money Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 17) Using the quantity theory of money, in the long run a 3 percent increase in the quantity of money leads to a 3 percent A) increase in the price level. B) increase in the real interest rate. C) decrease in the price level. D) decrease in the real interest rate. E) increase in real GDP. Answer: A Topic: Quantity theory of money Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 18) The average number of times in a year each dollar is used to buy goods and service is called A) velocity of circulation. B) inflation. C) circulation rate. D) nominal GDP. E) rate of circulation speed. Answer: A Topic: Equation of exchange Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking

19) The "velocity of circulation" refers to the A) ratio between the quantity of money and the price level. B) average number of times in a year each dollar is used to buy goods and services. C) average number of times a dollar is deposited and withdrawn from a bank account. D) average speed with which the Fed increases or decreases the quantity of money. E) average speed with which the nominal interest rate changes when the inflation rate changes. Answer: B Topic: Equation of exchange Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 20) The velocity of circulation is defined as the A) average number of times in a year that each dollar is used to buy goods and services. B) quantity of money supplied by the Fed. C) quantity of money demanded at equilibrium. D) price level obtained when the money market is at its equilibrium. E) speed with which changes in the interest rate spread throughout the economy. Answer: A Topic: Equation of exchange Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 21) The velocity of circulation is equal to A) the price level divided by real GDP. B) the price level multiplied by the quantity of money. C) nominal GDP divided by the quantity of money. D) the quantity of money divided by the price level and then multiplied by real GDP. E) the quantity of money divided by nominal GDP. Answer: C Topic: Equation of exchange Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

22) According to the equation of exchange, the A) quantity of money multiplied by the inflation rate equals nominal GDP. B) velocity of circulation is always smaller than the inflation rate. C) quantity of money divided by the inflation rate equals real GDP. D) quantity of money multiplied by the velocity of circulation equals nominal GDP. E) quantity of money minus the velocity of circulation equals real GDP minus the price level. Answer: D Topic: Equation of exchange Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 23) The equation of exchange shows that A) P = (M ÷ V) × Y. B) P = (M × Y) ÷ V. C) P = (V × M) × Y. D) P = (M × V) ÷ Y. E) P - Y = M + V. Answer: D Topic: Equation of exchange Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 24) Velocity is V, the quantity of money is M, the price level is P, and real GDP is Y. Which of the following formulas is correct? A) V = (P × Y) ÷ M B) V = (P + Y) × M C) Y = V × M D) Y = (P × M) ÷ V E) Y = (P + M) - V Answer: A Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

25) If the quantity of money is $6 billion and nominal GDP is $9 billion, the velocity of circulation is A) 0.67. B) 3. C) 1.5. D) 36. E) 54. Answer: C Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 26) If nominal GDP is $6.0 trillion and the quantity of money is $1.5 trillion, then the A) price level is 110. B) price level is 120. C) velocity of circulation is 4. D) velocity of circulation is 10. E) price level is 4.00. Answer: C Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 27) If real GDP is $200, the price level is 2.5, and velocity is 5, then the quantity of money is A) $200. B) $100. C) $750. D) $1,000. E) $500. Answer: B Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

28) Suppose the quantity of money and real GDP do not change. If velocity increases, then the A) price level will rise. B) price level will fall. C) real interest rate will rise. D) real interest rate will fall. E) inflation rate will fall. Answer: A Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 29) According to the equation of exchange, if velocity and real GDP do not change, a 3 percent increase in the quantity of money A) raises the price level by 3 percent. B) raises the price level by 3 ÷ (velocity). C) lowers the price level by 3 ÷ (real GDP). D) lowers the price level by 3 percent. E) raises the price level by less than 3 percent. Answer: A Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 30) According to the equation of exchange, if the quantity of money is $20 billion, velocity 3, and real GDP is $6 billion, then the price level is A) 10. B) 40. C) 1.6. D) 1.1. E) 2. Answer: A Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

31) Suppose the quantity of money is $1,000, the velocity of circulation is 6, and real GDP is $4,000. Then the price level is A) 2.5. B) 2.0. C) 1.5. D) 1.1. E) 6.0. Answer: C Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 32) Suppose nominal GDP is $2,000 a year and the quantity of money is $400. Then the velocity of circulation equals A) 5. B) 1/5. C) 10. D) 2. E) 8. Answer: A Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 33) If the price level is 2, real GDP is $50 billion, and the quantity of money is $4 billion, then velocity is A) 4. B) 10. C) 25. D) 12.5. E) 8. Answer: C Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

34) According to the equation of exchange, if the quantity of money is $4 billion and the velocity of circulation is 3, nominal GDP is A) $12 billion. B) $7 billion. C) $1.3 billion. D) $0.75 billion. E) $8 billion. Answer: A Topic: Equation of exchange Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 35) If velocity is equal to 6, and the quantity of money is $50 billion, according to the equation of exchange, nominal GDP is equal to A) $18 billion. B) $8.3 billion. C) $300 billion. D) $56 billion. E) $150 billion. Answer: C Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 36) Nominal GDP is $9.6 million dollars, real GDP is $9 million, and the velocity of circulation is 1.2. The quantity of money is ________ million. A) $8 B) $11.52 C) $7.5 D) $10.8 E) $12 Answer: A Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Revised AACSB: Analytic skills

37) If the velocity of circulation does not change and the quantity of money grows at the same rate as does real GDP, then in the long run A) the inflation rate equals the growth rate of the quantity of money. B) the nominal interest rate is less than the real interest rate. C) the real interest rate is less than the nominal interest rate. D) the inflation rate equals zero. E) the nominal interest rate equals zero. Answer: D Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Revised AACSB: Reflective thinking 38) If the velocity of circulation does not change and if real GDP and the quantity of money grow at the same rate, then the price level A) rises and the inflation rate is negative. B) falls and the inflation rate is negative. C) does not change and the inflation rate is zero. D) rises and the inflation rate is positive. E) falls and the inflation rate is positive. Answer: C Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Revised AACSB: Analytic skills 39) If real GDP and the velocity of circulation do not change and the quantity of money grows by 3 percent, then in the long the inflation rate is A) 3 percent. B) 0 percent. C) -3 percent. D) larger than 3 percent. E) More information is needed to answer the question. Answer: A Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

40) If real GDP grows by 3 percent, the velocity of circulation does not change, and the quantity of money grows by 3 percent, then in the long run the inflation rate is A) 3 percent. B) 0 percent. C) -3 percent. D) -6 percent. E) 6 percent. Answer: B Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 41) The velocity of circulation grows at 1 percent and real GDP grows at 3 percent. If the quantity of money grows at 2 percent, the inflation rate is A) 2 percent. B) 4 percent. C) 8 percent. D) zero. E) 10 percent. Answer: D Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 42) The velocity of circulation grows at 1 percent and real GDP grows at 3 percent. If the quantity of money grows at 4 percent, the inflation rate is A) 2 percent. B) 4 percent. C) 8 percent. D) zero. E) 10 percent. Answer: A Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

43) If real GDP grows by 3 percent, the velocity of circulation grows by 4 percent, and the quantity of money grows by 3 percent, then in the long run the inflation rate is A) 4 percent. B) 0 percent. C) -4 percent. D) 10 percent. E) 7 percent. Answer: A Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 44) If real GDP grows by 3 percent, the velocity of circulation grows by -4 percent, and the quantity of money grows by 3 percent, then in the long run the inflation rate is A) 4 percent. B) -4 percent. C) -1 percent. D) 10 percent. E) 1 percent. Answer: B Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 45) If real GDP grows by 3 percent, the velocity of circulation does not change, and the quantity of money grows by 5 percent, then in the long run the inflation rate is A) 3 percent. B) -5 percent. C) -2 percent. D) 8 percent. E) 2 percent. Answer: E Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

46) If real GDP grows at 4 percent, the quantity of money grows at 6 percent, and the velocity of circulation does not change, then in the long run the inflation rate is A) 4 percent. B) 6 percent. C) 10 percent. D) 2 percent. E) 1.5 percent. Answer: D Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 47) Suppose that real GDP grows by 3 percent a year, the quantity of money grows 6 percent a year, and the velocity of circulation grows by 1 percent. In the long run, the inflation rate equals A) 9 percent. B) 4 percent. C) 5 percent. D) 12 percent. E) 10 percent. Answer: B Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 48) Suppose that real GDP grows by 3 percent a year, the quantity of money grows 5 percent a year, and the velocity of circulation does not change. In the long run, the inflation rate equals A) 8 percent. B) 3 percent. C) 5 percent. D) 2 percent. E) 10 percent. Answer: D Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Revised AACSB: Analytic skills

49) If real GDP grows at 3 percent a year, the quantity of money grows at 5 percent a year, and the velocity of circulation is constant, then the price level must be A) increasing at 8 percent a year. B) decreasing at 8 percent a year. C) increasing at 2 percent a year. D) decreasing at 2 percent a year. E) increasing at 15 percent a year. Answer: C Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 50) If the quantity of money starts to grow more rapidly than real GDP and velocity does not change, the result is A) more rapid growth in potential GDP. B) the inflation rate rises. C) an increase in investment. D) an eventual slowing in the growth rate of the quantity of money. E) slower growth in the price level. Answer: B Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 51) If the inflation rate increases A) the velocity of circulation increases. B) potential GDP increases. C) real GDP growth increases. D) the nominal interest rate falls. E) the real interest rate rises. Answer: A Topic: Money growth and inflation Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking

52) Hyperinflation is defined as periods of A) negative price changes. B) low inflation. C) inflation over 50 percent per month. D) inflation under 10 percent per year. E) inflation over 25 percent per year Answer: C Topic: Hyperinflation Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 53) Inflation at a rate that exceeds 50 percent per month is called A) extreme inflation. B) super inflation. C) hyperinflation. D) megainflation. E) skyflation. Answer: C Topic: Hyperinflation Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 54) Hyperinflation A) occurs in the United States during each business cycle. B) occurs only in theory, never in reality. C) has never occurred in the United States. D) happens in all countries at some time during their business cycle. E) is a period of time when inflation exceeds 20 percent per year. Answer: C Topic: Hyperinflation Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking

55) In the early 1920s, Germany experienced hyperinflation because Germany's A) economy was growing very rapidly. B) population was growing very rapidly. C) quantity of money was growing very rapidly. D) real GDP was growing faster than nominal GDP. E) demand for money skyrocketed. Answer: C Topic: Eye on the past, hyperinflation in Germany in the 1920s Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 56) During the early 1920s, Germany experienced A) negative inflation as a result of high money creation. B) hyperinflation as a result of low money creation. C) moderate price changes as a result of a recession. D) hyperinflation as a result of high money creation. E) hyperinflation as a result of rapidly increasing demand for money. Answer: D Topic: Eye on the past, hyperinflation in Germany in the 1920s Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 57) In the 2000s and 2010s, the quantity theory of money did a ________ job of predicting changes in the inflation rate because ________. A) poor; velocity of circulation plunged B) poor; the Fed changed the growth rate of the quantity of money too quickly C) good; real GDP remained stable D) good; interest rates behaved predictably E) poor; the price level and the velocity of circulation did not change Answer: A Topic: Eye on the cause of inflation Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Revised AACSB: Reflective thinking

58) In the long run, the price level adjusts A) so that the real interest rate equals the nominal interest rate. B) so that the inflation rate equals zero. C) to achieve money market equilibrium. D) so that the inflation rate equals the growth rate of real GDP. E) so that the inflation rate is moderate. Answer: C Topic: Money and the price level Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 59) In the long run, an increase in the quantity of money ________ the value of money and ________ the price level. A) raises; raises B) does not change; raises C) raises; lowers D) lowers; raises E) lowers; lowers Answer: D Topic: Money and the price level Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 60) Other things remaining the same, if the quantity of money increases by a given percentage, then in the long run the ________ by the same percentage. A) price level rises B) price level falls C) real interest rate rises D) real interest rate falls E) nominal interest rate falls Answer: A Topic: Money and the price level Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking

61) The quantity theory of money is a proposition about A) the Fed's methods used to change the quantity of money. B) nominal and real interest rates. C) the relationship between a change in the quantity of money and the price level. D) the relationship between financial assets and currency demanded. E) the nominal interest rate and the quantity of money demanded. Answer: C Topic: Quantity theory of money Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 62) Suppose that P × Y is $5,000 million a year and the quantity of money is $500 million. Then the velocity of circulation is A) 50. B) 500. C) 10. D) 20. E) 2,500,000. Answer: C Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 63) If the quantity of money grows at 3 percent per year, velocity does not grow, and real GDP grows at 2 percent per year, then the inflation rate equals A) 6 percent. B) 5 percent. C) 1 percent. D) -1 percent. E) 12 percent. Answer: C Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

64) If the quantity of money grows at 4 percent a year, velocity grows at 2 percent, and real GDP grows at 2 percent a year, then the inflation rate equals A) 6 percent. B) 2 percent. C) 0 percent. D) 8 percent. E) 4 percent. Answer: E Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 65) Hyperinflation is A) inflation caused by negative growth in the quantity of money. B) inflation at a rate that exceeds 50 percent a month. C) inflation caused by excessive growth in the demand for money. D) inflation at a rate that exceeds 5 percent a month. E) only theoretical and has never occurred in the real world. Answer: B Topic: Hyperinflation Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 66) Which countries have experienced a hyperinflation during recent times? A) USA B) Zimbabwe C) Germany D) Japan E) all of the above Answer: B Topic: Hyperinflation Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Revised AACSB: Reflective thinking

67) During the early 1920s, Germany experienced a hyperinflation. What are possible causes of it? A) The German government stopped printing money and demand for money escalated. B) In order to pay war compensation, Germany started to print money. C) Price changes as a result of a recession. D) The German government ran out of gold. E) none of the above Answer: B Topic: Eye on the past, hyperinflation in Germany in the 1920s Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 68) During hyperinflation, it is reasonable to expect that the velocity of circulation A) increases. B) decreases. C) stays the same. D) is zero. E) none of the above. Answer: A Topic: Hyperinflation Skill: Level 5: Critical thinking Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 69) The quantity theory of money does a ________ job in explaining inflation in the United States in ________ because of ________ velocity of circulation. A) poor; 1960-1970s; constant B) poor; 2000-2010s; constant C) poor; 2000-2010s; decreasing D) good; 1960-1970s; increasing E) good; 2000-2010s; decreasing Answer: C Topic: Eye on the cause of inflation Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking

70) In the figure above, in the long run what happens if the Fed decreases the quantity of money? A) The value of money falls and there will be a movement down along the LRMD curve. B) The real interest rate falls and the LRMD curve shifts rightward. C) The nominal interest rate rises and the LRMD curve shifts leftward. D) The price level rises and the LRMD shifts leftward. E) The value of money rises and there will be a movement up the LRMD curve. Answer: E Topic: Long-run money demand Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 71) In the figure above, what happens if the Fed decreases the quantity of money? A) The LRMD curve shifts rightward. B) There is a movement downward along the LRMD. C) The price level rises, without changing the LRMD-MS equilibrium. D) The LRMD curve shifts leftward. E) here is a movement upward the LRMD. Answer: E Topic: Long-run money demand Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

28.3 The Cost of Inflation 1) High inflation A) leads to a more correct allocation of resources. B) lowers the price level. C) decreases uncertainty. D) makes it easier to use money as a standard of account. E) makes money function less well as a store of value. Answer: E Topic: Costs of inflation Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 2) High inflation makes money ________ because ________. A) function less well as a store of value; it decreases the price level and increases the buying power of money B) function better as a store of value; it leads to a more accurate allocation of resources C) function better as a unit of account; money never loses value but it does gain purchasing power in some regions D) function better as a store of value; the money gains value and therefore has greater purchasing power E) function less well as a store of value; the money loses value and therefore has less purchasing power Answer: E Topic: Costs of inflation Skill: Level 3: Using models Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 3) During an inflationary period, a household with savings of $100,000 A) gains because inflation increases the value of their savings. B) loses because the inflation increases the after-tax real interest rate. C) gains because the inflation gives savers more money and so more purchasing power. D) loses because inflation increases the real tax on the interest paid. E) neither gains nor loses because inflation does not affect savers. Answer: D Topic: Costs of inflation Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking

4) One effect of inflation is that it is a tax that redistributes goods and services from A) government to households. B) investors to savers. C) government to businesses. D) households and businesses to the government. E) businesses to households. Answer: D Topic: Inflation as a tax Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 5) Inflation is known as a ________ because it ________. A) revenue; is the only source of business income for the government B) bad thing; allows people to obtain the wrong kind of wealth C) good thing; keeps the value of goods and services increasing D) tax; redistributes goods and services from households and businesses to the government E) tax; redistributes goods and services from the government to households and businesses Answer: D Topic: Inflation as a tax Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 6) Inflation ________ the cost of holding money and ________ the after-tax real interest rate. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: B Topic: Costs of inflation, taxes and interest Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking

7) Assume an economy begins with zero inflation, a 25 percent income tax rate, and a real interest rate of 4 percent. If inflation rises to 4 percent, the nominal interest rate becomes ________ percent and the after-tax real interest becomes ________ percent. A) 0; 1 B) 8; 2 C) 8; 4 D) 6; 2 E) 8; 6 Answer: B Topic: Costs of inflation, taxes and interest Skill: Level 3: Using models Section: Checkpoint 28.3 Status: Old AACSB: Analytic skills 8) The "shoe-leather costs" of inflation are the costs from A) higher prices for all goods, including necessities such as shoes. B) the government taking a higher percentage of interest income. C) confusion as people lose track of real costs and benefits. D) time spent trying to spend money quickly. E) higher taxes due to higher inflation. Answer: D Topic: Cost of inflation, shoe-leather costs Skill: Level 1: Definition Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 9) The ________ cost of inflation is the result of a(n) ________ in velocity and is so-named because of ________. A) tax; decrease; the government collecting more tax revenue on all goods and services including basic items like shoes B) shoe leather; increase; the higher prices for all goods and services including basic items like shoes C) confusion; increase; the shoe leather that is wasted by people running around trying to spend money quickly D) shoe leather; increase; the shoe leather that is wasted by people running around trying to spend money quickly E) shoe leather; decrease; the shoe leather that is wasted in people running around trying to spend money quickly Answer: D Topic: Cost of inflation, shoe-leather costs Skill: Level 1: Definition Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 69 Copyright © 2023 Pearson Education Ltd.

10) Shoe-leather costs of inflation arise from the A) increasing costs of apparel (clothes and shoes) as inflation rises. B) increase of velocity as inflation rises. C) decline in the use of money as a unit of account. D) increasing costs of agricultural products as inflation rises. E) confusion that results from higher inflation. Answer: B Topic: Cost of inflation, shoe-leather costs Skill: Level 1: Definition Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 11) Because the inflation rate is so high Wanda refuses to carry cash. Even though it is a bother, she now goes to the ATM twice as often to get the cash she needs. Wanda's actions are an example of the A) shoe-leather costs of inflation. B) tax costs of inflation. C) confusion costs of inflation. D) uncertainty costs of inflation. E) tax distorting costs of inflation. Answer: A Topic: Cost of inflation, shoe-leather costs Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 12) If inflation is making it difficult for people to estimate the true marginal benefits and true marginal costs of activities, inflation is leading to A) tax costs. B) shoe-leather costs. C) confusion costs. D) uncertainty costs. E) increased economic growth. Answer: C Topic: Costs of inflation, confusion Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking

13) Uncertainty costs arise from inflation because inflation makes long-term planning ________ so people respond by ________ investment. A) more difficult; increasing B) more difficult; decreasing C) less difficult; not changing D) more difficult; not changing E) less difficult; increasing Answer: B Topic: Costs of inflation, uncertainty Skill: Level 1: Definition Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 14) Inflation is a tax because as the government ________ the quantity of money, the price level ________, and the purchasing power of households' money ________. A) increases; rises; increases B) decreases; falls; decreases C) increases; rises; decreases D) decreases; rises; decreases E) does not change; rises; increases Answer: C Topic: Inflation as a tax Skill: Level 1: Definition Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 15) Which of the following is NOT a cost of inflation? A) tax cost B) confusion cost C) uncertainty cost D) unemployment cost E) shoe-leather cost Answer: D Topic: Costs of inflation Skill: Level 1: Definition Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking

16) Which of the following is NOT a cost of inflation? A) tax costs B) confusion costs C) uncertainty costs D) government spending costs E) shoe-leather costs Answer: D Topic: Costs of inflation Skill: Level 1: Definition Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 17) Becky holds $30,000 as money. After a year during which inflation was 5 percent a year, the inflation tax over that year was A) $500. B) $1,000. C) $1,500. D) $3,000. E) $5. Answer: C Topic: Inflation as a tax Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Analytic skills 18) Suppose a country has a real interest rate of 4 percent and an inflation rate of 3 percent. If the income tax rate is 20 percent, then the after-tax real interest rate is A) 2.6 percent. B) 4.0 percent. C) 5.6 percent. D) 7.0 percent. E) 1.4 percent. Answer: A Topic: Costs of inflation, taxes and interest Skill: Level 3: Using models Section: Checkpoint 28.3 Status: Old AACSB: Analytic skills

19) Shoe-leather costs arise from inflation because the velocity of circulation of money ________ as the inflation rate ________. A) increases; falls B) decreases; rises C) increases; rises D) does not change; rises E) does not change; falls Answer: C Topic: Cost of inflation, shoe-leather costs Skill: Level 1: Definition Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 20) A consequence of hyperinflation is that people A) who make fixed-payment loans to others receive higher payments as inflation increases. B) spend time trying to keep their money holdings near zero. C) receive higher real wage hikes, which increases their purchasing power for goods and services. D) want to lend funds because interest rates are so high. E) increase the quantity of money demanded. Answer: B Topic: Cost of inflation, shoe-leather costs Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 21) The uncertainty costs of inflation cause people to A) increase their demand for money. B) increase investment causing economic growth to decrease. C) focus on the short run, which decreases investment and slows growth. D) focus on the long run, which increases investment and speeds growth. E) incur more shoe leather costs. Answer: C Topic: Costs of inflation, uncertainty Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking

22) The uncertainty costs of inflation cause ________ because ________. A) a decrease in investment and slower growth; people increase their demand for money B) an increase in investment and faster growth; people decrease their demand for money C) a decrease in investment and slower growth; people focus on the short run and not the long run D) a decrease in investment and slower growth; people focus on the long run and not the short run E) an increase in investment and faster growth; people focus on the short run and not the long run Answer: C Topic: Costs of inflation, uncertainty Skill: Level 3: Using models Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 23) The costs of inflation ________ when inflation is more rapid and ________ when inflation is more unpredictable. A) increase; increase B) increase; decrease C) decrease; increase D) increase; do not change E) do not change; increase Answer: A Topic: Cost of inflation, predictability Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 24) It is estimated that if the inflation rate is lowered from 3 percent a year to 0 percent a year, the growth rate of real GDP will rise by ________ percentage points a year. A) 0.06 to 0.09 B) 1 to 3 C) 2.3 D) 3.2 E) 0 Answer: A Topic: Costs of inflation, amount Skill: Level 1: Definition Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking

25) Which of the following countries experienced situations close to hyperinflation in the recent past? A) Japan throughout most of the first decade of the 2000s B) China between 2013 and 2014 C) Venezuela in 2016 D) Great Britain in 2016 E) none of the above Answer: C Topic: Costs of inflation Skill: Level 1: Definition Section: Checkpoint 28.3 Status: Revised AACSB: Reflective thinking

28.4 Chapter Figures

1) The demand for money curve is shown in the figure above. A movement from point B to point C could be the result of A) a fall in the nominal interest rate. B) a decrease in the total benefit from holding money. C) an increase in the quantity of money held by banks. D) a rise in the real interest rate. E) a rise in the real interest rate matched by an equal fall in the nominal interest rate. Answer: A Topic: Demand for money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

2) The demand for money curve is shown in the figure above. What could shift the demand for money curve rightward from the curve illustrated in the figure above? A) a decrease in the supply of money B) a decrease in real GDP C) a fall in the real interest rate D) a fall in the nominal interest rate E) an increase in the price level Answer: E Topic: Demand for money, price level Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 3) The demand for money curve is shown in the figure above. What could shift the demand for money curve rightward from the curve illustrated in the figure above? A) a decrease in the supply of money B) an increase in the supply of money C) a fall in the inflation rate D) a fall in the nominal interest rate E) an increase in real GDP Answer: E Topic: Demand for money, real GDP Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

4) The figure above shows the money market. At which interest rate are people selling bonds and thereby changing the interest rate? A) 6 percent B) 5 percent C) 4 percent D) 6 percent and 4 percent E) 6 percent, 5 percent, and 4 percent Answer: C Topic: Money market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 28.5 Integrative Questions 1) The dominant factor why the nominal interest rate differs among nations is that ________ differs among nations. A) potential GDP B) the unemployment rate C) inflation rate D) the price level E) the quantity of money Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 78 Copyright © 2023 Pearson Education Ltd.

2) If the inflation rate is zero, the nominal interest rate is A) greater than the real interest rate. B) less than the real interest rate. C) equal to the real interest rate. D) equal to the inflation rate. E) positive and the real interest rate is negative. Answer: C Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytic skills 3) The long-run effect of a decrease in the growth rate of the quantity of money is a A) lower real interest rate. B) higher real interest rate. C) lower nominal interest rate. D) higher nominal interest rate. E) higher inflation rate. Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 4) The long-run effect of an increase in the growth rate of the quantity of money is a A) lower real interest rate. B) higher real interest rate. C) lower nominal interest rate. D) higher nominal interest rate. E) lower inflation rate. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

5) If the Fed wants to lower the nominal interest rate in the short run, the Fed ________ the growth rate of the quantity of money. A) raises B) lowers C) does not change D) first lowers and then raises E) None of the above answers is correct because the premise of the question is wrong since the Fed cannot affect the nominal interest rate, only the real interest rate. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 6) If the Fed wants to lower the nominal interest rate in the long run, the Fed ________ the growth rate of the quantity of money. A) raises B) lowers C) does not change D) first lowers and then raises E) None of the above answers is correct because the premise of the question is wrong since the Fed cannot affect the nominal interest rate, only the real interest rate. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 7) In the long run, the real interest rate is 3 percent, real GDP grows at 4 percent, velocity is constant, and the quantity of money grows at 8 percent. The nominal interest rate is A) 6 percent. B) 7 percent. C) 8 percent. D) 10 percent. E) 12 percent. Answer: B Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills

8) In the long run, the real interest rate is 3 percent, real GDP grows at 4 percent, velocity is constant, and the quantity of money grows at 6 percent. The nominal interest rate is A) 3 percent. B) 4 percent. C) 5 percent. D) 10 percent. E) 6 percent. Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 9) In the short run, an increase in the growth rate of the quantity of money ________ the nominal interest rate and in the long run it ________ the nominal interest rate. A) raises; raises B) raises; lowers C) lowers; raises D) lowers; lowers E) does not change; raises Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 10) In the long run, an increase in the growth rate of the quantity of money ________ the inflation rate and ________ the nominal interest rate. A) raises; raises B) raises; lowers C) lowers; raises D) lowers; lowers E) raises; does not change Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

11) In the long run, when an economy experiences inflation, the price level ________ and the nominal interest rate ________. A) rises; remains constant B) remains constant; rises C) rises; rises D) falls; rises E) rises; falls Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 12) During the 1990s, Canada had an average inflation rate of 1.5 percent while Columbia had an average inflation rate of 21.5 percent. You would expect that nominal interest rates in Canada are A) less than nominal interest rates in Columbia. B) equal to nominal interest rates in Columbia. C) greater than nominal interest rates in Columbia. D) unpredictably different from nominal interest rates in Columbia. E) not comparable to nominal interest rates in Columbia. Answer: A Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 13) Inflation decreases the growth of capital because i. when the after-tax real interest rate falls, savings decreases. ii. velocity increases when inflation increases. iii. the higher the inflation rate, the higher is the true income tax rate on income from capital. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

14) In a period of hyperinflation, the velocity of circulation increases because A) households and firms spend money as soon as they receive payment. B) the nominal interest rate decreases. C) potential GDP increases. D) the real interest rate rises. E) money is valuable everyone wants it. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 15) During a period of hyperinflation, as households and firms avoid holding money A) potential GDP increases. B) long term savings accounts become more popular. C) barter becomes more common. D) capital investment increases. E) the costs of inflation decrease. Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 28.6 Essay: Money and the Interest Rate 1) What is the opportunity cost of holding money? Answer: The opportunity cost of holding money is the nominal interest rate. Topic: Demand for money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

2) Why is the nominal interest rate the opportunity cost of holding money? Answer: The nominal interest rate is the opportunity cost of holding money because the nominal interest is the income forgone by holding money. For instance, an individual with $1,000 can hold the funds either as money or as a financial asset with an interest rate of, say, 7 percent. If the funds are held as money, the interest paid is $0; if they are held as a financial asset, the interest paid is $70. Choosing to hold the funds as money therefore has an opportunity cost of the interest income forgone, which is $70 or 7 percent per dollar. So, the opportunity cost of each dollar held as money is 7 percent. Topic: Demand for money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Written and oral communication 3) What effect does an increase in the nominal interest rate have on the opportunity cost of holding money and on the demand for money curve? Answer: An increase in the nominal interest rate increases the opportunity cost of holding money. There is a movement upward along the demand for money curve. Topic: Demand for money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 4) If the inflation rate is 3 percent and the real interest rate is 3 percent, then what is the nominal interest rate? Answer: The nominal interest rate equals the real interest rate plus the inflation rate, or (3 percent) + (3 percent) = 6 percent. Topic: Interest rates Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 5) If the real interest rate is 3 percent and the inflation rate is 2 percent, what is the nominal interest rate? Answer: The nominal interest rate equals the real interest rate plus the inflation rate, or (3 percent) + (2 percent) = 5 percent. Topic: Interest rates Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

6) What factors lead to changes in the quantity demanded of money and what factors lead to changes in the demand for money? Answer: Changes in the nominal rate of interest change the quantity of money demanded. Changes in the price level, real GDP, and financial technology change the demand for money. Topic: Demand for money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 7) What effect does an increase in the price level have on the demand for money and the demand for money curve? Answer: An increase in the price level increases the demand for money and shifts the demand for money curve rightward. Topic: Demand for money, price level Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 8) What effect does an increase in real GDP have on the demand for money? Answer: An increase in real GDP increases the demand for money and shifts the demand for money curve rightward. Topic: Demand for money, real GDP Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 9) How would a widespread adoption of credit cards affect the demand for money and the demand for money curve? Answer: The widespread adoption of credit cards decreases the demand for money and shifts the demand for money curve leftward. Topic: Demand for money Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking

10) In the United States since 1970, how has the use of credit cards affected the demand for M1 as a percentage of GDP? Answer: Since 1970, credit cards have become more widespread. As a result, the demand for M1 as a percentage of real GDP has decreased. Topic: Eye on the U.S. economy, money and credit cards Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 11) "Because the nominal interest rate is the opportunity cost of holding money, the supply curve of money slopes downward." Is the previous statement correct or incorrect? Answer: The statement is incorrect. Because the nominal interest rate is the opportunity cost of holding money, the DEMAND FOR MONEY CURVE slopes downward but the supply curve of money does not slope downward. Topic: Supply of money Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Written and oral communication 12) How is the price of a financial asset, such as government bonds, related to the interest rate? Answer: The price of financial assets, such as government bonds, is negatively related to the interest rate. If the interest rate rises, the price of government bonds falls and if the interest rate falls, the price of government bonds rises. Topic: Interest rate and asset price Skill: Level 1: Definition Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 13) Jeremy purchases a bond that pays $600 in interest. If Jeremy paid $9,000 for the bond, what is the interest rate? If Jeremy paid $10,000 for the bond, what is the interest rate? How did a rise in the price of the bond affect the interest rate? Answer: When Jeremy paid $9,000 for the bond, the interest rate is ($600 ÷ $9,000) × 100 = 6.67 percent. When Jeremy paid $10,000 for the bond, the interest rate is ($600 ÷ $10,000) × 100 = 6.00 percent. The rise in the price of the bond brought about a fall in its interest rate. Topic: Interest rate and asset price Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

14) If a bond pays $50 a year to its holder and you buy it for $200, what is your interest rate? Answer: The interest rate is ($50 ÷ $200) × 100 = 25.0 percent. Topic: Interest rate and asset price Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 15) Suppose the quantity of money is greater than the quantity of money demanded. In the short run, what occurs to set the quantity of money equal to the quantity of money demanded? Answer: In the money market, the interaction between the supply of money and the demand for money determines the equilibrium nominal interest rate. The quantity of money available is greater than the quantity of the money demanded when the nominal interest rate is above the equilibrium interest rate. When this occurs, in an effort to decrease the amount of money to the quantity people want to hold, people buy bonds with the excess. As a result, the demand for bonds increases. The price of bonds rises and the interest rate falls. When the nominal interest rate reaches its equilibrium, there is no longer an excess supply of money because at the equilibrium nominal interest rate, the quantity of money supplied equals the quantity demanded. Topic: Equilibrium interest rate Skill: Level 2: Using definitions Section: Checkpoint 28.1 Status: Old AACSB: Written and oral communication 16) In the short run, how does the Fed change the nominal interest rate? Answer: The Fed changes the nominal interest rate by changing the quantity of money. If the Fed increases the quantity of money, the supply of money curve shifts rightward and the equilibrium nominal interest rate falls. If the Fed decreases the quantity of money, the supply of money curve shifts leftward and the equilibrium nominal interest rate rises. Topic: Equilibrium interest rate Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Reflective thinking 17) Suppose in the money market the equilibrium nominal interest rate is 5 percent. If the Fed increases the quantity of money, what is the effect on the nominal interest rate? Answer: If the Fed increases the quantity of money, the supply of money curve shifts rightward and the nominal interest rate falls. Topic: Equilibrium interest rate Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

18) In the short run, how is the nominal interest rate determined? If the nominal interest rate is less than the equilibrium nominal interest rate, what occurs? Answer: The nominal interest rate is determined in the money market by the interaction of the demand for money and the supply of money. If the nominal interest rate is less than the equilibrium, there is an excess demand for money. In order to increase the quantity of money they hold, people sell bonds and other financial assets. As a result, the price of financial assets falls and the interest rate rises. People continue to sell assets and the interest rate continues to rise until it reaches its equilibrium. Topic: Equilibrium interest rate Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Written and oral communication 19) Assume the Fed wants to lower the interest rate. How does the Fed lower the interest rate in the short run? Answer: In order to lower the interest rate, the Fed increases the quantity of money. In the short run, when the quantity of money increases, the interest rate falls. Topic: Equilibrium interest rate Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

20) In the figure below, label the axes and then draw a demand for money curve. Illustrate an increase in the demand for money.

Answer:

A completed figure is above. An increase in the demand for money is reflected in a rightward shift of the demand for money curve, as in the figure with the shift from MD1 to MD2. Topic: Demand for money Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills 89 Copyright © 2023 Pearson Education Ltd.

21) The above table has the demand for money schedule. a. If the Fed supplies $1.1 trillion dollars, what is the equilibrium nominal interest rate? b. Discuss how equilibrium is restored if the interest rate is greater than the equilibrium rate found in part (a). Answer: a. The equilibrium nominal interest rate is 4 percent. b. If the interest rate is greater than 4 percent, there is an excess supply of money. In this case, to be rid of their "extra" money, people buy bonds. The price of bonds rises and so the interest rate falls until it reaches its equilibrium value, 4 percent. At this interest rate, there is no longer an excess supply of money because the quantity demanded equals the quantity supplied. Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

22) The above table has the demand for money schedule. a. If the Fed sets the quantity of money equal to $1.0 trillion, what is the equilibrium nominal interest rate? b. If the Fed wants the interest rate to be 4 percent, what must it do? Answer: a. If the Fed sets the quantity of money equal to $1.0 trillion, the equilibrium nominal interest rate is 5 percent. b. If the Fed wants the interest rate to be 4 percent, it must set the quantity of money equal to $1.5 trillion. Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

23) The above diagram has a demand for money curve. Suppose the Fed initially sets the quantity of money equal to $0.6 trillion. Draw the supply of money curve in the figure. What is the equilibrium interest rate? Now suppose the Fed increases the quantity of money to $0.9 trillion. Draw the new supply curve. What is the new equilibrium interest rate? Answer:

The initial supply of money curve is MS1 and the equilibrium interest rate is 6 percent. When the Fed increases the quantity of money, the supply of money curve shifts to MS2 and the equilibrium interest rate falls to 4 percent. Topic: Money market equilibrium Skill: Level 3: Using models Section: Checkpoint 28.1 Status: Old AACSB: Analytic skills

28.7 Essay: Money, the Price Level, and Inflation 1) A government policymaker suggests "Double the money supply and U.S. citizens' real incomes will double." In the long run, is this policy advice correct? Answer: This statement is incorrect because in the long run an increase in the quantity of money increases only the price level. Indeed, it increases the price level by the same percentage. So if the Fed followed the advice and increased the quantity of money by 100 percent (which doubles it), then in the long run the only effect is to increase the price level by 100 percent. Topic: Money and the price level Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 2) In the money market, how is the adjustment to equilibrium brought about in the short run and in the long run? Answer: In the short run, the nominal interest rate adjusts to restore equilibrium in the money market. In the long run, however, the nominal interest rate equals the real interest plus the inflation rate, so it cannot freely adjust to restore equilibrium in the money market. In the long run when the economy is at full employment, the price level changes to restore equilibrium in the money market. Topic: Money market equilibrium in the short run and the long run Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 3) What is the short-run and long-run effect on the nominal interest rate from an increase in the growth rate of the quantity of money? Answer: In the short run, the increase in the growth rate of the quantity of money lowers the nominal interest rate. However in the long run the increase in the growth rate of the quantity of money creates higher inflation and the higher inflation leads to a rise in the nominal interest rate. Topic: Money growth and the nominal interest rate Skill: Level 4: Applying models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

4) If the Fed makes the quantity of money grow at the same rate as the growth rate of real GDP and velocity does not change, in the long run what happens to the price level and the inflation rate? Answer: If the quantity of money is growing at the same rate as real GDP and velocity does not change, then the price level does not change. In this case, the inflation rate equals 0 percent. Topic: Money growth and inflation Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 5) Suppose velocity does not change. Then, in the long run, a growth rate of the quantity of money that exceeds growth in real GDP has what effect? Answer: In the long run, growth in the quantity of money that exceeds growth in real GDP brings inflation. With velocity constant, the inflation rate equals the growth rate of the money supply minus the growth rate of real GDP. Topic: Money growth and inflation Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 6) "If the inflation rate is positive, then the real interest rate is greater than the nominal interest rate." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. The nominal interest rate equals the real interest rate plus the inflation rate. Therefore, if the inflation rate is positive, the nominal interest rate is greater than the real interest rate. Topic: Nominal interest rate and inflation rate Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 7) According to the quantity theory of money, what is the effect of an increase in the quantity of money? Answer: According to the quantity theory, in the long run an increase in the quantity of money brings an equal percentage increase in the price level. Topic: Quantity theory of money Skill: Level 1: Definition Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking

8) Define the quantity theory of money and show how it is related to the equation of exchange. Answer: The quantity theory of money is the proposition that in the long run, an increase in the quantity of money brings an equal percentage increase in the price level (other things remaining the same). The equation of exchange states that the quantity of money multiplied by velocity of circulation equals the price level times real GDP, or M × V = P × Y. Divide both sides of this formula by V to obtain P = (M × V) ÷ Y. This formula shows that when M increases, as long as V and Y do not change, P increases by the same percentage, which is the conclusion of the quantity theory of money. Topic: Equation of exchange Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Written and oral communication 9) What is the equation of exchange? Suppose that real GDP and velocity are constant. In this case, what effect will an increase in the quantity of money have? Answer: The equation of exchange is that M × V = P × Y, where M is the quantity of money, V is the velocity of circulation, P is the price level, and Y is real GDP. If real GDP and velocity are constant, then an increase in the quantity of money will increase the price level. Topic: Equation of exchange Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 10) "The velocity of circulation is the average speed with which money is loaned to businesses and households." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The velocity of circulation is the average number of times in a year that each dollar of money is used to purchase final goods and services. Topic: Equation of exchange Skill: Level 2: Using definitions Section: Checkpoint 28.2 Status: Old AACSB: Reflective thinking 11) If the growth rate of the quantity of money is 4 percent per year, potential GDP and real GDP grow at 3 percent per year, and velocity does not change, in the long run what is the inflation rate? Answer: With velocity constant, in the long run, the inflation rate equals the growth in the quantity of money minus the growth in potential GDP, or (4 percent) - (3 percent) = 1 percent. Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills

12) If the growth of the quantity of money is 5 percent per year, potential and real GDP grow at 3 percent per year, and velocity does not change, in the long run what is the inflation rate? Answer: With velocity constant, in the long run, the inflation rate equals the growth in the quantity of money minus the growth in potential GDP, or (5 percent) - (3 percent) = 2 percent. Topic: Money growth and inflation Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Old AACSB: Analytic skills 13) The quantity of money is $1 billion, the price level is 1.10, and real GDP is $10 billion. What is the velocity of circulation? Answer: The velocity of circulation equals 11. Topic: Equation of exchange Skill: Level 3: Using models Section: Checkpoint 28.2 Status: Revised AACSB: Analytic skills 28.8 Essay: The Cost of Inflation 1) "Inflation acts as a tax because the government gains purchasing power." Is the previous statement correct or incorrect? Answer: The statement is correct. Inflation decreases the purchasing power of people's money and the government essentially gains the purchasing power. Topic: Inflation as a tax Skill: Level 1: Definition Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking 2) Explain how the government gains revenue during inflation. Answer: The government issues securities and buys goods and services with the funds it raises. When the securities are bought by the Fed, money is created and the result is inflation. The government owns the Fed, so when the government pays interest to the Fed, the Fed returns the interest to the government and there is no overall cost to the government from issuing the securities. As a result, the government gets the revenue from selling the securities. Furthermore, as the incomes of households and firms increase during inflation, they move into a higher marginal tax brackets and consequently pay higher taxes. The higher taxes are another source of government revenue from inflation. Topic: Inflation as a tax Skill: Level 3: Using models Section: Checkpoint 28.3 Status: Old AACSB: Written and oral communication

3) What are the costs of inflation? Briefly explain each. Answer: The costs of inflation are the tax costs, the shoe-leather costs, the confusion costs, and the uncertainty costs. The tax costs refer to the point that the higher the inflation rate, the lower the after-tax real interest rate. As a result, people decrease their saving and so investment decreases. Shoe-leather costs reflect the costs incurred by people to spend money as rapidly as possible when inflation is high because high inflation means that the value of money is decreasing rapidly. Confusion costs are the result of inflation making it more difficult to use money to compare the costs and benefits of actions, such as saving or investing. Finally, uncertainty costs occur because people are uncertain about the long-term inflation rate. When making an investment or saving decision, people must try to factor in what the inflation rate will be throughout the life of the investment or saving, which is a difficult endeavor. Topic: Costs of inflation Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Written and oral communication 4) Explain the "shoe-leather" costs of inflation. Answer: When prices rise rapidly during anticipated inflation, people with money spend time finding goods to purchase to get rid of money. Households and firms also spend time finding others to barter goods for goods and spend time watching foreign exchange rates to be able to trade falling value domestic currency for constant value foreign currencies. These activities are costly, in part because they force people to spend time dealing with the rapidly falling value of money. The costs that people incur from running around to get rid of money are the shoe-leather costs. Topic: Cost of inflation, shoe-leather costs Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Written and oral communication 5) "Inflation reduces the velocity of money because people reduce their money holdings." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. As the inflation rate rises, people reduce their money holdings by spending money more rapidly. As a result, the velocity rises rather than falls. Topic: Cost of inflation, shoe-leather costs Skill: Level 2: Using definitions Section: Checkpoint 28.3 Status: Old AACSB: Reflective thinking

6) George purchased a $10,000 bond that pays a nominal interest rate of 8 percent per year. George's marginal income tax rate is 28 percent. Over the last year, inflation was 3 percent. Find George's before-tax real interest rate and his after-tax real interest rate. Answer: The before-tax interest rate equals the nominal interest rate minus the inflation rate, or . For the after-tax real interest rate, note that George must pay tax on the entire 8 percent (nominal) interest. Hence George pays (8 percent interest rate × 28 percent tax rate) = 2.24 percent as taxes. Therefore his after-tax real interest rate equals his before-tax real interest rate, 5 percent, minus what he pays in taxes, or 5 percent - 2.24 percent = 2.76 percent as his after-tax real interest rate. Topic: Cost of inflation, saving and investment Skill: Level 4: Applying models Section: Checkpoint 28.3 Status: Old AACSB: Analytic skills

Foundations of Economics, 9e (Bade), GE Chapter 13 Aggregate Supply and Aggregate Demand 29.1 Aggregate Supply 1) Over the business cycle, factors such as the quantity of capital, human capital and technology A) grow but do not fluctuate as much as the quantity of labor employed. B) change drastically, fluctuating more than the quantity of labor employed. C) fluctuate about the same amount as the quantity of labor employed. D) do not grow and are therefore not the source of economic growth. E) change randomly, sometimes growing, sometimes falling. Answer: A Topic: Aggregate supply basics Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 2) Over a business cycle, the quantities of capital, human capital, and entrepreneurial talent A) change gradually and do not fluctuate much. B) cycle alongside real GDP. C) are completely unpredictable and cannot be forecast. D) cycle more than real GDP. E) are constant and do not change. Answer: A Topic: Aggregate supply basics Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 3) Which of the following does NOT affect potential GDP? A) the quantity of money B) the quantity of labor employed C) the quantity of capital and human capital D) the amount of entrepreneurial talent available E) the quantity of land and natural resources Answer: A Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

4) Potential GDP A) increases as the price level increases because firms supply more goods and services. B) decreases as the price level increases because people demand fewer goods and services. C) might either increase or decrease as the price level increases, depending on whether aggregate demand increases or decreases. D) is independent of the price level. E) never changes. Answer: D Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 5) The line showing potential GDP is a vertical straight line because A) there is only one level of full employment at any point in time. B) economists are unsure about how to determine potential GDP. C) it represents the minimum level of real GDP in a recession. D) when nothing else changes, a higher price level has no effect on real GDP. E) the aggregate supply curve is upward sloping. Answer: A Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 6) A rise in the price level produces ________ the potential GDP line. A) a rightward shift of B) a movement downward along C) a leftward shift of D) a movement upward along E) neither a shift of the potential GDP line nor a movement along Answer: D Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

7) Which of the following is TRUE? A) Aggregate supply is another name for potential GDP. B) Potential GDP increases as the price level increases. C) At full employment, aggregate supply is equal to potential GDP. D) Potential GDP decreases as the price level increases. E) The potential GDP line has a negative slope. Answer: C Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 8) Moving along the potential GDP line, when the price level changes, the i. real wage rate stays at the full-employment equilibrium level. ii. money wage rate changes by the same percentage. iii. money prices of non-labor resources change by the same percentage. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 9) The real wage rate DEFINITELY falls if the money wage rate ________ and the price level ________. A) remains constant; rises B) remains constant; falls C) rises; falls D) rises; rises E) falls; falls Answer: A Topic: Real wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Analytic skills

10) A fall in the real wage rate ________ firms' profits and leads to ________ in the quantity supplied. A) raises; an increase B) raises; a decrease C) lowers; an increase D) lowers; a decrease E) does not change; no change Answer: A Topic: Real wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 11) The aggregate supply curve shows the relationship between A) potential GDP and the price level. B) potential GDP and real GDP. C) the quantity of real GDP supplied and the price level. D) the quantity of real GDP supplied and the interest rate. E) potential GDP and the aggregate demand curve. Answer: C Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 12) The slope of the aggregate supply curve shows that, all else the same, the A) quantity of real GDP supplied increases as the price level increases. B) quantity of real GDP supplied decreases as the price level increases. C) quantity of real GDP supplied remains constant as the price level increases. D) price level remains constant as real GDP increases. E) price level remains constant as potential GDP increases. Answer: A Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

13) Other things remaining the same, an increase in the price level A) increases aggregate supply. B) decreases aggregate supply. C) increases the quantity of real GDP supplied. D) decreases the quantity of real GDP supplied. E) neither changes aggregate supply nor changes the quantity of real GDP supplied. Answer: C Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 14) Moving along the AS curve, when the price level increases, the A) real wage rate falls, and there is an increase in the quantity of real GDP supplied. B) real wage rate rises, and there is an increase in the quantity of real GDP supplied. C) nominal wage rate falls, and there is an increase in the quantity of real GDP supplied. D) nominal wage rate rises, and there is a decrease in the quantity of real GDP supplied. E) real wage rate rises, and there is a decrease in the quantity of real GDP supplied. Answer: A Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 15) Moving along the aggregate supply curve, when the price level rises A) the quantity supplied does not change because the aggregate supply curve is a vertical line. B) the quantity supplied increases. C) the quantity supplied decreases. D) the aggregate demand curve shifts rightward. E) the aggregate demand curve shifts leftward. Answer: B Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

16) An increase in the price level leads to A) an upward movement along the aggregate supply curve. B) a downward movement along the aggregate supply curve. C) a leftward shift of the aggregate supply curve. D) a rightward shift of the aggregate supply curve. E) neither a movement along the aggregate supply curve nor a shift of the aggregate supply curve. Answer: A Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 17) The ________, the ________ is the quantity of real GDP supplied. A) lower the price level; greater B) higher the price level; greater C) greater the demand for labor; smaller D) lower the supply of labor; greater E) lower aggregate demand; greater Answer: B Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 18) The slope of the aggregate supply curve shows that the ________ the price level, the ________. A) higher; greater is the quantity of real GDP supplied B) higher; smaller is the quantity of real GDP supplied C) lower; greater is the quantity of real GDP supplied D) higher; is the quantity of potential GDP supplied E) lower; is the quantity of potential GDP supplied Answer: A Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

19) ________ increases the quantity of real GDP supplied and is shown as a movement along the AS curve. A) A decrease in the quantity of money B) A decrease in consumption expenditure C) A fall in the expected rate of profit D) A rise in the price level E) An increase in potential GDP Answer: D Topic: Aggregate supply curve Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Analytic skills 20) The aggregate supply curve illustrates that the A) higher the price level, the greater the quantity of real GDP supplied. B) higher the price level, the smaller the quantity of real GDP supplied. C) aggregate demand curve is not needed to determine the aggregate price level. D) price level does not affect the quantity of real GDP supplied. E) amount of potential GDP increases when the price level rises. Answer: A Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 21) Because there is a ________ relationship between the price level and the quantity of real GDP supplied, the aggregate supply curve is ________ curve. A) negative; an upward-sloping B) positive; a downward-sloping C) positive; an upward-sloping D) negative; a downward-sloping E) positive; a vertical Answer: C Topic: Aggregate supply curve Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

22) The aggregate supply curve is a(n) ________ curve because it represents the relationship between price level and the quantity of real GDP supplied, two items that are ________ correlated. A) upward-sloping; negatively B) downward-sloping; positively C) upward-sloping; positively D) downward-sloping; negatively E) vertical; not Answer: C Topic: Aggregate supply curve Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 23) If there is a rise in the price level, there is ________ in the quantity of real GDP supplied and a movement ________ along the AS curve. A) a decrease; downward B) an increase; upward C) an increase; downward D) a decrease; upward E) no change; upward Answer: B Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 24) If there is a rise in the price level, there is a(n) ________ movement along the AS curve because there is ________ in the quantity of real GDP supplied. A) downward; a decrease B) upward; an increase C) downward; an increase D) upward; a decrease E) upward; no change Answer: B Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

25) If the price level increases from 110.0 to 115.0, the quantity of A) real GDP supplied will increase. B) real GDP supplied will decrease. C) potential GDP will decrease. D) real GDP demanded will increase. E) potential GDP will increase. Answer: A Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 26) A change in the price level A) shifts the aggregate supply curve rightward. B) shifts the potential GDP line. C) shifts the aggregate supply curve leftward. D) changes the quantity of real GDP supplied. E) shifts the aggregate demand curve leftward. Answer: D Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 27) The quantity of real GDP supplied increases when the price level increases because A) investment increases. B) the quantity of money increases. C) the real wage rate falls. D) the real wage rate rises. E) aggregate demand increases. Answer: C Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

28) The quantity of real GDP supplied ________ when the price level increases because ________. A) decreases; investment increases B) increases; the quantity of money increases C) increases; the real wage rate falls D) decreases; the real wage rate rises E) increases; aggregate demand increases Answer: C Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 29) During 2016, a country reports that its price level fell and the money wage rate did not change. These changes led to A) a higher real wage rate, lower profits, and a decrease in the quantity of real GDP supplied. B) a higher real wage rate, higher profits, and an increase in the quantity of real GDP supplied. C) a lower real wage rate, lower profits, and a decrease in the quantity of real GDP supplied. D) a lower real wage rate, higher profits, and an increase in the quantity of real GDP supplied. E) no change in the real wage rate and an increase in aggregate demand. Answer: A Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 30) During 2016, a country reports that its price level fell and the money wage rate did not change. These changes led to a(n) ________ because their country experienced a(n) ________. A) decrease in the quantity of real GDP supplied; higher real wage rate and lower profits for firms B) increase in the quantity of real GDP supplied; higher real wage rate and lower profits for firms C) decrease in the quantity of real GDP supplied; lower real wage rate and lower profits for firms D) increase in the quantity of real GDP supplied; lower real wage rate and higher profits for firms E) decrease in aggregate demand; economic expansion Answer: A Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

31) The quantity of real GDP supplied decreases if the price level ________ because it ________ profits. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) None of the above answers is correct because the AS curve is vertical so that the quantity of real GDP supplied does not change when the price level changes. Answer: D Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 32) If profits are high because the price level rose A) it is likely the result of an increase in the real wage rate. B) new businesses open and the quantity of real GDP supplied increases. C) business failures rise and the quantity of real GDP supplied increases. D) potential GDP must be decreasing. E) the AS curve shifts leftward. Answer: B Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 33) When the price level rises, the quantity of real GDP supplied ________ because ________. A) decreases; new businesses open B) increases; new businesses open C) decreases; businesses fail and have to shut their doors D) increases; AS curve shifts rightward E) increases; businesses fail and have to shut their doors Answer: B Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

34) If the price level rises but the money wage rate does not, then firms will hire ________ labor and the quantity of real GDP supplied will ________. A) more; increase B) the same amount of; not change C) less; decrease D) more; not change E) less; increase Answer: A Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 35) It is profitable to hire more labor if the price level ________ and the money wage rate ________. A) rises; falls B) falls; rises C) falls; does not change D) does not change; rises E) rises; rises by the same percentage Answer: A Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 36) If the price level falls and the money wage rate does not change, some firms ________ and there is ________. A) shut down; a leftward shift of the aggregate supply curve B) start up; a rightward shift of the aggregate supply curve C) shut down; a decrease in the quantity of real GDP supplied D) shut down; a decrease in potential GDP E) start up; an increase in potential GDP Answer: C Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

37) When the price level rises and the money wage rate does not change A) the quantity of real GDP supplied increases as more businesses start up and potential GDP does not change. B) the quantity of real GDP supplied decreases as more businesses fail and potential GDP does not change. C) profits fall and more businesses fail. D) existing businesses do not change their level of output. E) the quantity of potential GDP increases because the quantity of real GDP supplied increases. Answer: A Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 38) Moving along the aggregate supply curve A) the quantity of capital used increases. B) only the price level changes. C) technology advances. D) the stock of human capital increases. E) the real wage rate is constant. Answer: B Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 39) A rise in the price level produces a ________ the aggregate supply curve. A) rightward shift of B) movement downward along C) leftward shift of D) movement upward along E) rightward shift of the aggregate supply curve and a movement downward along Answer: D Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

40) A fall in the price level produces a ________ the aggregate supply curve. A) rightward shift of B) movement downward along C) leftward shift of D) movement upward along E) rightward shift of the aggregate supply curve and a movement downward along Answer: B Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 41) If the money wage rate does not change, a decrease in the price level will ________ the real wage rate and ________ firms' profit. A) raise; decrease B) raise; increase C) lower; decrease D) lower; increase E) lower; not change Answer: A Topic: Aggregate supply, real wage rate Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 42) The money wage rate is constant when moving along A) only the aggregate supply curve. B) only the aggregate supply curve and the potential GDP line. C) only the potential GDP line. D) neither the aggregate supply curve nor the potential GDP line. E) the aggregate supply curve, the potential GDP line, and the aggregate demand curve. Answer: A Topic: Aggregate supply, real wage rate Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

43) The aggregate supply curve slopes ________ because a ________ in the price level brings a ________ in the real wage rate. A) upward; rise; rise B) downward; fall; rise C) upward; rise; fall D) upward; fall; fall E) downward; rise; rise Answer: C Topic: Aggregate supply, real wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 44) Along the aggregate supply curve, the quantity of real GDP supplied increases when the price level rises because A) profits decrease. B) the real wage rate falls. C) the real wage rate rises. D) the real wage rate and profits both fall. E) the demand for the goods and services increases. Answer: B Topic: Aggregate supply, real wage rate Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 45) A fall in the price level brings a ________ in the real wage rate that ________ profits and can lead to ________. A) rise; reduces; firms going out of business B) rise; reduces; new firms entering business C) fall; increases; firms going out of business D) rise; increases; new firms entering business E) fall; decreases; new firms entering business Answer: A Topic: Aggregate supply, real wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

46) A rise in the price level brings a ________ in the real wage rate that ________ profits which leads to ________ production. A) rise; reduces; decreasing B) rise; reduces; increasing C) fall; increases; increasing D) rise; increases; decreasing E) fall; decreases; decreasing Answer: C Topic: Aggregate supply, real wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 47) A fall in the price level brings a ________ in the real wage rate that ________ profits which leads to ________. A) rise; reduces; firms restarting production B) rise; reduces; firms temporarily shutting down C) fall; increases; firms temporarily shutting down D) rise; increases; firms restarting production E) rise; increases; firms temporarily shutting down Answer: B Topic: Aggregate supply, real wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 48) Which of the following changes aggregate supply and shifts the aggregate supply curve? i. change in the price level ii. change in potential GDP iii. change in the money wage rate A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: D Topic: Changes in aggregate supply Skill: Level 3: Using models Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

49) Changes in which of the following shifts the aggregate supply curve? i. the price level ii. the money wage rate iii. potential GDP A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: D Topic: Changes in aggregate supply Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 50) Which of the following does NOT shift the aggregate supply curve? A) an increase in energy prices B) an increase in the nominal wage rate C) an increase in the price level D) a decrease in the capital stock E) None of the above are correct because they all shift the aggregate supply curve. Answer: C Topic: Changes in aggregate supply Skill: Level 3: Using models Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 51) An increase in the money wage rate ________ and an increase in the money prices of raw materials ________. A) shifts the AS curve rightward; shifts the AS curve rightward B) shifts the AS curve leftward; shifts the AS curve leftward C) shifts the AS curve rightward; shifts the AS curve leftward D) shifts the AS curve leftward; shifts the AS curve rightward E) shifts the AS curve leftward; does not shift the AS curve Answer: B Topic: Changes in aggregate supply Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

52) Changes in which of the following do NOT shift the AS curve? i. the price level ii. potential GDP iii. the money wage rate A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: A Topic: Changes in aggregate supply Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 53) A change in the price level brings a ________ the aggregate supply curve, NOT a ________ the aggregate supply curve. A) shift in; movement along B) vertical displacement of; change in the slope of C) movement along; shift in D) change in the slope of; horizontal displacement of E) shift in; change in the slope of Answer: C Topic: Changes in aggregate supply Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 54) Which of the following changes aggregate supply and shifts the AS curve? i. a change in the price of a major resource ii. increases in the amount of capital iii. a change in the money income of consumers A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Changes in aggregate supply Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

55) If the costs of production decrease, there is A) an increase in aggregate supply and the AS curve shifts rightward. B) a decrease in aggregate supply and the AS curve shifts leftward. C) an increase in the quantity of real GDP supplied and a movement up along the AS curve. D) a decrease in the quantity of real GDP supplied and a movement down along the AS curve. E) an increase in aggregate supply and the AS curve shifts leftward. Answer: A Topic: Shifts in the aggregate supply curve Skill: Level 3: Using models Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 56) If the costs of production increase, there is A) an increase in aggregate supply and the AS curve shifts rightward. B) a decrease in aggregate supply and the AS curve shifts leftward. C) an increase in the quantity of real GDP supplied and a movement up along the AS curve. D) a decrease in the quantity of real GDP supplied and a movement down along the AS curve. E) a decrease in aggregate supply and the AS curve shifts rightward. Answer: B Topic: Shifts in the aggregate supply curve Skill: Level 3: Using models Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 57) Which of the following shifts the aggregate supply curve rightward? i. The money wage rate rises. ii. Potential GDP increases. iii. Government expenditure on goods and services increases. A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: B Topic: Shifts in the aggregate supply curve Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

58) Which of the following best describes the effect on the aggregate supply curve if political negotiations result in a substantial decrease in the price of oil? A) The AS curve shifts rightward. B) There is no change to the AS curve. C) The AS curve does not shift but there is an upward movement along it. D) The AS curve does not shift but there is a downward movement along it. E) The AS curve shifts leftward. Answer: A Topic: Changes in aggregate supply, money prices of resources Skill: Level 3: Using models Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 59) The aggregate supply curve shifts rightward when A) potential GDP decreases. B) the money wage rate falls. C) income taxes increase. D) government purchases increase. E) the money wage rate rises. Answer: B Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 60) The aggregate supply curve shifts A) rightward if potential GDP decreases. B) rightward if the money wage rate falls. C) rightward if the money wage rate rises. D) leftward if potential GDP increases. E) leftward if the aggregate demand curve shifts leftward. Answer: B Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

61) A fall in the money wage rate ________ aggregate supply and ________. A) decreases; shifts the AS curve rightward B) increases; shifts the AS curve leftward C) increases; shifts the AS curve rightward D) decreases; shifts the AS curve leftward E) does not change; does not shift the AS curve Answer: C Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 62) An increase in the money wage rate leads to A) an upward movement along the aggregate supply curve. B) a downward movement along the aggregate supply curve. C) a leftward shift of the aggregate supply curve. D) a rightward shift of the aggregate supply curve. E) a leftward shift of the aggregate demand curve. Answer: C Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 63) An increase in the money wage A) raises firms' costs and shifts the aggregate supply curve rightward. B) raises firms' costs and shifts the aggregate supply curve leftward. C) raises firms' sales and increases potential output. D) raises firms' costs and decreases potential output. E) has no effect on the aggregate supply curve. Answer: B Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

64) A rise in the money wage rate shifts the A) AD curve rightward. B) AD curve leftward. C) AS curve rightward. D) AS curve leftward. E) potential GDP curve rightward. Answer: D Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 65) If the money wage rate increases, then the A) aggregate supply curve shifts rightward. B) potential GDP increases. C) potential GDP decreases. D) aggregate supply curve shifts leftward. E) aggregate demand curve shifts leftward. Answer: D Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 66) ________ decreases aggregate supply. A) An increase in potential GDP B) An increase the quantity of capital C) A rise in the price level D) A rise in the money wage rate E) A fall in the money wage rate Answer: D Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

67) Which of the following shifts the aggregate supply curve leftward? A) increase in potential GDP B) increase in the money wage rate C) increase in real GDP D) decrease in the money price of oil E) a fall in the price level Answer: B Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 68) Which of the following statements is TRUE? A) An increase in potential GDP increases aggregate supply and shifts the AS curve leftward. B) A decrease in potential GDP decreases aggregate supply and shifts the AS curve leftward. C) An increase in the money wage rate shifts the AS curve rightward. D) A fall in the price level shifts the AS curve leftward. E) An increase in the money wage rate increases potential GDP. Answer: B Topic: Changes in aggregate supply, potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Analytic skills 69) Which of the following shifts the aggregate supply curve leftward? A) a decrease in potential GDP B) a fall in the money wage rate C) a decrease in the price level D) a fall in the real wage rate E) an increase in potential GDP Answer: A Topic: Changes in aggregate supply, potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

70) An increase in potential GDP ________ aggregate supply and ________. A) decreases; shifts the AS curve rightward B) increases; shifts the AS curve leftward C) increases; shifts the AS curve rightward D) decreases; shifts the AS curve leftward E) has no effect on; does not shift the AS curve Answer: C Topic: Changes in aggregate supply, potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Analytic skills 71) If potential GDP increases, then the A) aggregate supply curve shifts leftward. B) aggregate supply curve shifts rightward. C) real wage rate increases. D) real wage rate falls. E) aggregate demand curve shifts rightward. Answer: B Topic: Changes in aggregate supply, potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 72) Which of the following shifts the aggregate supply curve rightward? A) increase in potential GDP B) increase in the money wage rate C) increase in real GDP D) increase in the money price of oil E) increase in consumers' incomes Answer: A Topic: Changes in aggregate supply, potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

73) If potential GDP increases A) aggregate supply does not change. B) the quantity of aggregate supply decreases. C) aggregate supply increases. D) the price level rises. E) the money wage rate must have fallen. Answer: C Topic: Changes in aggregate supply, potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 74) When potential GDP increases, the potential GDP line ________, and the aggregate supply curve ________. A) shifts rightward; shifts rightward B) shifts rightward; shifts leftward C) shifts leftward; shifts rightward D) shifts leftward; shifts leftward E) shifts rightward; does not shift Answer: A Topic: Changes in aggregate supply, technology Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Analytic skills 75) An increase in ________ increases potential GDP and ________ aggregate supply. A) technology; increases B) technology; decreases C) the money wage rate; increases D) the money price of oil; decreases E) the money wage rate; decreases Answer: A Topic: Changes in aggregate supply, potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

76) An increase in technology ________ potential GDP and ________ aggregate supply. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: A Topic: Changes in aggregate supply, potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 77) A technological advance ________ potential GDP, ________ aggregate supply, and shifts the aggregate supply curve ________. A) increases; increases; leftward B) decreases; decreases; leftward C) increases; increases; rightward D) decreases; increases; rightward E) increases; decreases; leftward Answer: C Topic: Changes in aggregate supply, potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

78) The change in potential real GDP and aggregate supply shown in the graph above can be a result of A) an increase in the real wage rate. B) an increase in the quantity of capital. C) a decrease in the money wage rate. D) a decrease in the money price of oil. E) a fall in the price level. Answer: B Topic: Changes in aggregate supply, potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Revised AACSB: Analytic skills 79) As the money wage rate increases A) potential GDP increases. B) potential GDP decreases. C) aggregate supply increases. D) aggregate supply decreases. E) aggregate supply and potential GDP do not change. Answer: D Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Analytic skills

80) The change reflected in the above figure might be a result of A) a decrease in the money wage rate. B) a decrease in the real wage rate. C) an increase in the money wage rate. D) an increase in the real wage rate. E) a rise in the price level. Answer: A Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 29.1 Status: Revised AACSB: Analytic skills

81) The change reflected in the above figure might be a result of A) a decrease in the quantity of capital. B) an increase in the quantity of labor. C) a rise in the money wage rate. D) a decrease in the money prices of resources other than labor. E) a fall in the price level. Answer: C Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 29.1 Status: Old AACSB: Analytic skills 82) Moving along the potential GDP line, the money wage rate changes by the same percentage as the change in the price level so that the real wage rate A) increases. B) decreases. C) stays at the full-employment equilibrium level. D) might either increase or decrease. E) stays the same, though not necessarily at the full-employment equilibrium level. Answer: C Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

83) The aggregate supply curve is A) upward sloping. B) downward sloping. C) a vertical line. D) a horizontal line. E) U-shaped. Answer: A Topic: Aggregate supply curve Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 84) When the price level falls A) the AS curve shifts rightward but the potential GDP line does not shift. B) there is a movement upward along the AS curve. C) the AS curve shifts leftward but the potential GDP line does not shift. D) there is a movement downward along the AS curve. E) both the potential GDP line and the AS curve shift leftward. Answer: D Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Analytic skills 85) As the price level rises relative to costs and the real wage rate falls, profits ________ and the number of firms in business ________. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases E) do not change; do not change Answer: A Topic: Aggregate supply, price level Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

86) When potential GDP increases A) the AS curve shifts rightward. B) there is a movement up along the AS curve. C) the AS curve shifts leftward. D) there is a movement down along the AS curve. E) there is neither a movement along nor a shift in the AS curve. Answer: A Topic: Changes in aggregate supply, potential GDP Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Analytic skills 87) If the money wage rate rises A) the AS curve shifts rightward. B) there is a movement up along the AS curve. C) the AS curve shifts leftward. D) there is a movement down along the AS curve. E) there is neither a movement along or a shift in the AS curve. Answer: C Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Analytic skills 29.2 Aggregate Demand 1) A rise in the price level A) decreases aggregate demand. B) increases aggregate demand. C) decreases the quantity of real GDP demanded. D) increases the quantity of real GDP demanded. E) has no effect on aggregate demand or on the quantity of real GDP demanded. Answer: C Topic: Aggregate demand Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

2) Which of the following statements is correct? A) The price level does not affect the level of real GDP demanded. B) The lower the price level, the greater the quantity of real GDP demanded. C) The lower the price level, the more the aggregate demand curve shifts rightward. D) The lower the price level, the more the aggregate demand curve shifts leftward. E) The higher the price level, the more the aggregate demand curve shifts rightward. Answer: B Topic: Aggregate demand Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 3) The AD curve is a graph depicting the A) relationship between the price level and the quantity of real GDP supplied. B) business cycle during expansions and recessions. C) relationship between the price level and the quantity of real GDP demanded. D) relationship between the price level and potential GDP. E) relationship between the aggregate quantity of real GDP demanded and the aggregate quantity of real GDP supplied. Answer: C Topic: Aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 4) The aggregate demand curve illustrates the relationship between A) the price level and the quantity of goods demanded by households, firms, government, and foreigners. B) the real wage rate and the hours of labor demanded by firms. C) the price level and the potential quantity demanded of real GDP. D) the price level and the quantity of goods supplied by firms. E) the price level and the potential demand for real GDP. Answer: A Topic: Aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

5) Which of the following produces a movement along the aggregate demand curve and does not shift the aggregate demand curve? A) a change in foreign incomes B) a change in the price level C) a change in monetary policy D) a change in expectations about the future E) a change in government expenditures on goods and services Answer: B Topic: Aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 6) A change in the price level produces a ________ the aggregate demand curve. i. shift in ii. change in the slope of iii. movement along A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: C Topic: Aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 7) A fall in the price level produces a ________ the aggregate demand curve. A) rightward shift of B) movement downward along C) leftward shift of D) movement upward along E) change in the slope of Answer: B Topic: Aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

8) An increase in the price level leads to A) a rightward shift of the aggregate demand curve. B) a leftward shift of the aggregate demand curve. C) a movement upward along the aggregate demand curve. D) a movement downward along the aggregate demand curve. E) neither a shift in the aggregate demand curve nor a movement along it. Answer: C Topic: Aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 9) If the price level increases, there is ________ the AD curve and the quantity of real GDP demanded ________. A) a movement upward along; increases B) a movement downward along; increases C) a movement upward along; decreases D) a leftward shift in; decreases E) no change in; does not change Answer: C Topic: Aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 10) A rise in the price level ________ the buying power of money and ________ the quantity of real GDP demanded. A) does not affect; increases B) lowers; increases C) raises; decreases D) lowers; decreases E) does not affect; does not change Answer: D Topic: Buying power of money Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

11) A rise in the price level brings a ________ in the buying power of money that ________ consumption expenditures and causes the quantity of real GDP demanded to ________. A) rise; decreases; decrease B) fall; decreases; decrease C) fall; increases; increase D) rise; increases; increase E) fall; decreases; increase Answer: B Topic: Buying power of money Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 12) When the price level increases there is ________ movement along the aggregate demand curve because the buying power of money ________. A) an upward; decreases B) a downward; decreases C) an upward; increases D) a downward; increases E) no; does not change Answer: A Topic: Buying power of money Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 13) Last year the price level increased from 118 to 122. The increase in the price level leads to a decrease in A) the buying power of money. B) the real interest rate. C) the money wage rate. D) the price of domestic goods and services relative to foreign goods and services. E) potential GDP. Answer: A Topic: Buying power of money Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

14) At a price level of 100, John has savings equal to $20,000. If the price level increases to 130, the buying power of John's savings is approximately A) $12,780. B) $15,400. C) $20,000. D) $26,000. E) $30,000. Answer: B Topic: Buying power of money Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills 15) A year over year ________ in the buying power of money means that definitely ________ from one year to the next. A) decrease; the price level increased B) increase; the price level increased C) decrease; inflation increased D) increase; inflation increased E) Both answers A and C are correct. Answer: A Topic: Buying power of money Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills 16) If the price level doubles, it will A) increase the quantity of money. B) have no effect on the buying power of money. C) decrease the buying power of money. D) increase potential GDP. E) decrease potential GDP. Answer: C Topic: Buying power of money Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

17) When the price level rises and increases the demand for money, the nominal interest rate ________ and the real interest rate ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls E) does not change; does not change Answer: A Topic: Buying power of money Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 18) In the short run, a rise in the price level brings a ________ in the real interest rate that ________ investment, bringing ________ in the quantity of real GDP demanded. A) rise; decreases; a decrease B) fall; decreases; a decrease C) fall; increases; an increase D) rise; increases; an increase E) rise; decreases; an increase Answer: A Topic: Buying power of money Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 19) A reason why an increase in the price level decreases the quantity of real GDP demanded is that A) the buying power of money increases. B) the real interest rate falls. C) the price of domestic goods and services increases relative to foreign goods and services. D) the inflation rate decreases. E) potential GDP decreases. Answer: C Topic: Relative price of domestic and foreign goods Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

20) A rise in the U.S. price level brings a ________ in the price of U.S. exports relative to imports that ________ exports of U.S. goods, bringing ________ in the quantity of U.S. real GDP demanded. A) rise; decreases; a decrease B) fall; decreases; a decrease C) fall; increases; an increase D) rise; increases; an increase E) rise; increases; a decrease Answer: A Topic: Relative price of domestic and foreign goods Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 21) When the U.S. price level rises relative to other nations' price levels, then A) U.S. firms' profits increase and the aggregate demand curve shifts rightward. B) U.S. exports increase and the aggregate demand curve shifts rightward. C) U.S. exports decrease, U.S. imports increase, and the aggregate demand curve shifts leftward. D) U.S. exports decrease, U.S. imports increase, and there is a movement upward along the aggregate demand curve. E) U.S. exports decrease, U.S. imports increase, and the aggregate demand curve shifts rightward. Answer: D Topic: Relative price of domestic and foreign goods Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 22) Sherri lives in Canada and is considering buying a new sofa. If the price level in Canada falls and the price level in the United States does not change, Canadian manufactured sofas are relatively A) more expensive, so Sherri will likely purchase a U.S. manufactured sofa. B) more expensive, so Sherri will likely purchase a Canadian manufactured sofa. C) less expensive, so Sherri will likely purchase a U.S. manufactured sofa. D) less expensive, so Sherri will likely purchase a Canadian manufactured sofa. E) Both answers B and D could be correct depending on whether U.S. manufactured sofas were initially more expensive or less expensive than Canadian sofas. Answer: D Topic: Relative price of domestic and foreign goods Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

23) When the domestic price level increases, exports decrease and imports increase. Other things the same, this change is illustrated by a A) movement upward along the aggregate demand curve. B) movement downward along the aggregate demand curve. C) rightward shift of the aggregate demand curve. D) leftward shift of the aggregate demand curve. E) rightward shift of the aggregate supply curve. Answer: A Topic: Relative price of domestic and foreign goods Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 24) The aggregate demand curve shifts when any of the following factors change EXCEPT A) foreign income. B) the price level. C) monetary policy. D) expectations about the future. E) fiscal policy. Answer: B Topic: Changes in aggregate demand Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 25) Which of the following does NOT shift the aggregate demand curve? A) a change in the money wage B) a change in expectations about the future C) a change in monetary policy D) a change in fiscal policy E) a change in foreign income Answer: A Topic: Changes in aggregate demand Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

26) Changes in ________ cause a movement along the aggregate demand curve while changes in ________ shift the aggregate demand curve. A) price level; taxes B) taxes; government spending C) government spending; price level D) money wage rate; price level E) price level; money wage rate Answer: A Topic: Changes in aggregate demand Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 27) All of the following shift the aggregate demand curve to the right EXCEPT A) an increase in taxes. B) an expansion of the global economy. C) an increase in foreign income. D) an increase in government expenditure. E) an increase in expected future profit. Answer: A Topic: Changes in aggregate demand Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 28) All of the following actions shift the aggregate demand curve to the right EXCEPT A) the Fed raises the interest rate. B) an increase in government transfer payments. C) inflation is expected to rise next year. D) an increase in expected future profit. E) a decrease in taxes. Answer: A Topic: Changes in aggregate demand Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

29) If there is an increase in expected future income, then A) the aggregate demand curve shifts rightward. B) the aggregate demand curve shifts leftward. C) there is an upward movement along the aggregate demand curve. D) there is a downward movement along the aggregate demand curve. E) the aggregate demand curve becomes steeper. Answer: A Topic: Changes in aggregate demand, expectations Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 30) Aggregate demand A) decreases if expected future income rises. B) increases if the exchange rate rises. C) increases if government expenditures decrease. D) increases if the expected inflation rate increases. E) increases if aggregate supply increases. Answer: D Topic: Changes in aggregate demand, expectations Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 31) Aggregate demand ________ if the expected inflation rate increases because ________. A) increases; people expect to receive cost of living raises as the inflation begins B) decreases; people wait for the exchange rates to change before making purchases C) does not change; inflation does not affect the aggregate demand curve D) increases; people want to make purchases now before the price of goods and services begin to increase E) decreases; people want to wait for the price of goods and services begin to decrease Answer: D Topic: Changes in aggregate demand, expectations Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

32) If people's expectations about future income improve so they think their future income will be higher than previously believed, then the AD curve A) will not change until income actually rises. B) will shift leftward because people will spend less now. C) will shift rightward because people will increase spending now. D) and the AS curve will both shift leftward because people will increase their saving. E) will not shift, but potential GDP will increase. Answer: C Topic: Changes in aggregate demand, expectations Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 33) If firms' expectations about the future become pessimistic so that they think future profits will be lower, then A) aggregate demand decreases and the AD curve shifts leftward. B) aggregate demand increases and the AD curve shifts rightward. C) the quantity of real GDP demanded decreases, and there is a movement up along the AD curve. D) the quantity of real GDP demanded increases, and there is a movement down along the AD curve. E) the aggregate demand curve does not shift, but potential GDP decreases. Answer: A Topic: Changes in aggregate demand, expectations Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 34) Which of the following decreases aggregate demand and shifts the AD curve leftward? A) a tax cut B) a decrease in price level C) a decrease in government expenditures D) a decrease in the price of exported goods and services E) a decrease in potential GDP Answer: C Topic: Changes in aggregate demand, fiscal policy Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

35) An increase in government expenditure on goods and services leads to the A) aggregate supply curve shifting rightward. B) aggregate supply curve shifting leftward. C) aggregate demand curve shifting rightward. D) aggregate demand curve shifting leftward. E) potential GDP increasing. Answer: C Topic: Changes in aggregate demand, fiscal policy Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 36) An increase in government expenditure on goods and services A) shifts the aggregate supply curve leftward but does not change potential GDP. B) shifts the aggregate supply curve leftward and decreases potential GDP. C) shifts the aggregate demand curve leftward. D) shifts the aggregate demand curve rightward. E) has no effect on the aggregate supply or aggregate demand. Answer: D Topic: Changes in aggregate demand, fiscal policy Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 37) Aggregate demand ________ and shifts the AD curve ________ when ________. A) increases; rightward; government expenditure increases B) increases; rightward; taxes increase C) increases; rightward; future expected profit decreases D) decreases; leftward; foreign income increases E) increases; leftward; government expenditure increases Answer: A Topic: Changes in aggregate demand, fiscal policy Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills

38) A tax increase A) decreases aggregate demand and the AD curve shifts leftward. B) increases aggregate demand and the AD curve shifts rightward. C) decreases the quantity of real GDP demanded and there is a movement up along the AD curve. D) increases the quantity of real GDP demanded and there is a movement down along the AD curve. E) does not shift or lead to a movement along the aggregate demand curve. Answer: A Topic: Changes in aggregate demand, fiscal policy Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 39) Which of the following shifts the aggregate demand curve rightward? A) a decrease in expected future income B) a decrease in the price level C) a tax cut D) a decrease in the quantity of money E) a decrease in government expenditures on goods and services Answer: C Topic: Changes in aggregate demand, fiscal policy Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 40) A tax cut ________ aggregate demand and ________. A) decreases; shifts the AD curve rightward B) increases; shifts the AD curve leftward C) increases; shifts the AD curve rightward D) decreases; shifts the AD curve leftward E) does not change; does not shift the AD curve Answer: C Topic: Changes in aggregate demand, fiscal policy Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

41) Which of the following statements is correct? A) An increase in people's expected future income shifts the aggregate demand curve leftward. B) A tax increase shifts the aggregate demand curve leftward. C) An increase in potential GDP shifts the aggregate demand curve rightward. D) An increase in exports shifts the aggregate demand curve leftward. E) The higher the price level, the larger is the quantity of real GDP demanded. Answer: B Topic: Changes in aggregate demand, fiscal policy Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 42) If taxes are cut, there is A) an increase in aggregate demand and the AD curve shifts rightward. B) a decrease in aggregate demand and the AD curve shifts leftward. C) an increase in the quantity of real GDP demanded and a movement up along the AD curve. D) a decrease in the quantity of real GDP demanded and a movement down along the AD curve. E) no change in aggregate demand, only a change in potential GDP. Answer: A Topic: Changes in aggregate demand, fiscal policy Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 43) Which of the following decreases aggregate demand and shifts the AD curve leftward? A) a tax cut B) an interest rate hike C) an increase in quantity of money D) an increase in government expenditures on goods and services E) a decrease in potential GDP Answer: B Topic: Changes in aggregate demand, monetary policy Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

44) If a country is trying to recover from a recent recession, it is unlikely their government officials will decide to ________ because it would ________. A) lower interest rates; decrease aggregate demand B) raise interest rates; decrease aggregate demand C) raise interest rates; increase aggregate demand D) institute a tax cut; increase aggregate demand E) increase taxes; increase aggregate demand Answer: B Topic: Changes in aggregate demand, monetary policy Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 45) If the Fed increases the quantity of money, then A) aggregate demand decreases and the AD curve shifts leftward. B) aggregate demand increases and the AD curve shifts rightward. C) the quantity of real GDP demanded decreases and there is a movement up along the AD curve. D) the quantity of real GDP demanded increases and there is a movement down along the AD curve. E) both the aggregate demand curve and the aggregate supply curve shift leftward. Answer: B Topic: Changes in aggregate demand, monetary policy Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 46) An increase in the quantity of money ________ aggregate demand and ________. A) increases; shifts the aggregate demand curve rightward B) increases; shifts the aggregate demand curve leftward C) decreases; shifts the aggregate demand curve rightward D) decreases; shifts the aggregate demand curve leftward E) increases; rotates the aggregate demand curve so it is steeper Answer: A Topic: Changes in aggregate demand, monetary policy Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

47) Which of the following statements is correct? A) An increase in the price level shifts the aggregate demand curve rightward. B) An increase in the price level shifts the aggregate demand curve leftward. C) An increase in the quantity of the money shifts the aggregate demand curve rightward. D) An increase in the real interest rate shifts the aggregate demand curve rightward. E) An increase in the money wage rate shifts the aggregate demand curve leftward. Answer: C Topic: Aggregate demand curve Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 48) Aggregate demand ________ and shifts the AD curve ________ when ________. A) decreases; leftward; government expenditure increases B) increases; rightward; taxes increase C) decreases; leftward; foreign incomes decrease D) decreases; rightward; government expenditure increases E) increases; leftward; taxes decrease Answer: C Topic: Changes in aggregate demand, foreign income Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills 49) Aggregate demand ________ and shifts the AD curve ________ when ________. A) decreases; leftward; the price level rises B) increases; leftward; taxes increase C) increases; rightward; foreign incomes increase D) decreases; rightward; government expenditure increases E) increases; rightward; taxes increase Answer: C Topic: Changes in aggregate demand, foreign income Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills

50) One of the influences that the world economy has on U.S. aggregate demand comes from changes in A) world opinion. B) foreign income. C) foreign governments. D) world pollution. E) foreign aid. Answer: B Topic: Changes in aggregate demand, foreign income Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 51) If European economies enter a recession A) U.S. aggregate demand decreases and the U.S. AD curve shifts leftward. B) U.S. aggregate demand increases and the U.S. AD curve shifts rightward. C) the quantity of real GDP demanded in the United States decreases and there is a movement down along the U.S. AD curve. D) the quantity of real GDP demanded in the United States increases and there is a movement up along the U.S. AD curve. E) U.S. aggregate demand decreases and the U.S. AD curve shifts rightward. Answer: A Topic: Changes in aggregate demand, foreign income Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 52) A decrease in foreign income ________ exports of U.S.-made goods, so aggregate demand ________ and the aggregate demand curve shifts ________. A) increases; increases; rightward B) decreases; decreases; leftward C) decreases; increases; rightward D) increases; increases; leftward E) decreases; decreases; rightward Answer: B Topic: Changes in aggregate demand, foreign income Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills

53) Suppose the exchange rate in the year 2018 was 4 yuan per dollar and in 2019 the exchange rate fell to 3 yuan per dollar. If the price of a Chinese sweater was 120 yuan in both years, the new dollar price in 2019 would be ________ and imports of Chinese sweaters would ________. A) $40; increase B) $30; decrease C) $40; decrease D) $30; increase E) $40; stay the same because the price stayed the same at 120 yuan Answer: C Topic: Changes in aggregate demand, foreign exchange rate Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Revised AACSB: Analytic skills

54) In the figure above, as the price level increases, the aggregate demand curve will A) shift from AD1 to AD3. B) shift from AD1 to AD2. C) not shift, but the aggregate demand curve will change so that it is positively sloped. D) not shift. E) shift from AD1 to AD3 and then back to AD1. Answer: D Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Revised AACSB: Analytic skills

55) In the figure above, the shift in the aggregate demand curve from AD1 to AD2 could be result of A) a fall in the price level. B) a decrease in the quantity of money. C) an increase in government expenditures on goods and services. D) an increase in taxes. E) a rise in the price level. Answer: C Topic: Changes in aggregate demand, fiscal policy Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Revised AACSB: Analytic skills 56) In the figure above, the shift in the aggregate demand curve from AD1 to AD3 could be the result of A) a decrease in the real interest rate. B) a decrease in the buying power of money. C) an increased expectation of a recession that lowers the expected rate of profit from investment. D) a decrease in the foreign exchange rate. E) an increase in the price level. Answer: C Topic: Changes in aggregate demand, expectations Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Revised AACSB: Analytic skills 57) In the figure above, the shift in the aggregate demand curve from AD1 to AD3 could be the result of A) a fall in the price level. B) a tax cut. C) an increased expectation of a recession that lowers people's expected future incomes. D) a decrease in the foreign exchange rate. E) a rise in the price level. Answer: C Topic: Changes in aggregate demand, expectations Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Revised AACSB: Analytic skills

58) In the figure above, the shift in the aggregate demand curve from AD1 to AD3 could be the result of an increase in A) expected future income. B) the foreign exchange rate. C) foreign incomes. D) the price level. E) aggregate supply. Answer: B Topic: Changes in aggregate demand, foreign exchange rate Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Revised AACSB: Analytic skills 59) A change in any component of aggregate demand creates a larger change in overall aggregate demand. This is the ________ effect, and it means, for example, that a(n) ________ in consumption will cause an even larger ________ in AD. A) multiplier; increase; increase B) liquidity; decrease; decrease C) growth; increase; decrease D) multiplier; decrease; decrease E) liquidity; increase; increase Answer: D Topic: Aggregate demand multiplier Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills 60) The aggregate demand multiplier effect says that an initial increase in expenditure plans leads to an induced A) increase in consumption expenditure. B) increase in production expenditure. C) increase in government expenditures on goods and services. D) decrease in the price level. E) increase in exports. Answer: A Topic: Aggregate demand multiplier Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

61) Because of the existence of the aggregate demand multiplier, a $10 billion change in expenditure A) shifts the aggregate demand curve by more than $10 billion. B) shifts the aggregate demand curve by $10 billion. C) shifts the aggregate demand curve by less than $10 billion. D) changes the slope of the aggregate demand curve so it is less steep. E) changes the slope of the aggregate demand curve so it is steeper. Answer: A Topic: Aggregate demand multiplier Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills 62) If investment spending increases by $1 million, then the aggregate demand curve shifts A) rightward by $1 million. B) rightward by more than $1 million. C) rightward by less than $1 million. D) leftward by more than $1 million. E) leftward by less than $1 million. Answer: B Topic: Aggregate demand multiplier Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills 63) When the price level rises there is a ________ the aggregate demand curve. A) rightward shift of B) movement down along C) leftward shift of D) movement up along E) rotation of Answer: D Topic: Changes in the price level Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

64) A rise in the price level A) raises the buying power of money. B) decreases the prices of exports. C) lowers the buying power of money. D) increases aggregate demand. E) makes the aggregate demand curve steeper. Answer: C Topic: Buying power of money Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 65) When the price level rises, the real interest rate ________ and the quantity of real GDP demanded ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; does not change Answer: B Topic: Real interest rate Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking 66) A change in any of the following factors EXCEPT ________ shifts the aggregate demand curve. A) expectations about the future B) the money wage rate C) monetary and fiscal policy D) foreign income E) the foreign exchange rate Answer: B Topic: Changes in aggregate demand Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills

67) Which of the following shifts the aggregate demand curve leftward? A) a decrease in government expenditure on goods and services B) an increase in the price level C) a tax cut D) an increase in foreign income E) a decrease in the price level Answer: A Topic: Changes in aggregate demand, expectations Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills 68) When investment increases, the ________ in aggregate demand is ________ the change in investment. A) increase; greater than B) increase; smaller than C) increase; the same as D) decrease; the same as E) decrease; greater than Answer: A Topic: Aggregate demand multiplier Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills 29.3 Explaining Economic Trends and Fluctuations 1) Macroeconomic equilibrium occurs when A) there is no inflation. B) real GDP is equal to potential GDP. C) the aggregate quantity demanded is equal to the aggregate quantity supplied. D) the economy is fully employed. E) the price level equals the potential price level. Answer: C Topic: Macroeconomic equilibrium Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

2) A macroeconomic equilibrium occurs when the A) quantity of real GDP demanded is greater than the quantity of real GDP supplied. B) quantity of real GDP demanded is less than the quantity of real GDP supplied. C) quantity of real GDP demanded equals the quantity of real GDP supplied even if they are not equal to potential GDP. D) quantity of real GDP demanded equals the quantity of real GDP supplied and both equal potential GDP. E) None of the above answers is correct. Answer: C Topic: Macroeconomic equilibrium Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 3) If the economy is at macroeconomic equilibrium, then real GDP A) must equal potential GDP. B) must be less than potential GDP. C) must be great than potential GDP. D) might be equal to, greater than, or less than potential GDP. E) cannot be compared to potential GDP. Answer: D Topic: Macroeconomic equilibrium Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 4) According to the AS-AD model A) the aggregate quantity supplied is typically greater than the aggregate quantity demanded, thereby leading to unemployment. B) the equilibrium is where the AS curve crosses the AD curve, but the amount of real GDP at this point is not always equal to potential GDP. C) the aggregate quantity demanded is typically greater than the aggregate quantity supplied, thereby leading to inflation. D) the AS curve is always equal to potential GDP. E) changes in the amount of potential GDP is the only factor that shifts both the aggregate supply curve and the aggregate demand curve. Answer: B Topic: Macroeconomic equilibrium Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

5) In its macroeconomic equilibrium, the economy can be producing at i. below full employment. ii. full employment. iii. above full employment. A) i only B) ii only C) iii only D) i or ii E) i, ii, or iii Answer: E Topic: Macroeconomic equilibrium Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 6) When the quantity of real GDP demanded exceeds the quantity of real GDP supplied, firms A) increase production and prices. B) decrease production and prices. C) increase production and lower prices. D) decrease production and increase prices. E) do not change production because aggregate demand and potential GDP will adjust. Answer: A Topic: Macroeconomic equilibrium Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 7) If the quantity of real GDP demanded is less than the quantity of real GDP supplied, then A) the economy must be producing at potential GDP. B) the price level falls and firms decrease production. C) the price level falls and firms increase production. D) the price level rises to restore the macroeconomic equilibrium. E) aggregate demand changes to restore the equilibrium. Answer: B Topic: Macroeconomic equilibrium Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

8) If the quantity of real GDP demanded is greater than the quantity of real GDP supplied, then A) the economy must be producing at potential GDP. B) the price level falls and firms decrease production. C) the price level rises and firms increase production. D) the price level falls to restore the macroeconomic equilibrium. E) aggregate demand changes to restore equilibrium. Answer: C Topic: Macroeconomic equilibrium Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 9) If real GDP is greater than potential GDP, then to restore equilibrium, ________ and the price level ________. A) the aggregate demand curve shifts leftward; rises B) the aggregate demand curve shifts rightward; falls C) the aggregate supply curve shifts leftward; rises D) the aggregate supply curve shifts rightward; falls E) potential GDP increases; falls Answer: C Topic: Inflationary gap Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 10) If the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP more than potential GDP, there is A) a recessionary gap. B) an inflationary gap. C) a falling price level. D) a rising real GDP. E) a below-full employment equilibrium. Answer: B Topic: Inflationary gap Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

11) During an inflationary gap A) real GDP is less than potential GDP. B) the aggregate demand curve and the aggregate supply curve intersect at potential GDP. C) the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP that exceeds potential GDP. D) the aggregate demand curve and the aggregate supply curve do not intersect. E) the price level will fall to restore the long-run equilibrium. Answer: C Topic: Inflationary gap Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 12) Starting from a situation of full employment, an increase in aggregate demand creates ________ and ________ the price level. A) an inflationary gap; raises B) a recessionary gap; lowers C) a recessionary gap; raises D) an inflationary gap; lowers E) a recessionary gap; does not change Answer: A Topic: Inflationary gap Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 13) If real GDP is less than potential GDP, then the money wage rate ________, and aggregate supply ________ so that the price level ________. A) rises; decreases; rises B) falls; increases; falls C) rises; increases; falls D) falls; decreases; rises E) does not change; increases; falls Answer: B Topic: Recessionary gap Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

14) If real GDP is less than potential GDP, then the ________ and the price level ________. A) aggregate demand curve shifts leftward; rises B) aggregate demand curve shifts rightward; falls C) aggregate supply curve shifts leftward; rises D) aggregate supply curve shifts rightward; falls E) amount of potential GDP increases; falls Answer: D Topic: Recessionary gap Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 15) A recessionary gap occurs when ________ so that real GDP is ________ potential GDP. A) aggregate supply increases; less than B) aggregate supply decreases; less than C) aggregate demand increases; greater than D) aggregate demand decreases; less than E) potential GDP decreases; greater than Answer: D Topic: Recessionary gap Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 16) If the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP less than potential GDP, there is A) a recessionary gap. B) an inflationary gap. C) a rising price level. D) a falling real GDP. E) an above full-employment equilibrium. Answer: A Topic: Recessionary gap Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

17) If the equilibrium price level is 135 but the actual price level is 150, then A) firms increase their production because they are able to sell their output at a higher than expected price. B) the quantity of real GDP demanded is less than the quantity of real GDP supplied. C) the quantity of real GDP demanded is greater than the quantity of real GDP supplied. D) aggregate demand will increase to restore equilibrium. E) aggregate demand will decrease to restore equilibrium. Answer: B Topic: Macroeconomic equilibrium Skill: Level 4: Applying models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 18) If the equilibrium price level is 135 but the actual price level is 120, then A) firms decrease their production because they cannot sell the output they produce. B) the quantity of real GDP demanded is less than the quantity of real GDP supplied. C) the quantity of real GDP demanded is greater than the quantity of real GDP supplied. D) aggregate demand will increase to restore equilibrium. E) aggregate demand will decrease to restore equilibrium. Answer: C Topic: Macroeconomic equilibrium Skill: Level 4: Applying models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 19) At a peak in the business cycle, the macroeconomic equilibrium is ________ the level of potential real GDP. A) greater than B) equal to C) less than D) falling below E) None of the above answers is always correct because the relationship depends on whether the previous phase of the business cycle had been a recession or an expansion. Answer: A Topic: Macroeconomic equilibrium Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

20) At a trough in the business cycle, the macroeconomic equilibrium is ________ the level of potential real GDP. A) greater than B) rising above C) equal to D) less than E) None of the above answers is always correct because the relationship depends on whether the previous phase of the business cycle had been a recession or an expansion. Answer: D Topic: Macroeconomic equilibrium Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

The table gives the aggregate demand and aggregate supply schedules for a nation. 21) Based on the table above, equilibrium real GDP is A) $10 trillion. B) $9 trillion. C) $8 trillion. D) $7 trillion. E) $6 trillion. Answer: D Topic: Equilibrium AD and AS Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills

22) Based on the table above, the equilibrium price level is A) 130. B) 120. C) 110. D) 100. E) 90. Answer: C Topic: Equilibrium AD and AS Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 23) Refer to the table above. If the price level is 120, then the aggregate quantity demanded is ________ than the aggregate quantity supplied and the price level ________. A) greater; rises B) greater; falls C) less; rises D) less; falls E) less; might fall, rise or not change depending on whether real GDP is more than, less than, or equal to potential GDP. Answer: D Topic: Equilibrium AD and AS Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 24) If the price level is 90, then the price level will ________ because ________. A) either fall or rise; markets are unstable and macroeconomic equilibrium is difficult to predict B) fall; the aggregate quantity demanded is less than the aggregate quantity supplied C) rise; the aggregate quantity demanded is less than the aggregate quantity supplied D) rise; the aggregate quantity demanded is greater than the aggregate quantity supplied E) fall; the aggregate quantity demanded is greater than the aggregate quantity supplied Answer: D Topic: Equilibrium AD and AS Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills

25) The table above gives data for the nation of Pearl, a small island in the South Pacific. The economy is at full employment when real GDP is A) $25 billion. B) $28 billion. C) $22 billion. D) $31 billion. E) $34 billion. Answer: A Topic: Equilibrium AD and AS Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 26) The table above gives data for the nation of Pearl, a small island in the South Pacific. When the economy is at full employment the price level is A) 130. B) 120. C) 110. D) 140. E) 150. Answer: B Topic: Equilibrium AD and AS Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills

27) The table above gives data for the nation of Pearl, a small island in the South Pacific. If a supply shock decreases the quantity of real GDP supplied by $6 billion at each price level, the new equilibrium real GDP is A) $16 billion. B) $19 billion. C) $22 billion. D) $23 billion. E) $17 billion. Answer: C Topic: Equilibrium AD and AS Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 28) The table above gives data for the nation of Pearl, a small island in the South Pacific. If aggregate demand increases so that the quantity of real GDP demanded is $6 billion more at each price level, the new equilibrium real GDP is A) $34 billion. B) $31 billion. C) $28 billion. D) $25 billion. E) $23 billion. Answer: C Topic: Equilibrium AD and AS Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 29) The table above gives data for the nation of Pearl, a small island in the South Pacific. If aggregate demand increases so that the quantity of real GDP demanded is $6 billion more at each price level, the new equilibrium real GDP is ________, and the nation is now experiencing a(n) ________. A) $22 billion; inflationary gap B) $22 billion; recessionary gap C) $28 billion; inflationary gap D) $28 billion; recessionary gap E) $25 billion; equilibrium Answer: C Topic: Equilibrium AD and AS Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills

30) According to the figure above, which point or points correspond to full employment? A) only point a B) only point b C) only point c D) points a and b E) points a, b, and c Answer: D Topic: Adjustment to full employment Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 31) In the figure above, the short-run equilibrium occurs at A) point a only. B) point b only. C) either point a or point b but more information is needed to determine which. D) point c only. E) None of the above answers is necessarily correct. Answer: D Topic: Adjustment to full employment Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills

32) In the figure above, the economy is at an equilibrium with real GDP of $20 trillion and a price level of 110. At this point there is A) an inflationary gap. B) a recessionary gap. C) price stability. D) a full-employment equilibrium. E) an above full-employment equilibrium. Answer: B Topic: Recessionary gap Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 33) In the figure above, the economy is at an equilibrium with real GDP of $20 trillion and a price level of 110. As the economy moves toward its ultimate equilibrium, the ________ curve shifts ________. A) aggregate supply; leftward B) aggregate supply; rightward C) aggregate demand; rightward D) aggregate demand; leftward E) potential GDP; leftward Answer: B Topic: Adjustment to full employment Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills

34) In the figure above, the economy is at an equilibrium with real GDP of $20 trillion and a price level of 110. As the economy moves toward its ultimate equilibrium, the ________ curve shifts ________ because ________. A) aggregate supply; leftward; the money wage rate rises B) aggregate supply; rightward; the money wage rate falls C) aggregate demand; rightward; the money wage rate falls D) aggregate demand; leftward; the money wage rate rises E) potential GDP; leftward; the money wage rate falls Answer: B Topic: Adjustment to full employment Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 35) An economy experiences a recessionary gap. As the economy adjusts to full employment, the money wage rate A) falls, shifting the aggregate supply curve rightward. B) rises, shifting the aggregate supply curve leftward. C) rises, shifting the aggregate demand curve rightward. D) falls, shifting the aggregate demand curve leftward. E) falls, increasing potential GDP. Answer: A Topic: Adjustment to full employment Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 36) If the economy is above full employment, there is ________ gap, and as the economy adjusts toward full employment, the price level ________. A) an inflationary; rises B) an inflationary; falls C) a recessionary; rises D) a recessionary; falls E) an inflationary; does not change Answer: A Topic: Adjustment to full employment Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

37) Which of the following can start an inflation? A) an increase in aggregate demand B) an increase in aggregate supply C) a decrease in aggregate supply D) Both answers A and C are correct. E) Answers A, B, and C are correct. Answer: D Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 38) Inflation can be started by A) a decrease in aggregate supply or a decrease in aggregate demand. B) a decrease in aggregate supply or an increase in aggregate demand. C) an increase in aggregate supply or an increase in aggregate demand. D) an increase in aggregate supply or a decrease in aggregate demand. E) an increase in aggregate demand or an increase in potential GDP. Answer: B Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 39) Demand-pull inflation starts with A) an increase in aggregate demand. B) a decrease in aggregate demand. C) an increase in potential GDP. D) an increase in aggregate supply. E) a decrease in aggregate supply. Answer: A Topic: Demand-pull inflation, start Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

40) Demand-pull inflation starts with a shift of the A) AS curve rightward. B) AD curve rightward. C) AS curve leftward. D) AD curve leftward. E) potential GDP line leftward. Answer: B Topic: Demand-pull inflation, start Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 41) Demand pull inflation can be started by A) a decrease in the quantity of money. B) an increase in government expenditure. C) a decrease in net exports. D) an increase in the price of oil. E) a decrease in the money price of resources. Answer: B Topic: Demand-pull inflation, start Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 42) Which of the following factors could start a demand-pull inflation? A) an increase in tax rates B) a decrease in government expenditure C) a decrease in the money wage rate D) an increase in the money wage rate E) an increase in the quantity of money Answer: E Topic: Demand-pull inflation, start Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

43) Increases in the quantity of money can start a ________ inflation and an increase in government expenditure can start a ________ inflation. A) demand-pull; demand-pull B) demand-pull; cost-push C) cost-push; cost-push D) cost-push; demand-pull E) None of the above is correct because increases in the quantity of money are necessary to continue an inflation but cannot start an inflation. Answer: A Topic: Demand-pull inflation, start Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 44) Initially, demand-pull inflation will A) increase the price level and not change real GDP. B) increase both the price level and increase real GDP. C) increase the price level and decrease real GDP. D) shift the aggregate supply curve rightward. E) decrease potential GDP. Answer: B Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 45) A demand-pull inflation initially is characterized by A) increasing real output and a labor shortage. B) increasing real output and a labor surplus. C) decreasing real output and a labor shortage. D) decreasing real output and a labor surplus. E) no change in real output and a labor shortage. Answer: A Topic: Demand-pull inflation Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

46) If demand pull inflation occurs when the economy is already at potential GDP, then following the initial increase in aggregate demand, the A) AS curve shifts rightward. B) potential GDP line shifts rightward. C) AS curve shifts leftward. D) potential GDP line shifts leftward. E) None of the above is correct because demand-pull inflation shifts only the aggregate demand curve. Answer: C Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 47) Compared to the initial equilibrium, an initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in new long-run equilibrium with A) a higher price level but the same real GDP. B) a higher price level and an increased level of real GDP. C) the same price level and a lower level of real GDP. D) the same price level and the same real GDP. E) None of the above answers is correct. Answer: A Topic: Demand-pull inflation Skill: Level 4: Applying models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 48) A demand-pull inflation consists of ________ shifts in the AD curve and ________ shifts in the AS curve. A) rightward; rightward B) rightward; leftward C) right; no D) leftward; rightward E) leftward; leftward Answer: B Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

49) In a persisting demand-pull inflation A) aggregate supply decreases and aggregate demand increases. B) aggregate demand decreases and aggregate supply decreases. C) aggregate demand increases and potential GDP decreases. D) aggregate supply increases and aggregate demand increases. E) None of the above answers is correct. Answer: A Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 50) Demand-pull inflation results from continually increasing the quantity of money, which leads to continually A) decreasing potential GDP. B) increasing potential GDP. C) increasing aggregate supply. D) decreasing aggregate demand. E) increasing aggregate demand. Answer: E Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 51) Demand-pull inflation persists because of A) continuing increases in government expenditures. B) continuing increases in the quantity of money. C) continuing increases in the real wage rate. D) continuing decreases in the money wage rate. E) continuing increases in aggregate supply. Answer: B Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

52) For a demand-pull inflation to persist requires persistent increases in A) tax rates. B) the real wage rate. C) real GDP. D) the quantity of money. E) government expenditures. Answer: D Topic: Demand-pull inflation Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 53) During a demand-pull inflation, if the Fed tries to maintain a level of real GDP above potential GDP, the AD curve will ________ and the AS curve will ________. A) shift rightward once; shift rightward continuously B) shift rightward continuously; shift rightward continuously C) shift rightward continuously; not shift D) not shift; shift rightward continuously E) shift rightward continuously; shift leftward continuously Answer: E Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 54) In a demand-pull inflation, money wage rates rise because A) a decrease in aggregate demand creates a labor shortage. B) an increase in aggregate demand creates a labor surplus. C) an increase in aggregate demand creates a labor shortage. D) a decrease in aggregate demand creates a labor surplus. E) an increase in aggregate supply creates a labor shortage. Answer: C Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

55) To prevent demand-pull inflation A) firms must refuse to increase the money wage rate. B) firms must refuse to increase the real wage rate. C) the Fed must not let the quantity of money persistently rise. D) the natural unemployment rate must increase. E) real GDP must increase. Answer: C Topic: Demand-pull inflation Skill: Level 4: Applying models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 56) In a demand-pull inflation, if the Fed stops expanding the quantity of money A) a cost-push inflation will occur. B) government expenditure will cause the demand-pull inflation to continue. C) a deflation will occur. D) the demand-pull inflation ends. E) None of the above answers is correct. Answer: D Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 57) The main sources of cost-push inflation are increases in A) the money wage rate and the price of raw materials. B) the real wage rate and the price of raw materials. C) the money wage rate and aggregate demand. D) the quantity of money and the real wage rate. E) government expenditure and the quantity of money. Answer: A Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

58) Cost-push inflation can be started by A) a decrease in the money wage rate. B) an increase in the money prices of raw materials. C) an increase in the quantity of money. D) an increase in government expenditure on goods and services. E) a decrease in government expenditure on goods and services. Answer: B Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 59) Cost-push inflation can start with A) a decrease in investment. B) an increase in oil prices. C) an increase in government expenditure. D) a decrease in government expenditure. E) a decrease in the quantity of money. Answer: B Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 60) Cost-push inflation might initially result from A) an increase in the quantity of money. B) a decrease in the quantity of money. C) the use of new technology. D) an increase in government expenditure. E) an increase in the cost of resources. Answer: E Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

61) Cost-push inflation starts with A) an increase in aggregate demand. B) a decrease in aggregate demand. C) an increase in aggregate supply. D) a decrease in aggregate supply. E) an increase in potential GDP. Answer: D Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 62) When cost-push inflation starts, real GDP ________ and the unemployment rate ________. A) decreases; falls B) does not change; falls C) decreases; rises D) does not change; does not change E) increases; falls Answer: C Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 63) When cost-push inflation starts, real GDP ________ and the price level ________. A) decreases; falls B) does not change; falls C) decreases; rises D) does not change; does not change E) increases; falls Answer: C Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

64) At the start of a cost-push inflation A) the price level remains constant and real GDP decreases. B) the price level and real GDP both increase. C) the price level remains constant and real GDP increases. D) the price level rises and real GDP decreases. E) the price level rises and real GDP does not change. Answer: D Topic: Cost-push inflation Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 65) Suppose that the money prices of raw materials increase so that short-run aggregate supply decreases. If the Federal Reserve does not respond, the higher money price of raw materials will i. repeatedly shift the aggregate demand curve rightward and raise the price level. ii. shift the aggregate demand curve rightward and the aggregate supply curve leftward, raising prices. iii. result initially in lower employment and a higher price level. A) i only B) i and ii C) ii and iii D) i and iii E) iii only Answer: E Topic: Cost-push inflation Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 66) By itself, an increase in the price of oil shifts the A) aggregate supply curve leftward and does not shift the aggregate demand curve. B) aggregate supply curve rightward and does not shift the aggregate demand curve. C) aggregate demand curve leftward and does not shift the aggregate supply curve. D) aggregate demand curve rightward and does not shift the aggregate supply curve. E) aggregate demand curve rightward and shifts the potential GDP line rightward. Answer: A Topic: Cost-push inflation Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills

67) The AS curve shifts leftward if A) good weather increases agricultural harvests. B) OPEC reduces world oil prices. C) tax cuts stimulate labor supply. D) the money wage rate increases. E) government expenditure increases. Answer: D Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 68) If oil prices increase, then in the short run, real GDP will ________ and the price level will ________. A) increase; rise B) increase; fall C) decrease; rise D) decrease; fall E) not change; rise Answer: C Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 69) In the short-run, an increase in the price of raw materials will ________ the price level and ________ real GDP. A) raise; increase B) raise; decrease C) raise; not change D) lower; increase E) lower; decrease Answer: B Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

70) By itself, a supply shock, such as a hike in the price of oil, can A) cause real GDP to permanently decrease year after year. B) not result in persisting inflation. C) be inflationary as long as there is no policy response. D) result in persisting inflation if aggregate supply persistently increases. E) result in a persisting wage-price spiral. Answer: B Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 71) A combination of recession and inflation is called A) an expansion. B) stagflation. C) a business cycle. D) depression. E) a recession. Answer: B Topic: Stagflation Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 72) Stagflation is defined as a period when real GDP ________ and the price level ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) is constant; rises rapidly Answer: C Topic: Stagflation Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

73) A combination of declining real GDP and rising price level is referred to as A) an expansion. B) a trough. C) stagflation. D) deflation. E) a depression. Answer: C Topic: Stagflation Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 74) Reasons that the recession of 2008-2009 did not become a depression include i. The Fed bailed out troubled financial institutions. ii. The government aggressively balanced its budget. iii. The government increased its expenditures, which increased aggregate demand. A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: D Topic: 2008-2009 recession Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 75) Oil price hikes A) increase aggregate supply. B) decrease aggregate supply. C) increase aggregate demand. D) decrease aggregate demand. E) increase potential GDP. Answer: B Topic: Eye on the past, oil price cycles in U.S. & global economies Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

76) When OPEC nearly tripled the price of oil in late 1973 A) U.S. real GDP increased as profits by oil producers increased. B) U.S. real GDP did not change although the price level rose. C) the U.S. price level fell because production became too expensive. D) the U.S. price level rose and real GDP decreased. E) both U.S. real GDP and the price level increased. Answer: D Topic: Eye on the past, oil price cycles in U.S. & global economies Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 77) At the beginning of 2022, a country is at full-employment. During 2022, oil-producing countries decrease oil production leading to much higher oil prices. The higher oil prices can A) increase aggregate demand and lead to an expansion. B) increase aggregate supply and lead to an expansion. C) decrease aggregate demand and lead to a stagflation. D) decrease aggregate supply and lead to a stagflation. E) decrease aggregate demand and lead to a higher price level. Answer: D Topic: Eye on the past, oil price cycles in U.S. & global economies Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 78) Potential GDP increased from $5 trillion to $18.5 trillion between 1970 and 2018 resulting in economic growth. Also, during this time ________ occurred because ________. A) inflation; aggregate demand decreased by more than potential GDP B) stagflation; aggregate demand increased by more than potential GDP C) deflation; aggregate demand increased by more than potential GDP D) inflation; aggregate demand increased by more than potential GDP E) inflation; aggregate demand increased by less than potential GDP Answer: D Topic: Eye on the U.S. economy Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills

79) In reality, AD rarely ________; however, the economy performs as though it does when it ________. A) decreases; fluctuates with potential GDP B) increases; decreases at a pace much slower than potential GDP C) stagnates; increases at a pace much faster than potential GDP D) decreases; increases at a pace much slower than potential GDP E) decreases; increases at a pace much faster than potential GDP Answer: D Topic: Eye on the U.S. economy Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 80) The 2008-2009 recession must have been a result of ________ because otherwise the combination of the ________ cannot be explained. A) a decrease in AD and an increase in AS; fall in the price level and the decrease in real GDP B) a decrease in AD and an increase in AS; rise in the price level and the decrease in real GDP C) an increase in AD and AS; rise in the price level and the decrease in real GDP D) a decrease in AD and AS; rise in the price level and the decrease in real GDP E) a decrease in AD and AS; decrease in the price level and the decrease in real GDP Answer: D Topic: Eye on the U.S. economy Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 81) If the quantity of real GDP supplied equals the quantity of real GDP demanded, then A) nominal GDP must equal real GDP. B) real GDP must equal potential GDP. C) real GDP must be greater than potential GDP. D) real GDP might be greater than, equal to, or less than potential GDP. E) real GDP must be less than potential GDP. Answer: D Topic: Macroeconomic equilibrium Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills

82) An increase in investment ________ aggregate demand, the aggregate demand curve shifts ________ and the economy is in the ________ phase of the business cycle. A) decreases; rightward; expansion B) increases; rightward; expansion C) decreases; leftward; recession D) increases; rightward; recession E) increases; leftward; recession Answer: B Topic: Aggregate demand fluctuations Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 83) If the price of oil rises, the A) AD curve shifts rightward, real GDP increases, and the price level rises. B) AS curve shifts leftward, the price level rises, and real GDP decreases. C) AD curve and the AS curve shift leftward, real GDP decreases, and the price level rises. D) AD curve and the AS curve shift rightward, the price level rises, and real GDP decreases. E) AS curve shifts leftward, the price level rises, and real GDP increases. Answer: B Topic: Aggregate supply fluctuations Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 84) Stagflation is a combination of ________ real GDP and a ________ price level. A) increasing; rising B) increasing; falling C) decreasing; rising D) decreasing; falling E) no change in; rising Answer: C Topic: Stagflation Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

85) An inflationary gap is created when A) real GDP is greater than potential GDP. B) real GDP equal to potential GDP. C) the inflation rate is less than potential inflation. D) the price level exceeds the equilibrium price level. E) potential GDP is greater than real GDP. Answer: A Topic: Inflationary gap Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 86) The economy is at full employment. If aggregate demand increases A) an inflationary gap is created and the AS curve shifts leftward as the money wage rate rises. B) an inflationary gap is created and the AD curve shifts leftward. C) an inflationary gap is created and potential GDP increases to close the gap. D) a recessionary gap is created and the AS curve shifts leftward as the money wage rate falls. E) a recessionary gap is created and the AS curve shifts leftward as the money wage rate rises. Answer: A Topic: Adjustment to full employment Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills

29.4 Chapter Figures

The figure above shows the aggregate supply curve and potential GDP. 1) Based on the figure above, the aggregate supply curve shifts rightward and the potential GDP line does not change when A) the money wage rate rises. B) the price level rises. C) the money wage rate falls. D) the price level falls. E) both the price level and money wage rate rise by the same proportion. Answer: C Topic: Shifts in the aggregate supply curve Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 2) If potential GDP increases, then in the figure above the potential GDP line ________, and the aggregate supply curve ________. A) shifts rightward; does not shift B) does not shift; shifts rightward C) shifts rightward; shifts rightward D) shifts rightward; shifts leftward E) does not shift; does not shift Answer: C Topic: Shifts in the aggregate supply curve Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 85 Copyright © 2023 Pearson Education Ltd.

3) If the money wage rate and the price level both rise by the same proportion, then in the figure above the potential GDP line ________, and the aggregate supply curve ________. A) shifts rightward; does not shift B) does not shift; shifts rightward C) shifts rightward; shifts rightward D) shifts rightward; shifts leftward E) does not shift; shifts leftward Answer: E Topic: Shifts in the aggregate supply curve Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills

The figure above shows the aggregate demand curve. 4) The aggregate demand curve in the figure above shifts rightward if A) potential GDP increases. B) the money wage rate falls. C) taxes are hiked. D) government expenditure decreases. E) the expected future profit increases so that investment increases. Answer: E Topic: Shifts in the aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills

5) The aggregate demand curve in the figure above shifts rightward if A) potential GDP increases. B) the money wage rate falls. C) taxes are cut. D) government expenditure decreases. E) the Federal Reserve raises the interest rate. Answer: C Topic: Shifts in the aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 6) The aggregate demand curve in the figure above shifts rightward if A) potential GDP increases. B) the money wage rate falls. C) taxes are raised. D) government expenditure increases. E) the Federal Reserve raises the interest rate. Answer: D Topic: Shifts in the aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 7) The aggregate demand curve in the figure above shifts rightward if A) potential GDP increases. B) the money wage rate falls. C) taxes are raised. D) government expenditure decreases. E) the Federal Reserve lowers the interest rate. Answer: E Topic: Shifts in the aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills

The figure above shows aggregate demand curves. 8) Based on the figure above, the aggregate demand curve will shift from AD0 to AD1 when A) potential GDP increases. B) the price level falls. C) the price level rises. D) government expenditure decreases. E) the Federal Reserve lowers the interest rate. Answer: E Topic: Shifts in the aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 9) Based on the figure above, the aggregate demand curve will shift from AD0 to AD2 when A) potential GDP increases. B) the price level falls. C) the price level rises. D) government expenditure decreases. E) the Federal Reserve lowers the interest rate. Answer: D Topic: Shifts in the aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills

10) Based on the figure above, the aggregate demand curve will shift from AD0 to AD2 when A) potential GDP increases. B) the price level falls. C) taxes are lowered. D) government expenditure increases. E) the Federal Reserve raises the interest rate. Answer: E Topic: Shifts in the aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 11) Based on the figure above, the aggregate demand curve will shift from AD0 to AD2 when A) potential GDP increases. B) the price level falls. C) the price level rises. D) government expenditure decreases. E) taxes are lowered. Answer: E Topic: Shifts in the aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 29.5 Integrative Questions 1) An increase in the price level ________ the aggregate quantity supplied and ________ the aggregate quantity demanded. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; decreases Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

2) The ________, the ________ is the quantity of real GDP supplied and the ________ is the quantity of real GDP demanded. A) lower the price level; greater; smaller B) higher the price level; greater; smaller C) greater the demand for labor; smaller; greater D) lower the supply of labor; greater; smaller E) lower aggregate demand; greater; smaller Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 3) The aggregate supply curve shifts A) rightward if potential GDP decreases. B) rightward if the money wage rate falls. C) rightward if the money wage rate rises. D) leftward if potential GDP increases. E) leftward if the aggregate demand curve shifts leftward. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 4) During the late 1960s, U.S. defense spending increased as the United States fought in Vietnam. This increase in government expenditure on goods and services most likely created A) a recessionary gap. B) an inflationary gap. C) a decrease in aggregate supply. D) a decrease in aggregate demand because consumers' expenditures decreased. E) an increase in potential GDP. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

5) A recession in the rest of the world means U.S. A) aggregate supply decreases. B) aggregate demand decreases. C) potential GDP decreases. D) exports increase. E) potential GDP increases. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 6) ________ increases potential GDP. A) A decrease in the money wage rate B) A recessionary gap C) A recession D) An increase in the amount of human capital E) An increase in aggregate demand Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 7) Unemployment increases when A) an inflationary gap is created. B) potential GDP increases. C) the government decreases its expenditure on goods and services. D) aggregate demand increases. E) aggregate supply increases. Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking

8) In the late 1920s, the U.S. economy experienced a decrease in investment, which perhaps triggered the Great Depression. The decrease in investment A) increased aggregate supply. B) decreased aggregate supply. C) increased aggregate demand. D) decreased aggregate demand. E) increased potential GDP. Answer: D Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 9) When the macroeconomic equilibrium is such that real GDP exceeds potential real GDP, the economy is suffering from ________, and the government policy to eliminate this gap will ________ real GDP and ________ the price level. A) an inflationary gap; increase; increase B) a recessionary gap; decrease; decrease C) an inflationary gap; increase; decrease D) a recessionary gap; increase; decrease E) an inflationary gap; decrease; decrease Answer: E Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 10) When the macroeconomic equilibrium is such that real GDP is less than potential real GDP, the economy is suffering from ________, and the government policy to eliminate this gap will ________ real GDP and ________ the price level. A) a recessionary gap; decrease; decrease B) an inflationary gap; increase; decrease C) a recessionary gap; increase; increase D) an inflationary gap; decrease; increase E) a recessionary gap; decrease; increase Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills

11) A decrease in investment leads to ________ in aggregate demand and ________ in real GDP. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease E) no change; a decrease Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 12) A deep recession hits the world economy, and real GDP in the rest of the world decreases. In the United States A) aggregate supply and aggregate demand both increase, and the price level rises. B) aggregate supply decreases while aggregate demand does not change, and the price level rises. C) aggregate demand decreases while aggregate supply does not change, and the price level falls. D) aggregate supply increases and aggregate demand decreases, so the effect on the price level is uncertain. E) aggregate supply and aggregate demand both decrease, and the price level rises. Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 13) If the AD curve shifts rightward, then A) both the price level and real GDP will increase. B) the price level will increase, but no change will occur in real GDP. C) the price level will not change, but real GDP will increase. D) both the price level and real GDP will decrease. E) potential GDP increases. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

14) An economy is at a full-employment equilibrium, and then the aggregate demand curve shifts leftward. As a result, the price level ________ and real GDP ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) falls; does not change Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 15) An increase in government expenditure on goods and services ________ aggregate demand, shifting the aggregate demand curve ________ and potentially bringing the ________ phase of the business cycle. A) decreases; rightward; expansion B) increases; rightward; recession C) decreases; leftward; recession D) increases; rightward; expansion E) increases; leftward; recession Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 16) The the government increases the level of government expenditure. If there is no change in the aggregate supply curve, then aggregate demand will ________, real GDP will ________, and the price level will ________. A) increase; remain the same; increase B) remain the same; increase; increase C) increase; increase; increase D) decrease; increase; increase E) decrease; remain the same; decrease Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

17) If the AD curve shifts rightward while the AS curve and potential GDP don't change, then A) the economy will move from a peak into recession. B) the expansion phase of the business cycle occurs. C) there will be no change in real GDP, so the economy is at the peak of the cycle. D) there will be no change in real GDP, so the economy is at the trough of the cycle. E) real GDP does not change. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 18) The global economy enters a recession, thereby decreasing the level of U.S. exports. If the aggregate supply curve does not shift, then aggregate demand will ________, real GDP will ________, and the price level will ________. A) increase; remain the same; increase B) remain the same; increase; increase C) increase; increase; remain the same D) decrease; increase; increase E) decrease; decrease; decrease Answer: E Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 19) The government passes a law which doubles the wages of all workers. Aggregate supply will ________, and real GDP will ________, and the price level will ________. A) increase; remain the same; increase. B) remain the same; increase; increase. C) increase; increase; remain the same. D) decrease; increase; increase. E) decrease; decrease; increase. Answer: E Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

20) A technological advance ________ aggregate supply, shifting the aggregate supply curve ________ and potentially bringing the ________ phase of the business cycle. A) decreases; rightward; expansion B) decreases; leftward recession C) increases; rightward; expansion D) increases; rightward; recession E) increases; leftward; expansion Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 21) An increase in the price of oil ________ aggregate supply, shifting the aggregate supply curve ________ and potentially bringing the ________ phase of the business cycle. A) decreases; rightward; expansion B) increases; rightward; recession C) increases; rightward; expansion D) decreases; leftward; recession E) decreases; rightward; recession Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 22) A crisis in the Middle East drastically raises the price of petroleum. If the aggregate demand curve does not shift, then aggregate supply will ________, real GDP will ________, and the price level will ________. A) increase; remain the same; increase B) decrease; decrease; increase C) increase; increase; increase D) remain the same; increase; increase E) decrease; remain the same; decrease Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

23) Which of the following could result in a recession? A) a rise in the price of oil B) an increase in investment C) a tax cut D) an increase in the quantity of money E) an increase in government expenditures on goods and services Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 24) ________ could result in a recession because it would ________. A) A rise in the price of oil; shift the AS curve to the left B) An increase in investment; shift the AD curve to the right C) A tax cut; shift the AS curve to the left D) An increase in the quantity of money; shift the AS curve to the right E) An increase in government expenditures on goods and services; shift the AD curve to the right Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 25) Real GDP definitely increases if A) both the AD curve and the AS curve shift rightward. B) both the AD curve and AS curve shift leftward. C) the AD curve shifts leftward and the AS curve shifts rightward. D) the AS curve shifts leftward and the AD curve does not shift. E) potential GDP decreases so that real GDP exceeds potential GDP. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

29.6 Essay: Aggregate Supply 1) Name the four factors of production that determine the quantity of real GDP supplied. Which one fluctuates the most over the course of the business cycle? Answer: The factors are the quantity of labor employed, the quantities of capital and human capital and the technologies they employ, the quantities of land and natural resources, and the amount of entrepreneurial talent available. Over the course of a business cycle, the quantity of labor employed fluctuates the most. Topic: Aggregate supply Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Written and oral communication 2) What factor changes the quantity of real GDP supplied and results in a movement along the AS curve? Answer: Changes in the price level change the quantity of real GDP supplied and result in a movement along the AS curve. Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 3) Does a rise in the price level bring a movement along the aggregate supply curve or does it shift the aggregate supply curve? Answer: A rise in the price level results in an upward movement along the aggregate supply curve. It does not shift the aggregate supply curve. Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 4) If the money wage rate is constant and the price level increases, what happens to the real wage rate, firms' profits, and the aggregate quantity supplied? Answer: The real wage rate falls. Because the price level has increased and money wage rates are constant while real wage rates are lower, firms' profits increase. As a result, the aggregate quantity of goods and services supplied increases. Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 29.1 Status: Old AACSB: Written and oral communication

5) List three changes that lead to a shift of the aggregate supply curve. Discuss why each change shifts the aggregate supply curve and in which direction the curve shifts. Answer: A change in potential GDP, a change in the money wage rate, and a change in the money prices of other resources shift the aggregate supply curve. If potential GDP increases (decreases) or the money wage rate decreases (increases) or the money prices of other resources decrease (increase), aggregate supply increases (decreases) and the AS curve shifts rightward (leftward). Topic: Changes in aggregate supply Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Written and oral communication 6) How does a fall in the money wage rate affect the aggregate supply curve? Answer: A fall in the money wage rate lowers firms' costs and shifts the aggregate supply curve rightward. Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking 7) Give examples of factors that decrease aggregate supply. Which way does the AS curve shift? Answer: Aggregate supply decreases if potential GDP decreases. A rise in the money wage rate or the money price of other resources such as the price of oil raises firms' costs and decreases aggregate supply. The AS curve shifts leftward. Topic: Aggregate supply curve Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Written and oral communication 8) What is the effect on aggregate supply and potential GDP of an increase in the money wage rate? Answer: An increase in the money wage rate decreases aggregate supply and shifts the aggregate supply curve leftward. It has no effect on potential GDP. Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Reflective thinking

9) "Moving along the AS curve, the real wage rate is constant while moving along the potential GDP line, the real wage rate changes." Explain whether the previous statement is correct or incorrect. Answer: The statement is incorrect. It reverses the situation. Moving along the AS curve, the money wage rate is constant and so the real wage rate changes. Moving along the potential GDP line, money wage rates have adjusted to the change in the price level and so the real wage rate is constant. Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 29.1 Status: Old AACSB: Written and oral communication

10) What can lead to the shift illustrated in the figure above? Answer: A decrease in the money wage rate or in the money prices of other resources, such as the price of oil, increase aggregate supply and shift the AS curve rightward while not changing potential GDP. Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 29.1 Status: Revised AACSB: Analytic skills

11) In the above figure, illustrate the effect on the AS curve from an increase in the money price of a key resource such as oil. Answer:

An increase in the money price of a key resource such as oil squeezes firms' profits and decreases aggregate supply. As illustrated in the figure above, the AS curve shifts leftward, in the figure from AS1 to AS2. Topic: Changes in aggregate supply, money prices of resources Skill: Level 3: Using models Section: Checkpoint 29.1 Status: Revised AACSB: Analytic skills 29.7 Essay: Aggregate Demand 1) What is the effect on the aggregate demand curve from an increase in the price level? In particular, does the aggregate demand curve shift leftward or rightward? Answer: When the price level increases, there is a movement along the aggregate demand curve. The quantity of real GDP demanded decreases in response to an increase in the price level. However, the aggregate demand curve does NOT shift. Topic: Aggregate demand curve Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Written and oral communication

2) How does an increase in the price level affect the aggregate quantity of goods and services demanded? Answer: An increase in the price level decreases the aggregate quantity of goods and services demanded for three reasons. First, it decreases the buying power of money. As a result, people decrease their demand for goods and services. Second, it raises the real interest rate. The real interest rate rises because an increase in the price level increases the demand for money, which raises the nominal interest rate, which, in the short run, raises the real interest rate. When the real interest rate rises, people and businesses delay plans for investment and purchases of big-ticket items. Finally, an increase in the price level makes domestically produced goods and services more expensive relative to foreign-produced goods and services. As a result, people and firms buy more foreign produced and fewer domestically produced goods and services, which decreases the quantity demanded of domestically produced goods and services. Topic: Aggregate demand curve Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Written and oral communication 3) Explain the difference between a movement along the aggregate demand curve and a shift of the aggregate demand curve. Answer: There is a movement along the aggregate demand curve if there is a change in the price level. If some factor that affects aggregate demand other than the price level changes, such as monetary or fiscal policy, income in the rest of the world, or expectations, there is a shift in the aggregate demand curve. Topic: Aggregate demand curve Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Written and oral communication 4) How does the aggregate demand curve reflect an increase in aggregate demand? Answer: An increase in aggregate demand means that the aggregate demand curve shifts rightward. Topic: Aggregate demand curve Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

5) State how each of the following affect the aggregate demand curve. a. The price level increases. b. Consumers expect higher inflation in the future. c. The exchange rate rises. d. Foreign income decreases. Answer: a. There is a movement upward along the aggregate demand curve. The aggregate demand curve does not shift. b. The aggregate demand curve shifts rightward. c. The aggregate demand curve shifts leftward. d. The aggregate demand curve shifts leftward. Topic: Changes in aggregate demand Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Analytic skills 6) Give examples of factors that decrease aggregate demand. Which way does the aggregate demand curve shift? Answer: Anything that decreases spending decreases aggregate demand. A rise in the interest rate, a decrease in the quantity of money, a decrease in government expenditures or a tax hike, and a decrease in real GDP in the rest of the world all decrease spending and decrease aggregate demand. The aggregate demand curve shifts leftward. Topic: Changes in aggregate demand Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Written and oral communication 7) How does a rise in the foreign exchange rate affect aggregate demand in the United States? Explain your answer. Answer: An increase in the foreign exchange rate decreases U.S. aggregate demand. The foreign exchange rate is the amount of a foreign currency that a dollar can buy. If the exchange rate rises, a dollar buys more foreign currency. As a result, foreign goods and services become cheaper to U.S. citizens because U.S. citizens need to spend fewer dollars to buy foreign-produced goods and services. Simultaneously, U.S.-produced goods and services become more expensive to foreigners because they must spend more of their currency in order to buy the dollars necessary to buy the U.S.-produced goods and services. As a result, U.S. imports increase and U.S. exports decrease, both of which decrease U.S. aggregate demand. Topic: Changes in aggregate demand, foreign exchange rate Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Written and oral communication

8) How does a recession in Asia affect U.S. aggregate demand and the U.S. aggregate demand curve? Answer: A recession in Asia means that Asians purchase fewer U.S.-made goods and services. As a result, U.S. exports decrease so that U.S. aggregate demand decreases and the U.S. aggregate demand curve shifts leftward. Topic: Changes in aggregate demand, world income Skill: Level 3: Using models Section: Checkpoint 29.2 Status: Old AACSB: Written and oral communication 9) "An increase in Mexican income decreases aggregate demand in the United States." Is the preceding statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. An increase in Mexican income means that Mexican citizens buy more goods and services exported from the United States. The increase in U.S. exports increases U.S. aggregate demand. Topic: Changes in aggregate demand, world income Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Written and oral communication 10) What are the two channels through which the world economy can affect U.S. aggregate demand? State what changes in the world economy can increase U.S. aggregate demand. Answer: The world economy can affect aggregate demand through the foreign exchange rate and foreign income. If the foreign exchange rate falls, then U.S. aggregate demand increases because U.S. exports become cheaper to foreign residents while U.S. imports become more expensive to U.S. citizens. If foreign income increases, then U.S. aggregate demand increases because foreign citizens will spend some of their increased income on U.S.-produced goods and services. Topic: Changes in aggregate demand, world economy Skill: Level 2: Using definitions Section: Checkpoint 29.2 Status: Old AACSB: Written and oral communication 11) "The aggregate demand multiplier results in the aggregate demand curve shifting by more than any given initial change in expenditure." Is the previous statement correct or incorrect? Answer: The statement is correct. The implication is that a, say $10 billion increase in investment shifts the aggregate demand curve rightward by more than $10 billion. Topic: Aggregate demand multiplier Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Reflective thinking

12) What is the aggregate demand multiplier and why does it occur? Answer: The aggregate demand multiplier is an effect that magnifies changes in expenditure plans. So, for example, if some component of expenditure such as investment increases, aggregate demand increases by more than the increase in investment. The aggregate demand multiplier exists because when aggregate demand increases, households' incomes increase. Then the increase in income results in an increase in consumption expenditure, which adds to the initial increase in aggregate demand. Topic: Aggregate demand multiplier Skill: Level 1: Definition Section: Checkpoint 29.2 Status: Old AACSB: Written and oral communication 29.8 Essay: Explaining Economic Trends and Fluctuations 1) What two variables are determined in an aggregate supply-aggregate demand figure? Is the slope of the aggregate supply curve positive or negative? Is the slope of the aggregate demand curve positive or negative? Answer: The aggregate supply-aggregate demand framework determines the equilibrium price level and equilibrium real GDP. The aggregate supply curve is positively sloped, indicating that an increase in the price level increases the aggregate quantity of goods and services supplied. The aggregate demand curve is negatively sloped, indicating that an increase in the price level decreases the aggregate quantity of goods and services demanded. Topic: Aggregate supply and aggregate demand model Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Written and oral communication 2) Can actual real GDP exceed potential GDP? Answer: Yes, actual real GDP temporarily can exceed potential GDP as the economy nears a business cycle peak. Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

3) Define potential GDP. Under what circumstances does actual real GDP fall short of potential GDP, equal potential GDP, and exceed potential GDP? Answer: Potential GDP is the level of real GDP that the economy produces when it is at full employment. Potential GDP can be contrasted with actual real GDP, the amount of real GDP the country actually produces. Actual real GDP can be less than potential GDP when the economy is producing at less than full employment, that is, when there is less than full employment in the labor market. Actual real GDP equals potential GDP when the economy is producing at full employment. Actual real GDP can exceed potential GDP temporarily as the economy approaches and then recedes from a business cycle peak. Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

4) Based on the table above, a. What is the equilibrium price level and real GDP? b. If potential GDP is $11.0 trillion, what does that imply about the economy's level of employment? c. If potential GDP is $9.0 trillion, what does that imply about the economy's level of employment? Answer: a. The equilibrium price level is 105; the equilibrium real GDP is $10.0 trillion. b. If potential GDP is $11.0 trillion, then the economy is at an equilibrium that is a below fullemployment equilibrium with a recessionary gap. c. If potential GDP is $9.0 trillion, then the economy is at an equilibrium that is an above fullemployment equilibrium with an inflationary gap. Topic: Inflationary gap and recessionary gap Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills

5) Suppose that during 2015, the actual real GDP of Chile was 3.5 billion pesos at the same time the potential GDP was 3.4 billion pesos. What sort of equilibrium existed in Chile? Answer: Chile's actual real GDP exceeded its potential GDP, so Chile was in an above fullemployment equilibrium with an inflationary gap. Topic: Inflationary gap Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 6) When the aggregate supply curve intersects the aggregate demand curve at a level of real GDP that exceeds potential GDP, is there an inflationary gap or a deflationary gap? What adjustments will take place? Answer: There is an inflationary gap because real GDP exceeds potential GDP. In this situation, the money wage rate will rise, shifting the aggregate supply curve leftward and raising the price level. Eventually the economy will return to potential GDP. At this time, real GDP is lower than when the inflationary gap existed but the price level is higher. Topic: Inflationary gap Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Written and oral communication 7) The economy is at full employment and then aggregate demand increases. Describe what happens as an immediate result of the increase in aggregate demand. Describe how the economy adjusts back to full employment. Answer: The immediate effect of an increase in aggregate demand is to increase both the price level and real GDP. The money wage rate does not change, so with the higher price level the real wage rate falls. Eventually, however, workers demand a higher (money) wage rate to compensate for the higher price level. As firms pay the higher money wage rate, aggregate supply decreases. The decrease in aggregate supply means that the price level rises and real GDP decreases. Workers continue to demand a higher money wage rate and aggregate supply continues to decrease until finally the economy returns to full employment. At that point, the money wage rate has increased enough so that the real wage rate is back to its initial level. Real GDP once again equals potential GDP, so the changes in real GDP were only temporary. The price level, though, is higher than its initial level, so the increase in the price level is permanent. Topic: Inflationary gap Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Written and oral communication

8) What is the current equilibrium price level and real GDP for the economy illustrated in the figure above? Does this economy have an inflationary gap, a recessionary gap, or neither? As it adjusts toward full employment, which curve shifts? What is the equilibrium real GDP and price level that the economy will ultimately reach? Answer: The equilibrium is where the aggregate demand and aggregate supply curves intersect. Thus the equilibrium price level is 110 and equilibrium real GDP is $20.5 trillion. Real GDP exceeds potential GDP, so the economy has an inflationary gap. The aggregate supply curve will shift leftward as the economy adjusts to full employment. Ultimately the aggregate supply curve will shift so that it intersects the aggregate demand curve where the aggregate demand curve crosses the potential GDP line. Thus ultimately equilibrium real GDP equals potential GDP, $20.0 trillion, and the price level is 120. Topic: Inflationary gap Skill: Level 4: Applying models Section: Checkpoint 29.3 Status: Revised AACSB: Analytic skills 9) Explain how changes in foreign income can impact real GDP in a country. Answer: Changes in the income of any nation impact the level of exports and imports of all other nations trading with it. For example, in the United States aggregate demand increases if the income of our trading partners, such as Mexico and Canada, increases because some of the increase in Mexican and Canadian income translates into buying goods and services imported from the United States. As a result, U.S. aggregate demand increases, which means that U.S. real GDP increases. Thus increases in foreign income increase domestic real GDP while decreases in foreign income decrease domestic real GDP. Topic: Aggregate demand fluctuations Skill: Level 5: Critical thinking Section: Checkpoint 29.3 Status: Old AACSB: Written and oral communication

10) How does a cut in interest rates that increases investment affect the quantity of real GDP demanded, the aggregate demand curve, real GDP, and the price level? Answer: The increase in investment increases the aggregate quantity demanded and shifts the AD curve rightward. As a result, the equilibrium price level rises and the equilibrium real GDP increases. Topic: Aggregate demand fluctuations Skill: Level 5: Critical thinking Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 11) State how shifts in the aggregate demand curve can explain the movement of real GDP around potential GDP. Answer: When the aggregate demand curve and the aggregate supply curve intersect at the level of potential GDP, then real GDP is equal to potential GDP. When something shifts the aggregate demand curve rightward, then the aggregate demand curve and the aggregate supply curve will intersect at a level of real GDP that is above potential GDP. The economy will be in an expansion. When something shifts the aggregate demand curve leftward, then the aggregate demand curve and the aggregate supply curve will intersect at a level of real GDP that is below potential GDP. The economy will be in a recession. Topic: Aggregate demand fluctuations Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Analytic skills 12) What is demand-pull inflation? Answer: An inflation that starts from an initial increase in aggregate demand is a demand-pull inflation. Topic: Demand-pull inflation Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

13) What are sources that can start a demand-pull inflation? Answer: Demand-pull inflation starts with an increase in aggregate demand. This increase can arise by increases in the quantity of money, increases in government expenditure, or increases in net exports because any of these three shift increase aggregate demand and shift the AD curve rightward. The increase in aggregate demand leads to a higher price level and, temporarily, a higher level of real GDP. If the economy began at full employment, then temporarily the level of real GDP will be above potential. In the long run, however, the money wage rate rises to offset the increase in the price level, so aggregate supply decreases and the AS curve shifts leftward. The decrease in aggregate supply also raises the price level. So the only way the inflation can continue is if aggregate demand continues to increase. Topic: Demand-pull inflation Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Written and oral communication 14) Describe how a demand-pull inflation can occur. Answer: Demand-pull inflation starts from an initial increase in aggregate demand. But if this increase is a one-time only event, the result is a higher price level but not inflation. For inflation to occur, aggregate demand needs to continue to increase. Continuing increases in the quantity of money result in continuing increases in aggregate demand, so monetary growth is necessary for a demand-pull inflation. Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking 15) What is a cost-push inflation? Answer: A cost-push inflation is an inflation that starts as a result of an increase in costs. Money wage rates and the cost of raw materials are the main sources of cost-push inflation. Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

16) What factors can start a cost-push inflation? What must the Fed's response be for the inflation to continue? Answer: Cost push inflation starts with a decrease in aggregate supply, that is, a leftward shift of the AS curve. The decrease in aggregate supply can be the result of an increase in the money wage rate or an increase in the money price of other raw materials. In either instance firms' costs have risen and they respond by decreasing production, which decreases aggregate supply. The dilemma for the Fed is that the decreases in aggregate supply means that real GDP falls below potential GDP and the price level rises. If the Fed responds by increasing the quantity of money in order to increase aggregate demand and move real GDP back to potential GDP, the price level will rise still higher. And if the initial agent that raised costs responds to the higher price level by again raising its costs, then a cost-push inflation might well occur. Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 29.3 Status: Old AACSB: Written and oral communication 17) Define "stagflation" and explain how it can be created. Answer: Stagflation is a combination of two words: stagnation and inflation. Stagnation means real GDP is below the full employment level and falling, that is, the economy is in recession while at the same time the price level is rising, that is, the economy is experiencing inflation. An increase in the price of a major resource that decreases aggregate supply can trigger stagflation. Topic: Stagflation Skill: Level 2: Using definitions Section: Checkpoint 29.3 Status: Old AACSB: Reflective thinking

Foundations of Economics, 9e (Bade), GE Chapter 14 Aggregate Expenditure Multiplier 30.1 Expenditure Plans and Real GDP 1) Which of the following variables is fixed in the aggregate expenditure model? A) price level B) consumption C) output D) investment E) real GDP Answer: A Topic: Fixed price level Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 2) In order to analyze the factors that determine the quantity of real GDP demanded, in the aggregate expenditure model we assume that A) the unemployment level is fixed. B) the inflation rate is assumed to equal the natural unemployment rate. C) the natural rate of unemployment is fixed. D) the price level is fixed. E) real GDP does not change. Answer: D Topic: Fixed price level Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 3) What is the key difference between the aggregate expenditure model and the aggregate demand/aggregate supply model? A) The aggregate expenditure model examines monetary policy, whereas the aggregate demand/aggregate supply model does not. B) Monetary and real factors interact in the aggregate demand/aggregate supply model. C) The aggregate expenditure model assumes that the price level is fixed. D) The aggregate demand/aggregate supply model assumes that the price level is fixed. E) The aggregate expenditure model assumes that real GDP is fixed. Answer: C Topic: Fixed price level Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 1 Copyright © 2023 Pearson Education Ltd.

4) Which of the following is NOT a part of aggregate expenditure? A) government expenditure B) imports C) investment D) taxes E) exports Answer: D Topic: Aggregate expenditure Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 5) Aggregate expenditure is equal to A) C + I + G. B) C + I + G - NX. C) C - I - G - NX. D) C + I + G + NX. E) Y + C + I + G + NX. Answer: D Topic: Aggregate expenditure Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 6) During 2019, a country has consumption expenditures of $3.0 trillion, investment expenditures of $1.5 trillion, government expenditure of $1.5 trillion, exports of $1.0 trillion, and imports of $1.5 trillion. Aggregate expenditure for the country is A) $5.5 trillion. B) $6.0 trillion. C) $7.0 trillion. D) $8.5 trillion. E) $6.5 trillion. Answer: A Topic: Aggregate expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills

7) Disposable income equals aggregate income A) minus net taxes. B) minus saving. C) minus saving and minus net taxes. D) plus saving minus net taxes. E) plus net taxes. Answer: A Topic: Disposable income Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 8) The consumption function shows the relationship between A) consumption expenditure and disposable income. B) inventory levels and real GDP. C) consumption expenditure and planned income. D) consumption expenditure and planned inventory investment. E) consumption expenditure and the price level. Answer: A Topic: Consumption function Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 9) The consumption function shows the relationship between A) consumption expenditure and disposable income. B) consumption expenditure and taxes. C) consumption expenditure and the interest rate. D) consumption expenditure and wealth. E) consumption expenditure and the price level. Answer: A Topic: Consumption function Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

10) A movement along the consumption function shows the change in consumption expenditure as a result of a change in A) disposable income. B) the price level. C) the interest rate. D) saving. E) net taxes. Answer: A Topic: Consumption function Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 11) The relationship between disposable income and consumption expenditure is A) positive. B) negative. C) nonexistent. D) U-shaped. E) not stable because it depends on whether the economy is in equilibrium or not. Answer: A Topic: Consumption function Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 12) When disposable income increases, consumption expenditure A) also increases, but by less. B) does not change. C) also increases, and by an equal amount. D) decreases by the same amount. E) also increases, and by more. Answer: A Topic: Consumption function Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

13) As disposable income ________, planned consumption expenditure ________ by a ________ amount. A) increases; increases; smaller B) decreases; increases; smaller C) increases; increases; larger D) decreases; increases; larger E) increases; decreases; smaller Answer: A Topic: Consumption function Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 14) When disposable income increases A) the consumption function shifts upward. B) there is a movement upward along the consumption function, but the consumption function does not shift. C) there is no movement along the consumption function, and the consumption function does not shift. D) the consumption function shifts downward. E) there is a movement downward along the consumption function, but the consumption function does not shift. Answer: B Topic: Consumption function Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 15) If disposable income decreases during a recession, there is A) a downward shift in the consumption function. B) movement downward along the consumption function. C) no change in consumption expenditures. D) an upward shift in the consumption function. E) movement upward along the consumption function. Answer: B Topic: Consumption function Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

16) As disposable income ________ planned consumption expenditure ________. A) increases; decreases B) decreases; increases C) decreases; remains the same, since it is autonomous expenditure D) increases; increases E) increases; changes only if net taxes also change Answer: D Topic: Consumption function Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 17) As a household's disposable income increases, its autonomous expenditures ________ and its induced expenditures ________. A) increase; do not change B) decrease; do not change C) do not change; increase by a smaller amount than the increase in income D) do not change; increase by an amount equal to the increase in income E) increase; increase by a smaller amount than the increase in income Answer: C Topic: Consumption function Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 18) When disposable income is zero, consumption expenditure is A) equal to autonomous consumption. B) also zero. C) negative. D) equal to induced consumption expenditure. E) None of the above answers is correct. Answer: A Topic: Consumption function, autonomous consumption Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

19) The amount of consumption expenditure that takes place when income is zero is A) equal to zero. B) equal to saving. C) called autonomous consumption. D) called induced consumption. E) called zero-based consumption. Answer: C Topic: Consumption function, autonomous consumption Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 20) When consumption expenditure is ________ disposable income, saving is ________. A) less than; positive B) greater than; positive C) equal to; positive D) equal to; negative E) less than; negative Answer: A Topic: Consumption function, saving Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 21) Consumption expenditure exceeds disposable income A) never. B) when there is positive saving. C) when there is dissaving. D) always. E) only when the economy is in equilibrium. Answer: C Topic: Consumption function, saving Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

22) In the range of disposable income where the consumption function lies above the 45° line A) disposable income is negative. B) saving is negative. C) saving is positive. D) disposable income equals planned expenditures. E) induced consumption is zero. Answer: B Topic: Consumption function, saving Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 23) On a graph of the consumption function, where the consumption function crosses the 45 degree line A) disposable income is zero. B) the maximum level of disposable income is earned. C) there is no saving and no dissaving. D) there are no tax payments. E) induced consumption equals zero. Answer: C Topic: Consumption function, saving Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 24) On a graph of the consumption function, where the consumption function is below the 45 degree line, there is A) saving. B) dissaving. C) zero disposable income. D) maximum disposable income. E) no induced consumption. Answer: A Topic: Consumption function, saving Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

25) If your planned consumption expenditure is $600 per month and your disposable income is $500 per month, your A) autonomous consumption must be zero per month. B) dissaving is $100 per month. C) autonomous consumption is -$100 per month. D) saving is $100 per month. E) induced consumption is $600. Answer: B Topic: Consumption function, saving Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills 26) The slope of the consumption function is A) equal to the MPC and is less than 1. B) equal to the MPC and is greater than 1. C) equal to the MPC and is equal to 1. D) not equal to the MPC and is equal to 1. E) not equal to the MPC and is less than 1. Answer: A Topic: Consumption function, slope Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

27) The above table has data from the nation of Atlantica. Based on these data, autonomous consumption is A) $1.8 trillion. B) $2.6 trillion. C) $3.2 trillion. D) $4.0 trillion. E) $5.8 trillion. Answer: A Topic: Autonomous consumption Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 9 Copyright © 2023 Pearson Education Ltd.

28) The above table has data from the nation of Atlantica. Based on these data, when disposal income equals $3.0 trillion A) savings equals $4.0 trillion. B) savings equals $1. trillion. C) dissavings equals $4.0 trillion. D) dissavings equals $1.0 trillion. E) savings equals $3.0 trillion. Answer: D Topic: Consumption function, saving Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 29) The above table has data from the nation of Atlantica. Based on these data, at what point does saving equal zero? A) None, dissavings is present at all of the above points. B) None, savings is present at all of the above points. C) Between disposable income of $0.0 and $1.8 trillion D) Between disposable income of $4.0 trillion and $5.8 trillion E) Between disposable income of $2.0 trillion and $3.2 trillion Answer: A Topic: Consumption function, saving Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills

30) The above table has data from the nation of Atlantica. Based on these data, at what point does saving equal zero? A) None, dissavings occurs at all of the above points. B) None, savings occurs at all of the above points. C) between disposable income of $0.0 and $1.5 trillion D) between disposable income of $8.0 trillion and $7.5 trillion E) at disposable income of $6.0 Answer: E Topic: Consumption function, saving Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 31) The above table has data from the nation of Atlantica. Based on these data, when disposable income equals 8.0 there is A) dissavings of $7.5 trillion. B) savings of $15.5 trillion. C) dissavings of $15.5 trillion. D) dissavings of $0.5 trillion. E) savings of $0.5 trillion. Answer: E Topic: Consumption function, saving Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills

32) The above table has data from the nation of Atlantica. Based on these data, when disposable income equals 2.0 there is A) dissavings of $1.0 trillion. B) savings of $1.0 trillion. C) dissavings of $5.0 trillion. D) dissavings of $3.0 trillion. E) savings of $3.0 trillion. Answer: A Topic: Consumption function, saving Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 33) The above table has data from the nation of Atlantica. Based on these data, the amount of autonomous consumption is A) $1.5 trillion. B) $1.0 trillion. C) $0.5 trillion. D) $7.5 trillion. E) $6.0 trillion. Answer: A Topic: Autonomous consumption Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 34) The above table has data from the nation of Atlantica. Based on these data, what is marginal propensity to consume? A) 0.75 B) 0.50 C) 1.33 D) 1.00 E) 1.50 Answer: A Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills

35) The figure above shows a nation's consumption function. The amount of autonomous consumption expenditure is A) $0. B) $1 trillion. C) $2 trillion. D) $3 trillion. E) more than $3 trillion. Answer: B Topic: Consumption function, autonomous consumption Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 36) The figure above shows a nation's consumption function. If disposable income is $2 trillion, then the MPC is ________ and saving is ________. A) positive; positive B) positive; negative C) negative; positive D) negative; negative E) positive; zero Answer: B Topic: Consumption function, saving Skill: Level 4: Applying models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills

37) The figure above shows a nation's consumption function. If disposable income is $4 trillion, then the MPC is ________ and saving is ________. A) positive; positive B) positive; negative C) negative; positive D) negative; negative E) positive; zero Answer: A Topic: Consumption function, saving Skill: Level 4: Applying models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills

38) In the figure above, when disposable income equals $10 trillion A) consumption expenditure is greater than disposable income, so consumers are dissaving. B) consumption expenditure is less than disposable income, so consumers are dissaving. C) consumption expenditure is greater than disposable income, so consumers are saving. D) consumption expenditure is less than disposable income, so consumers are saving. E) consumption expenditure is greater than disposable income but it is not possible to determine if consumers are saving or dissaving. Answer: A Topic: Consumption function, saving Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills

39) In the figure above, when disposable income equals $20 trillion A) consumption expenditure is greater than disposable income, so consumers are dissaving. B) consumption expenditure is less than disposable income, so consumers are dissaving. C) consumption expenditure is greater than disposable income, so consumers are saving. D) consumption expenditure is less than disposable income, so consumers are saving. E) consumption expenditure is less than disposable income but it is not possible to determine if consumers are saving or dissaving. Answer: D Topic: Consumption function, saving Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 40) In the figure above, what is the MPC? A) 0.50 B) 0.75 C) 0.80 D) 0.90 E) 1.00 Answer: A Topic: Marginal propensity to consume Skill: Level 4: Applying models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 41) The fraction of a change in disposable income that is spent on consumption is the A) marginal propensity to consume. B) marginal buying power of money. C) expected future disposable income. D) marginal dissaving ratio. E) marginal propensity to dissave. Answer: A Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

42) The consumption function shows that when disposable income increases by one dollar, consumption expenditure A) increases by one dollar. B) increases by more than a dollar. C) increases by less than a dollar. D) does not change. E) decreases by less than a dollar. Answer: C Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 43) The MPC is equal to the A) change in consumption expenditure divided by the change in disposable income that brought it about. B) change in consumption expenditure divided by the total disposable income that brought it about. C) level of consumption expenditure divided by the level of total disposable income that brought it about. D) level of consumption divided by the change in disposable income that brought it about. E) change in disposable income divided by the change in consumption expenditure. Answer: A Topic: Marginal propensity to consume Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 44) The MPC is equal to the i. fraction of a change in disposable income that is spent on consumption. ii. change in consumption expenditure divided by the change in disposable income. iii. slope of the consumption function. A) i, ii, and iii B) i and ii only C) iii only D) i and iii only E) ii only Answer: A Topic: Marginal propensity to consume Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

45) The marginal propensity to consume equals A) consumption expenditure divided by disposable income. B) consumption expenditure divided by the change in disposable income. C) the change in consumption expenditure divided by the change in disposable income. D) the change in consumption expenditure divided by disposable income. E) the change in autonomous consumption divided by the change in induced consumption. Answer: C Topic: Marginal propensity to consume Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 46) The marginal propensity to consume is A) another name for consumption expenditure. B) disposable income minus consumption expenditure. C) the change in disposable income minus the change in consumption expenditure. D) the change in consumption expenditure divided by the change in disposable income that brought it about. E) another name for autonomous consumption expenditure. Answer: D Topic: Marginal propensity to consume Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 47) The smaller the amount saved out of a change in disposable income, the A) smaller the MPC. B) more horizontal the consumption function. C) larger the MPC. D) smaller is autonomous consumption. E) more net taxes affect consumption. Answer: C Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

48) Jane supports herself at college by working in a bookstore earning $300 a month, which she spends entirely every month. If she gets a salary increase of $100 a month, she spends $90 more dollars on consumption expenditure. Jane's MPC is equal to A) 1.00. B) 0.90. C) $90. D) 0.10. E) 0.50. Answer: B Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills 49) When Joe's disposable income is $50,000, his consumption expenditure is $45,000, and when his disposable income is $60,000, his consumption expenditure is $53,000. Joe's marginal propensity to consume is A) 100. B) 0.80. C) 1.25 D) 80. E) $8,000. Answer: B Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills 50) When disposable income is $8 trillion, consumption expenditure is $5 trillion; when disposable income is $5 trillion, consumption expenditure is $3 trillion. The MPC is A) (5/8 + 3/5) = 1.225. B) (5 + 3) ÷ (8 + 5) = 0.615. C) (5 - 3) ÷ (8 - 5) = 0.667. D) (5 + 3) ÷ (8 - 5) = 2.667. E) (8 - 5) ÷ (5 - 3) = 1.333. Answer: C Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills

51) If disposable income increases from $5 trillion to $6 trillion and, as a result, consumption expenditure increases from $7 trillion to $7.8 trillion, the MPC is A) 1.0. B) 0.8. C) 5 ÷ 7 = 0.71. D) 6 ÷ 7.8 = 0.77. E) 6 ÷ 7 = 0.86. Answer: B Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills 52) What is the value of the MPC if $66 out of every $100 increase in disposable income is consumed? A) 0.66 B) $166 C) 0.34 D) $34 E) More information is needed to determine the MPC. Answer: A Topic: Marginal propensity to consume Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills 53) Jack Nelson, a supervisor in the hardware department at Sears, received a $3,000 increase in his annual disposable income. Suppose his marginal propensity to consume is 0.80. How much of the $3,000 increase will Jack spend on consumption? A) $2,750 B) $2,500 C) $2,400 D) $2,200 E) $3,000 Answer: C Topic: Marginal propensity to consume Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills

54) If your MPC is 0.5, then when your disposable income increases by $100, your consumption expenditure increases by A) $5. B) $200. C) $100. D) $50. E) $95. Answer: D Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills 55) If the marginal propensity to consume is ________, then a $2 trillion increase in disposable income increases consumption expenditure by $1.2 trillion. If the marginal propensity to consume is ________, then a $2 trillion increase in disposable income increases consumption expenditures by $1.6 trillion. A) 0.6; 0.8 B) 1.2; 1.6 C) 1.67; 2.25 D) 6.0; 8.0 E) None of the above because a $2 trillion increase in disposable income always leads to a $2 trillion increase in consumption expenditure. Answer: A Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills

56) The above table has data from the nation of Media. Based on these data, when disposable income is $8.0 trillion, saving is A) -$0.5 trillion. B) -$1.5 trillion. C) $0.5 trillion. D) $1.5 trillion. E) $7.5 trillion. Answer: C Topic: Consumption function, saving Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 57) The above table has data from the nation of Media. Based on these data, the marginal propensity to consume is A) 0.25. B) 0.67. C) 0.75. D) 1.33. E) 1.50. Answer: C Topic: Marginal propensity to consume Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills

58) Which of the following creates a movement along the consumption function and not a shift of the consumption function? A) a change in disposable B) a change in the real interest rate C) a change in wealth D) a change in expected future income E) None of the above are correct because they all shift the consumption function. Answer: A Topic: Consumption function Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 59) When the real interest rate falls, the consumption function A) shifts upward. B) does not shift and there is no movement along the consumption function. C) shifts downward. D) does not shift and there is a movement upward along the consumption function. E) does not shift and there is a movement downward along the consumption function. Answer: A Topic: Consumption function, real interest rate Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 60) When the real interest rate falls, there is A) an increase in the slope of the consumption function. B) an upward shift of the consumption function. C) a downward shift of the consumption function. D) a decrease in the slope of the consumption function. E) a movement upward along the consumption function. Answer: B Topic: Consumption function, real interest rate Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

61) When the real interest rate rises, there is A) an upward movement along the consumption function. B) a downward movement along the consumption function. C) an upward shift of the consumption function. D) a downward shift of the consumption function. E) neither a shift of the consumption function nor a movement along the consumption function. Answer: D Topic: Consumption function, real interest rate Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 62) If the real interest rate increases, there is A) a movement upward along the consumption function. B) a movement downward along consumption function. C) an upward shift of the consumption function. D) a downward shift of the consumption function. E) a change in the slope of the consumption function. Answer: D Topic: Consumption function, real interest rate Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 63) A rise in the real interest rate ________ consumption expenditure and ________. A) increases; shifts the consumption function upward B) decreases; shifts the consumption function downward C) increases; shifts the consumption function downward D) decreases; shifts the consumption function upward E) decreases; results in a movement downward along the consumption function Answer: B Topic: Consumption function, real interest rate Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

64) An increase in expected future disposable income ________ consumption expenditure and ________. A) increases; shifts the consumption function upward B) decreases; shifts the consumption function downward C) increases; shifts the consumption function downward D) decreases; shifts the consumption function upward E) increases; results in a movement upward along the consumption function Answer: A Topic: Consumption function, expected future income Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 65) In Germany, expected future income increased during 2010. This increase led to A) a movement upward along the consumption function. B) a movement downward along the consumption function. C) an upward shift of the consumption function. D) a downward shift of the consumption function. E) no movement along the consumption function and no shift of the consumption function. Answer: C Topic: Consumption function, expected future income Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 66) ________ shifts the consumption function upward. A) A decrease in the marginal propensity to consume B) An increase in the real interest rate C) An increase in expected future disposable income D) An increase in disposable income E) An increase in the price level Answer: C Topic: Consumption function, expected future income Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

67) When the economy enters an expansion of a business cycle, households become more optimistic about expected future disposable income. The increase in optimism leads to A) a shift upward of the consumption function. B) an increase in consumption expenditures. C) no change in the level of consumption expenditures. D) a movement upward along the consumption function. E) a movement downward along the consumption function. Answer: A Topic: Consumption function, expected future income Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 68) A decrease in wealth ________ consumption expenditure and ________. A) increases; shifts the consumption function upward B) decreases; shifts the consumption function downward C) increases; shifts the consumption function downward D) decreases; shifts the consumption function upward E) decreases; results in a movement downward along the consumption function Answer: B Topic: Consumption function, wealth Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 69) Other things remaining the same, ________ in U.S. real GDP results in ________ in U.S. imports. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; no change E) an increase; a decrease followed by no change Answer: A Topic: Imports Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

70) When U.S. real GDP increases, U.S. imports A) decrease by the same amount. B) increase by the same amount. C) increase by less than the change in real GDP. D) decrease by less than the change in real GDP. E) increase by more than the change in real GDP. Answer: C Topic: Imports Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 71) As real U.S. GDP increases, U.S. income increases and so A) U.S. imports decrease. B) U.S. exports decrease. C) U.S. imports increase. D) U.S. exports increase. E) investment increases. Answer: C Topic: Imports Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 72) The marginal propensity to import equals A) imports divided by exports. B) the fraction of an increase in real GDP that is spent on imports. C) exports divided by imports. D) the fraction of an increase in real GDP that is spent on imports minus the fraction spent on exports. E) the change in imports divided by the change in exports. Answer: B Topic: Marginal propensity to import Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

73) If the marginal propensity to import is ________, then a $2 trillion increase in disposable income would increase import expenditure by $0.2 trillion. If the marginal propensity to import is ________, then a $2 trillion increase in disposable income would increase import expenditure by $0.6 trillion. A) 1.0; 3.0 B) 0.1; 0.3 C) 0.2; 0.6 D) 0.6; 2.0 E) 0.3; 0.1 Answer: B Topic: Marginal propensity to import Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills 74) Based on data from the U.S. economy, the marginal propensity to consume is about A) 0.80. B) 0.20. C) 0.60. D) 0.95. E) 1.10. Answer: A Topic: Eye on the U.S. economy, the U.S. consumption function Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Revised AACSB: Reflective thinking 75) The components of aggregate expenditure are consumption expenditure A) interest, gross spending, and net spending. B) investment, government expenditure on goods and services, and net income. C) interest, government expenditure on goods and services, and net exports. D) investment, government expenditure on goods and services, and net exports. E) investment, government expenditure on goods and services, and net taxes. Answer: D Topic: Aggregate expenditure Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

76) Which of the following is TRUE? A) Actual aggregate expenditure does not always equal real GDP. B) Aggregate planned expenditure always equals real GDP. C) Actual aggregate expenditure always equals real GDP. D) Aggregate planned expenditure and actual aggregate expenditures both are always equal to real GDP. E) Actual aggregate expenditure cannot be measured. Answer: C Topic: Actual aggregate expenditure Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 77) Autonomous expenditure is the component of A) aggregate expenditure that changes when real GDP changes. B) induced expenditure that changes when in real GDP changes. C) aggregate planned expenditure that changes only when government expenditure on goods and services change. D) aggregate expenditure that does not change when real GDP changes. E) aggregate expenditure that does not change when the interest rate changes. Answer: D Topic: Autonomous expenditure Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 78) The components of aggregate expenditure that change when real GDP changes are known as A) unplanned expenditure. B) induced expenditure. C) planned expenditure. D) autonomous expenditure. E) changeable expenditure. Answer: B Topic: Induced expenditure Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking

79) The consumption function is the relationship between ________, other things remaining the same. A) consumption expenditure and saving B) consumption expenditure and the price level C) consumption expenditure and disposable income D) net taxes and disposable income E) consumption expenditure and net taxes Answer: C Topic: Consumption function Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 80) When disposable income increases from $9 trillion to $10 trillion, consumption expenditure increases from $6 trillion to $6.8 trillion. The MPC is A) 1.00. B) 0.80. C) 0.60. D) 0.68. E) $6.8 trillion. Answer: B Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills 30.2 Equilibrium Expenditure 1) The components of aggregate expenditure that are NOT influenced by GDP are known as A) unplanned expenditure. B) induced expenditure. C) planned expenditure. D) autonomous expenditure. E) fixed expenditure. Answer: D Topic: Autonomous expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

2) Autonomous expenditure is expenditure that is A) influenced by real GDP. B) influenced by the interest rate. C) not influenced by real GDP. D) not influenced by the interest rate. E) not influenced by the price level. Answer: C Topic: Autonomous expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 3) The quantity of U.S. exports is determined by A) U.S. GDP. B) U.S. consumption expenditure. C) political factors. D) aggregate incomes in the rest of the world. E) U.S. aggregate expenditure. Answer: D Topic: Autonomous expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 4) Autonomous expenditure includes A) investment, government expenditure for goods and services, and imports. B) consumption expenditures, investment, and exports. C) consumption expenditure, investment, and imports. D) investment, government expenditure on goods and services, and exports. E) consumption expenditure, investment, and net taxes. Answer: D Topic: Autonomous expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

5) Induced expenditure is any expenditure that A) is fixed for all levels of real GDP. B) is fixed for all price levels. C) is fixed for all levels of the interest rate. D) changes when real GDP changes. E) changes when the interest rate changes. Answer: D Topic: Induced expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 6) Induced expenditures are defined as that part of A) aggregate expenditure that responds to changes in real GDP. B) real GDP that does not respond to changes in aggregate expenditure. C) aggregate expenditure that does not respond to changes in real GDP. D) autonomous expenditure that responds to changes in real GDP. E) autonomous expenditure that does not respond to changes in real GDP. Answer: A Topic: Induced expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 7) Which of the following increases as a result of an increase in real GDP? i. autonomous expenditure ii. induced expenditure iii. potential GDP A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: B Topic: Induced expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

8) Which aggregate expenditure categories are influenced by the level of real GDP? A) investment and government expenditures on goods and services B) consumption and investment C) imports and exports D) consumption and imports E) consumption and government expenditures on goods and services Answer: D Topic: Induced expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 9) Induced expenditure includes A) consumption expenditure, government expenditure on goods and services, and imports. B) investment, consumption expenditures, and exports. C) consumption expenditure and imports. D) consumption expenditure and exports. E) consumption expenditure and government expenditure on goods and services. Answer: C Topic: Induced expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 10) Which components of aggregate expenditure change as a result of real GDP changing? A) consumption expenditure and imports B) consumption expenditure and investment C) consumption expenditure, investment, and exports D) consumption expenditure, investment, and government expenditure on goods and services E) consumption expenditure and government expenditure on goods and services Answer: A Topic: Induced expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

11) To find aggregate planned expenditures, which of the following must be added to consumption expenditure? i. net exports ii. investment iii. government expenditure on goods and services A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Aggregate planned expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 12) Which of the following is NOT included in aggregate expenditure? A) consumption expenditure B) investment C) government expenditure D) taxes E) net exports Answer: D Topic: Aggregate planned expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 13) The aggregate expenditure (AE) curve A) includes expenditures by domestic residents only. B) includes expenditures on foreign as well as domestic goods. C) does not include expenditures on either imports or exports. D) includes all expenditures on domestic goods. E) adds expenditures on imports because they are consumed in the nation and subtracts expenditures on exports because they are consumed abroad. Answer: D Topic: Aggregate planned expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

14) The AE curve illustrates the relationship between A) aggregate planned expenditure and real GDP. B) real GDP and actual expenditure. C) real GDP and the interest rate. D) the interest rate and aggregate planned expenditure. E) the quantity of real GDP demanded and the price level. Answer: A Topic: Aggregate planned expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 15) As real GDP ________, aggregate planned expenditure ________. A) increases; increases B) increases; decreases C) decreases; remains the same, because it is independent from real GDP D) increases; remains the same, because the increase in some components is precisely offset by the decrease in others E) decreases; increases Answer: A Topic: Aggregate planned expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 16) Aggregate planned expenditure decreases if A) government expenditure on goods and services increases. B) exports increase. C) real GDP decreases. D) investment increases. E) autonomous consumption increases. Answer: C Topic: Aggregate planned expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

17) For each one dollar increase in real GDP, aggregate planned expenditure A) is unaffected. B) increases by one dollar. C) increases by less than a dollar. D) increases by more than a dollar. E) increases only if autonomous expenditure increases. Answer: C Topic: Aggregate planned expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

18) The above table presents data from the nation of Pacifica. When real GDP equals $2.0 trillion, aggregate planned expenditure equals A) $3.75 trillion. B) $5.00 trillion. C) $5.50 trillion. D) $6.00 trillion. E) $4.00 trillion. Answer: B Topic: Aggregate planned expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

19) The above table presents data from the nation of Pacifica. Aggregate planned expenditure equals $7.5 trillion when real GDP equals A) $4.0 trillion. B) $6.0 trillion. C) $7.5 trillion. D) $8.0 trillion. E) $8.5 trillion. Answer: B Topic: Aggregate planned expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 20) Moving along the aggregate expenditure (AE) curve, when real GDP increases, aggregate planned expenditures increase A) by more than real GDP. B) by the same amount as does real GDP. C) by less than real GDP. D) proportionately with real GDP. E) by the same percentage as does real GDP. Answer: C Topic: AE model Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 21) Equilibrium expenditure occurs when A) aggregate planned expenditure equals real GDP. B) disposable income equals real GDP. C) disposable income equals consumption expenditures plus imports. D) real GDP plus net taxes equals disposable income. E) real GDP minus net taxes equals disposable income. Answer: A Topic: Equilibrium expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

22) Equilibrium expenditure is the level of aggregate expenditure at which A) aggregate production equals real GDP. B) aggregate actual expenditure equals real GDP. C) aggregate planned expenditure equals real GDP. D) aggregate private expenditure equals real GDP. E) planned inventory investment equals zero. Answer: C Topic: Equilibrium expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 23) Equilibrium expenditure is A) the amount of aggregate expenditure at which aggregate planned expenditure equals real GDP. B) when unplanned inventory change is positive. C) the amount of aggregate expenditure at which aggregate planned expenditure exceeds real GDP. D) the amount of aggregate expenditure at which aggregate planned expenditure is less than real GDP. E) when unplanned inventory change is zero or negative. Answer: A Topic: Equilibrium expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 24) The equilibrium level of aggregate planned expenditure is found where A) there is no saving and no dissaving. B) aggregate planned expenditure equals real GDP. C) net exports is zero. D) autonomous expenditure equals equilibrium expenditure. E) the price level is rising at a constant rate. Answer: B Topic: Equilibrium expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

25) If aggregate planned expenditure equals GDP, then A) firms' inventories exceed planned inventories. B) firms' inventories are less than planned inventories. C) firms' inventories equal planned inventories. D) firms do not have any inventories. E) firms' actual investment has no relationship to their planned investment. Answer: C Topic: Equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 26) If aggregate planned expenditure equals GDP, then A) there must be no change in firms' inventories. B) the change in firms' inventories must be positive. C) the change in firms' inventories must be equal to the planned change. D) the change in firms' inventories must be negative. E) actual aggregate expenditure might be greater than, equal to, or less than real GDP. Answer: C Topic: Equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 27) If actual aggregate expenditure equals aggregate planned expenditure, then A) there is never any change in firms' inventories. B) unplanned inventory changes are positive. C) firms obtain the desired change in their inventories. D) unplanned inventory changes are negative. E) actual aggregate expenditure might be greater than, equal to, or less than real GDP. Answer: C Topic: Equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

28) If aggregate planned expenditures equal real GDP, then A) inventories increase above their planned levels and businesses decrease their production. B) inventories decrease below their planned levels and businesses increase their production. C) there is no equilibrium level of real GDP. D) inventories decrease below their planned levels and businesses decrease their production. E) unplanned inventory changes equal zero. Answer: E Topic: Equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 29) Equilibrium expenditure occurs when A) aggregate planned expenditures equals real GDP so that unplanned inventories are positive. B) aggregate planned expenditures equals real GDP so that unplanned inventories are negative. C) aggregate planned expenditures equals real GDP so that unplanned inventories are zero. D) aggregate planned expenditures and unplanned inventories are zero. E) aggregate planned expenditures and unplanned inventories equal real GDP. Answer: C Topic: Equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 30) In the aggregate expenditure (AE) model, the economy is driven to its equilibrium by changes in A) government expenditures on goods and services that are the result of changes in real GDP. B) induced expenditures that are the result of changes in real GDP. C) investment that are the result of changes in real GDP. D) autonomous expenditures that are the result of changes in real GDP. E) net taxes that are the result of changes in real GDP. Answer: B Topic: Adjustment to equilibrium expenditure, process Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

31) Unplanned inventories increase when A) real GDP is less than aggregate planned expenditure. B) actual aggregate expenditure is greater than aggregate planned expenditure. C) actual aggregate expenditure is equal to GDP. D) aggregate planned expenditure is less than GDP. E) actual aggregate expenditure is less than GDP. Answer: D Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 32) When the change in unplanned inventories is positive, then A) real GDP is less than aggregate planned expenditure. B) real GDP equals aggregate planned expenditure. C) real GDP is larger than aggregate planned expenditure. D) economic growth will occur as the economy returns to equilibrium. E) planned inventories will increase in order to return to equilibrium. Answer: C Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 33) According to the aggregate expenditure model, when faced with unwanted inventory, firms A) are forced to go out of business. B) decrease production. C) immediately cut prices. D) increase production. E) do nothing and wait for equilibrium to be restored. Answer: B Topic: Adjustment to equilibrium expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

34) If real GDP ________ aggregate planned expenditure, then as a result firms ________ production. A) equals; increase B) exceeds; decrease C) is less than; decrease D) equals; decrease E) exceeds; increase Answer: B Topic: Adjustment to equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 35) A country reports that unplanned inventories increased during 2019. The increase in unplanned inventories leads to A) the government decreasing production, which decreases GDP. B) consumers increasing their consumption expenditure, which increases GDP. C) firms decreasing production, which decreases GDP. D) firms increasing production, which increases GDP. E) actual aggregate expenditure being different than real GDP. Answer: C Topic: Adjustment to equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 36) If a firm accumulates unwanted inventories, then it A) will increase its production. B) must hire more workers. C) has actual investment that is less than its planned investment. D) will decrease its production. E) has actual investment equal to its planned investment. Answer: D Topic: Adjustment to equilibrium expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

37) If firms' inventories exceed their planned inventories, firms A) increase production. B) decrease production. C) increase GDP. D) increase income. E) increase employment. Answer: B Topic: Adjustment to equilibrium expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 38) In the aggregate expenditure (AE) model, when real GDP exceeds aggregate planned expenditure, actual inventories ________ planned inventories and real GDP ________. A) exceed; increases B) exceed; decreases C) are less than; increases D) are less than; decreases E) exceed; does not change Answer: B Topic: Adjustment to equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 39) When aggregate planned expenditure is less than GDP A) firms increase production until the economy reaches equilibrium expenditure. B) firms decrease production until the economy reaches equilibrium expenditure. C) the economy might be at its equilibrium expenditure and if it is, firms do not change their production. D) the economy definitely is at its equilibrium expenditure and firms do not change production. E) the economy definitely is at its equilibrium expenditure but even so, firms decrease production. Answer: B Topic: Adjustment to equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

40) If real GDP exceeds aggregate planned expenditure, then the change in unplanned inventories is ________ and firms ________ production. A) positive; increase B) positive; decrease C) negative; increase D) negative; decrease E) zero; do not change Answer: B Topic: Adjustment to equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 41) When aggregate planned expenditure ________ real GDP, there are unplanned ________ in inventories, and firms ________ production, therefore decreasing real GDP. A) is less than; increases; decrease B) exceeds; decreases; decrease C) is less than; increases; increase D) exceeds; increases; increase E) is less than; decreases; decrease Answer: A Topic: Adjustment to equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 42) If aggregate planned expenditures are less than real GDP, then A) inventories increase above their planned levels and businesses decrease their production. B) inventories decrease below their planned levels and businesses increase their production. C) there is no equilibrium level of real GDP. D) inventories increase above their planned levels and businesses increase their production. E) unplanned inventory changes equal zero. Answer: A Topic: Adjustment to equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

43) When real GDP exceeds aggregate planned expenditure A) firms increase production. B) real GDP increases. C) an unplanned decrease in inventories occurs. D) an unplanned increase in inventories occurs. E) real GDP remains at its equilibrium. Answer: D Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 44) When GDP = $2.5 trillion, C = $1.0 trillion, I = $0.6 trillion, G = $0.4 trillion, and NX = $0. Then A) unplanned inventory change = $0.5 trillion. B) aggregate planned expenditure = $2.5 trillion. C) aggregate planned expenditure = $1.6 trillion. D) unplanned inventory change = -$0.5 trillion. E) equilibrium expenditure = $2.0 trillion. Answer: A Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Analytic skills 45) Which of the following situations leads to an unplanned increase in inventories of $2.0 trillion? A) real GDP = $5.0 trillion and aggregate planned expenditures = $7.0 trillion B) real GDP = $5.0 trillion and aggregate planned expenditures = $5.0 trillion C) real GDP = $6.0 trillion and aggregate planned expenditures = $4.0 trillion D) real GDP = $8.0 trillion and aggregate planned expenditures = $5.0 trillion E) More information is needed about planned investment and actual investment. Answer: C Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Analytic skills

46) Points where the aggregate expenditure (AE) curve lie above the 45° line are points where aggregate planned expenditure is A) greater than real GDP. B) less than real GDP. C) equal to real GDP. D) the inverse of real GDP. E) not related to real GDP. Answer: A Topic: AE model Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 47) If aggregate planned expenditure is greater than GDP, then A) inventory investment is smaller than planned. B) inventory investment is larger than planned. C) production is too high. D) a recession will result. E) the consumption function will shift downward to restore the equilibrium. Answer: A Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 48) When aggregate planned expenditure exceeds real GDP A) firms decrease production. B) real GDP decreases. C) an unplanned decrease in inventories occurs. D) an unplanned increase in inventories occurs. E) real GDP remains at its equilibrium level. Answer: C Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

49) If aggregate planned expenditure exceeds real GDP, then A) unplanned inventory changes are positive. B) unplanned inventory changes are negative. C) aggregate planned expenditure must decrease to restore the equilibrium. D) real GDP will decrease. E) planned inventory changes must be negative. Answer: B Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 50) When the AE line lies above the 45° line A) there are unplanned decreases in inventories. B) aggregate planned expenditure is less than real GDP. C) there are unplanned increases in inventories. D) real GDP exceeds aggregate planned expenditure. E) the price level is rising. Answer: A Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 51) When aggregate planned expenditure exceeds real GDP, there are unplanned ________ in inventories, and firms ________ production, so that real GDP ________. A) decreases; decrease; increases B) increases; decrease; decreases C) increases; increase; increases D) decreases; increase; increases E) decreases; decrease; decreases Answer: D Topic: Adjustment to equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

52) Real GDP is $16 trillion and aggregate planned expenditure is $17 trillion. As a result, unplanned inventory change is ________ and real GDP ________. A) positive; decreases B) positive; increases C) negative; increases D) negative; decreases E) negative; does not change Answer: C Topic: Adjustment to equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 53) When aggregate planned expenditure exceeds real GDP A) firms increase production and real GDP increases. B) firms decrease production and real GDP increases. C) firms decrease production and real GDP decreases. D) firms increase production and real GDP decreases. E) firms do nothing because induced expenditure will increase so that the equilibrium is reached. Answer: A Topic: Adjustment to equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 54) If aggregate planned expenditures exceed real GDP, then A) inventories increase above their planned levels and businesses decrease their production. B) inventories decrease below their planned levels and businesses increase their production. C) there is no equilibrium level of real GDP. D) inventories decrease below their planned levels and businesses decrease their production. E) unplanned inventory changes equal zero. Answer: B Topic: Adjustment to equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

55) When planned aggregate expenditure is larger than real GDP, actual inventories ________ planned inventories and real GDP ________. A) are less than; increases B) are less than; decreases C) are more than; increases D) are more than; decreases E) are not related to; increases Answer: A Topic: Adjustment to equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 56) If the level of real GDP is $17 trillion while aggregate planned expenditure is $18 trillion, then A) aggregate planned expenditure decreases to reach the equilibrium of $17 trillion. B) inventories rise more than planned, leading firms to cut production. C) inventories fall more than planned, leading firms to increase production. D) real GDP increases and planned expenditure decreases reaching equilibrium in the middle. E) inventories rise more than planned, leading firms to increase production. Answer: C Topic: Adjustment to equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 57) Which of the following situations lead firms to increase production? A) real GDP = $16.0 trillion and aggregate planned expenditures = $15.0 trillion B) real GDP = $12.0 trillion and aggregate planned expenditures = $12.0 trillion C) real GDP = $15.0 trillion and aggregate planned expenditures = $14.0 trillion D) real GDP = $15.0 trillion and aggregate planned expenditures = $16.0 trillion E) Both answers A and C are correct. Answer: D Topic: Adjustment to equilibrium expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Analytic skills

58) A country reports that when real GDP is $13.0 trillion, aggregate planned expenditure is $14.0 trillion. When real GDP equals $13.0 trillion A) unplanned inventory changes by -$1.0 trillion. B) unplanned inventory changes by $1.0 trillion. C) planned inventory changes by $1.0 trillion. D) planned inventory changes by -$1.0 trillion. E) both planned and unplanned inventory changes are -$1.0 trillion. Answer: A Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Analytic skills 59) During 2019, a country reports aggregate planned expenditures of $5 trillion and an actual real GDP of $4 trillion. During 2019 A) inventories are less than planned. B) inventories are greater than planned. C) inventories are unaffected. D) actual aggregate expenditures are greater than real GDP. E) actual aggregate expenditures are less than real GDP. Answer: A Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Analytic skills

60) The above table gives real GDP and the aggregate expenditure schedule. Equilibrium real GDP is A) $11 billion. B) $12 billion. C) $13 billion. D) $14 billion. E) $10 billion. Answer: B Topic: Equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 61) The above table gives real GDP and the aggregate expenditure schedule. When real GDP is $15 billion, the amount of unplanned investment is A) $0.75 billion. B) $14.25 billion. C) $29.25 billion. D) $15 billion. E) unknown. Answer: A Topic: Unplanned inventories Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

62) The above table gives real GDP and the aggregate expenditure schedule. When real GDP is $10 billion, the amount of unplanned investment is A) -$0.5 billion. B) $0.5 billion. C) $20.5 billion. D) -$20.5 billion. E) unknown. Answer: A Topic: Unplanned inventories Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

63) The above table gives data for the nation of Mojo. At what level of real GDP is the economy at equilibrium expenditure? A) $3.0 trillion B) $6.0 trillion C) $9.0 trillion D) $12.0 trillion E) more than $12.0 trillion. Answer: B Topic: Equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

64) The above table gives data for the nation of Mojo. At what level of real GDP is the unplanned inventory change equal to $1.75 trillion? A) $3.0 trillion B) $6.0 trillion C) $9.0 trillion D) $12.0 trillion E) $0.0 trillion Answer: C Topic: Adjustment to equilibrium expenditure Skill: Level 4: Applying models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

65) The above table gives data for the nation of Mouseville. There are no imports into or exports from Mouseville. The equilibrium level of real GDP is A) $800 billion. B) $100 billion. C) $500 billion. D) $700 billion. E) $900 billion. Answer: A Topic: Equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

66) The above table gives data for the nation of Mouseville. There are no imports into or exports from Mouseville. Aggregate planned expenditure is less than actual expenditure if real GDP is A) more than $800 billion. B) less than $800 billion. C) $800 billion. D) more than $700 billion. E) less than $700 billion. Answer: A Topic: Adjustment to equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 67) The above table gives data for the nation of Mouseville. There are no imports into or exports from Mouseville. If real GDP is equal to $400 billion then A) unplanned inventory is -$200 billion. B) unplanned inventory is $200 billion. C) unplanned inventory is -$300 billion. D) aggregate expenditure is equal to consumption expenditure. E) aggregate expenditure is $450 billion. Answer: A Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 68) The above table gives data for the nation of Mouseville. There are no imports into or exports from Mouseville. Unplanned inventory changes are zero when real GDP equals A) $800 billion. B) $900 billion. C) $300 billion. D) $500 billion. E) $700 billion. Answer: A Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

69) The above table gives data for the nation of Mouseville. There are no imports into or exports from Mouseville. Unplanned inventory changes equal $50 billion when real GDP equals A) $900 billion. B) $800 billion. C) $300 billion. D) $500 billion. E) $700 billion. Answer: A Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

70) The above table gives data for the nation of South Hampton. There are no imports into or exports from South Hampton. The equilibrium level of real GDP is A) $500 billion. B) $600 billion. C) $700 billion. D) $800 billion. E) $400 billion. Answer: C Topic: Equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

71) The above table gives data for the nation of South Hampton. There are no imports into or exports from South Hampton. Aggregate planned expenditure is less than actual expenditure if real GDP is A) $700 billion. B) less than $700 billion. C) more than $700 billion. D) at the equilibrium level. E) Both answers A and C are correct. Answer: C Topic: Adjustment to equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 72) The above table gives data for the nation of South Hampton. There are no imports into or exports from South Hampton. If real GDP is equal to $900 billion, then A) aggregate planned expenditure is greater than real GDP. B) aggregate planned expenditure is less than real GDP. C) this is the equilibrium level of real GDP. D) aggregate planned expenditure is equal to real GDP. E) aggregate planned expenditure will need to decrease to reach the equilibrium. Answer: B Topic: Adjustment to equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

73) The table above gives data for the nation of Mosh. The MPC of the economy is A) 1. B) .75. C) .80. D) .90. E) indeterminate with the information provided. Answer: B Topic: Marginal propensity to consume Skill: Level 4: Applying models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 74) The table above gives data for the nation of Mosh. The amount of autonomous expenditure is A) $4 trillion. B) $1.5 trillion. C) $4.5 trillion. D) $9.0 trillion. E) not shown in this table. Answer: C Topic: Autonomous expenditure Skill: Level 4: Applying models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

75) The table above gives data for the nation of Mosh. If real GDP is $6 trillion, then A) firms decrease production because inventories exceed their target levels. B) firms increase production because inventories are less than their target levels. C) the economy has reached equilibrium and no change in production will occur. D) firms increase production because inventories exceed their target levels. E) We need more information to determine whether firms increase, decrease, or do not change their production. Answer: B Topic: Adjustment to equilibrium expenditure Skill: Level 4: Applying models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 76) The table above gives data for the nation of Mosh. If real GDP is $10 trillion, then A) firms decrease production because inventories exceed their target levels. B) firms increase production because inventories are less than their target levels. C) the economy has reached equilibrium and no change in production will occur. D) firms decrease production because inventories are less than their target levels. E) We need more information to determine whether firms increase, decrease, or do not change their production. Answer: A Topic: Adjustment to equilibrium expenditure Skill: Level 4: Applying models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 77) The table above gives data for the nation of Mosh. In Mosh, equilibrium expenditure equals A) $4 trillion. B) $6 trillion. C) $9 trillion. D) $7 trillion. E) $10 trillion. Answer: C Topic: Equilibrium expenditure Skill: Level 4: Applying models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

78) The table above gives data for the nation of Mosh. If we graphed these data, we would see that when GDP equals A) $6 trillion, the AE curve is below the 45° line. B) $10 trillion, the 45° line is above the AE curve. C) $9 trillion, the AE curve intersects the 45° line. D) $4 trillion, the AE curve intersects the 45° line. E) $10 trillion, the AE curve intersects the 45° line. Answer: C Topic: Equilibrium expenditure Skill: Level 4: Applying models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 79) The table above gives data for the nation of Mosh. If real GDP is $9 trillion, then unplanned inventory change equals A) 0. B) $5.5 trillion. C) $1.25 trillion. D) $5 trillion. E) $9 trillion. Answer: A Topic: Equilibrium expenditure Skill: Level 4: Applying models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

80) In the figure above, if real GDP is $20 trillion, aggregate planned expenditure is ________ $20 trillion and unplanned inventory changes are ________. A) less than; positive B) equal to; equals to zero C) less than; negative D) equal to; negative E) equal to; positive Answer: A Topic: Adjustment to equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 81) In the figure above, if real GDP is $10 trillion, aggregate planned expenditure is A) less than $10 trillion and unplanned inventory changes are positive. B) equal to $10 trillion and there are no unplanned inventory changes. C) more than $10 trillion and unplanned inventory changes are negative. D) equal to $10 trillion and unplanned inventory changes are negative. E) equal to $10 trillion and unplanned inventory changes are positive. Answer: C Topic: Adjustment to equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

82) In the above figure, equilibrium expenditure is equal to A) $5 trillion. B) $10 trillion. C) $15 trillion. D) $20 trillion. E) None of the above answers is correct. Answer: C Topic: Equilibrium expenditure Skill: Level 4: Applying models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 83) If exports increase, then the aggregate expenditure curve shifts ________ and equilibrium expenditure ________. A) upward; decreases B) upward; increases C) downward; decreases D) downward; increases E) upward; does not change Answer: B Topic: Change in equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Analytic skills 84) If autonomous imports increase, then the aggregate expenditure curve shifts ________ and equilibrium real GDP ________. A) upward; decreases B) upward; increases C) downward; decreases D) downward; increases E) downward; does not change Answer: C Topic: Change in equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Analytic skills

85) According to John Maynard Keynes A) Say's Law is always correct. B) a free market economy automatically finds equilibrium at full employment. C) prices and wages move up and down freely. D) effective demand determines real GDP. E) supply creates its own demand. Answer: D Topic: Eye on the past, Say's law and Keynes' principle of effective demand Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 86) When aggregate planned expenditure exceeds real GDP, there is A) a planned decrease in inventories. B) a planned increase in inventories. C) an unplanned decrease in inventories. D) an unplanned increase in inventories. E) an unplanned decrease in the price level. Answer: C Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 87) If aggregate planned expenditure is greater than real GDP A) an unplanned decrease in inventories leads to an increase in production. B) an unplanned increase in inventories leads to a decrease in production. C) a planned decrease in inventories leads to a decrease in production. D) a planned increase in inventories leads to an increase in production. E) an unplanned decrease in inventories leads to an increase in the price level. Answer: A Topic: Adjustment to equilibrium expenditure, inventories Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

88) If real GDP equals aggregate planned expenditure, then inventories A) rise above their target levels. B) fall below their target levels. C) equal their target levels. D) are either above or below their target levels depending on whether planned inventories are above or below their target levels. E) None of the above answers is necessarily correct because there is no relationship between inventories and aggregate planned expenditure. Answer: C Topic: Equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 89) Equilibrium expenditure is the level of expenditure at which A) firms' inventories are zero. B) firms' inventories are at the desired level. C) firms produce more output than they sell. D) aggregate planned expenditure minus planned changes in inventories equals real GDP. E) aggregate planned expenditure plus planned changes in inventories equals real GDP. Answer: B Topic: Equilibrium expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 30.3 Expenditure Multipliers 1) The expenditure multiplier explains how a change in A) real GDP leads to a change in autonomous expenditure. B) induced expenditure leads to a change in real GDP. C) autonomous expenditure leads to a change in real GDP. D) real GDP leads to a change in induced expenditure. E) induced expenditure leads to a change in autonomous expenditure. Answer: C Topic: Multiplier Skill: Level 1: Definition Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

2) The expenditure multiplier measures the change in A) equilibrium expenditure that results from a change in autonomous expenditure. B) autonomous spending that results from a change in equilibrium expenditure. C) equilibrium expenditure from a change in induced consumption. D) consumption expenditure for a given change in disposable income. E) the price level that results from a change in real GDP. Answer: A Topic: Multiplier Skill: Level 1: Definition Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 3) The idea of the multiplier is that a change in ________ expenditure changes real GDP, which then changes ________ expenditure. The change in total expenditure will be larger than the initial change in ________ expenditure. A) induced; autonomous; induced B) autonomous; induced; induced C) induced; autonomous; autonomous D) induced; induced; autonomous E) autonomous; induced; autonomous Answer: E Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 4) The expenditure multipliers occur because A) a change in autonomous expenditure causes real GDP to change in the opposite direction. B) government expenditure on goods and services change by a proportional amount to government taxes. C) a change in autonomous expenditures changes households' incomes. D) any change in real GDP must also change the price level. E) a change in households' incomes changes autonomous expenditure. Answer: C Topic: Multiplier Skill: Level 1: Definition Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

5) In an economy in with no income taxes or imports, the multiplier equals A) . B)

D) E)

. .

Answer: A Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 6) The expenditure multiplier is typically A) less than 1 but greater than 0. B) greater than 1. C) equal to 1. D) greater than 10. E) negative. Answer: B Topic: Multiplier Skill: Level 1: Definition Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 7) According to the aggregate expenditure model, when autonomous expenditure increases, equilibrium expenditure A) increases by a larger amount. B) increases by an equal amount. C) does not change because only induced expenditures increase equilibrium expenditure. D) does not change because autonomous expenditures has no effect on equilibrium expenditure. E) increases by a smaller amount. Answer: A Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

8) When investment increases, the multiplier points out that A) consumption decreases by a greater amount. B) real GDP increases by a greater amount. C) consumption increases by the same amount. D) real GDP decreases by a greater amount. E) ultimately investment increases by more than the initial increase. Answer: B Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 9) If investment increases,which of the following happens? i. Aggregate expenditure increases. ii. Real GDP increases. iii. Consumption expenditure decreases. A) i and ii B) i only C) ii only D) ii and iii E) i, ii, and iii Answer: A Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 10) The multiplier means that an increase in investment results in ________ aggregate expenditure that is ________ the increase in investment. A) increased; larger than B) increased; the same size as C) increased; smaller than D) decreased; larger than E) decreased; smaller than Answer: A Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

11) Increases in autonomous expenditure induce ________ in aggregate expenditure thereby making the multiplier ________. A) further increases; greater than one B) further increases; less than one C) a decrease; greater than one D) a decrease; less than one E) further increases; unnecessary Answer: A Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 12) If investment increases by $100, then the aggregate expenditure model concludes that equilibrium expenditure A) increases by $100. B) increases by less than $100. C) increases by more than $100. D) remains unchanged. E) decreases by $100. Answer: C Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 13) If autonomous spending decreases, then A) equilibrium expenditure decreases by the same amount. B) the expenditure multiplier means that equilibrium expenditure decreases by a larger amount. C) equilibrium expenditure does not change. D) the expenditure multiplier means that equilibrium expenditure increases by a larger amount. E) the expenditure multiplier means that equilibrium expenditure increases by a smaller amount. Answer: B Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

14) In an economy with no income taxes or imports, the expenditure multiplier is A) less than 1 only if the MPC is less than 1. B) greater than 1 only if the MPC is greater than 1. C) equal to 1 if the MPC is greater than 1. D) greater than 1 if the MPC is less than 1. E) always less than 1 no matter what the size of the MPC. Answer: D Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 15) If an increase of $10 billion of investment results in an increase in equilibrium expenditure of $40 billion, the multiplier equals A) $10 billion × $40 billion = $400 billion. B) $40 billion - $10 billion = $30 billion. C) $40 billion ÷ $10 billion = 4. D) $10 billion ÷ $40 billion = 0.25. E) $10 billion - $40 billion = -$30 billion. Answer: C Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 16) The multiplier is 5 and, as a result of a change in expenditure, equilibrium expenditure and real GDP change by $200 billion. What was the initial change in autonomous expenditure? A) $50 billion B) $40 billion C) $20 billion D) $200 billion E) $1,000 billion Answer: B Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

17) When the multiplier is ________, an autonomous decrease in investment of $200 billion decreases equilibrium real GDP by $400 billion. When the multiplier is ________, an autonomous decrease in investment of $200 billion decreases equilibrium real GDP by $800 billion. A) 2.0; 4.0 B) 0.2; 0.4 C) 0.4; 0.2 D) $400 billion; $800 billion E) 4.0; 8.0 Answer: A Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 18) If a $2 billion increase in investment brings about a $5 billion increase in equilibrium expenditure, we know that the multiplier equals A) 3. B) 10. C) 2.5. D) 4. E) 5. Answer: C Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 19) If the MPC is 0.6 and there are no imports or income taxes, the multiplier is A) 0.4. B) 0.6. C) 2.5. D) 6. E) 1.7. Answer: C Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

20) An economy has no imports or income taxes. The MPC is 0.75 and real GDP is $120 billion. Businesses increase investment by $4 billion. The multiplier is ________ and the change in real GDP from the increase in investment is ________ billion. A) 5; $25 B) 4; $16 C) 5; $16 D) 4; $25 E) 0.75; $3 Answer: B Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 21) If autonomous spending increases by $500 billion and, as a result, equilibrium real GDP increases by $2 trillion, then we know that the A) MPC is greater than 1. B) expenditure multiplier is 0.25. C) expenditure multiplier is 4.0. D) MPC equals 1. E) expenditure multiplier is 2.0. Answer: C Topic: Multiplier Skill: Level 4: Applying models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 22) A $1.5 trillion increase in investment leads equilibrium expenditure to increase from $7.0 trillion to $10.5 trillion. In this case, the expenditure multiplier is A) 1.50. B) 2.33. C) 4.67. D) 7.00. E) 10.5. Answer: B Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

23) An economy has no imports or income taxes. An increase in autonomous expenditure of $40 billion increases equilibrium expenditure by $160 billion. The expenditure multiplier equals A) 2. B) 4. C) 6. D) 8. E) 16. Answer: B Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 24) As a result of an initial increase in investment of $200 billion, real GDP increased by $800 billion. Given this information, the expenditure multiplier equals A) 6. B) 2. C) 4. D) 1/4. E) $800 billion. Answer: C Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 25) The MPC is 0.90 and there are no income taxes or imports. If government expenditures on goods and services increases by $2.0 billion, after the multiplier effect works out, aggregate expenditure increases by A) $1.8 billion. B) $2.22 billion. C) $10 billion. D) $20 billion. E) $2.0 billion. Answer: D Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

26) An economy has no imports or income taxes. The MPC is 0.75 and real GDP is $120 billion. Businesses increase investment by $4 billion. The new level of real GDP is A) $124 billion. B) $128 billion. C) $132 billion. D) $136 billion. E) $140 billion. Answer: D Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 27) In an economy with no income taxes or imports, if the MPC is .75, the multiplier is A) 0.25. B) 0.33. C) 0.50. D) 4.00. E) 3.00. Answer: D Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 28) In an economy with no income taxes or imports, if the multiplier is 5, what does the MPC equal? A) 0.5 B) 0.4 C) 0.8 D) 0.2 E) 0.9 Answer: C Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

29) If the marginal propensity to consume is very close to zero, then the multiplier A) is very close to zero. B) is very close to one. C) is very large. D) cannot be calculated. E) might be negative if the marginal tax rate is large enough. Answer: B Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

30) The above table contains information about the nation of Syldavia. There are no income taxes or imports in this nation. The marginal propensity to consume in Syldavia is equal to A) 0.80. B) 0.20. C) 5.00. D) 0.75. E) 0.40. Answer: A Topic: Marginal propensity to consume Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Revised AACSB: Analytic skills

31) The above table contains information about the nation of Syldavia. There are no income taxes or imports in this nation. When real GDP is $15 billion, firms' inventories experience an unplanned A) decrease of $10 billion. B) increase of $4 billion. C) increase of $10 billion. D) decrease of $1 billion. E) increase of $5 billion. Answer: D Topic: Convergence to equilibrium Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Revised AACSB: Analytic skills 32) The above table contains information about the nation of Syldavia. There are no income taxes or imports in this nation. The equilibrium expenditure is A) $15 billion. B) $25 billion. C) $10 billion. D) $20 billion. E) $30 billion. Answer: D Topic: Equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Revised AACSB: Analytic skills 33) The above table contains information about the nation of Syldavia. There are no income taxes or imports in this nation. The expenditure multiplier is equal to A) 0.8. B) 5. C) 2. D) 1.25. E) 10. Answer: B Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Revised AACSB: Analytic skills

34) Which of the following affects the magnitude of the multiplier? i. marginal propensity to consume ii. marginal propensity to invest iii. marginal tax rate A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Multiplier, income taxes, and imports Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 35) The value of the multiplier changes if the ________ changes. i. marginal tax rate ii. marginal propensity to import iii. marginal propensity to consume A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Multiplier, income taxes, and imports Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 36) The size of the expenditure multiplier is influenced by i. the marginal propensity to consume. ii. autonomous spending. iii. the marginal tax rate. A) i only B) ii only C) iii only D) ii and iii E) i and iii Answer: E Topic: Multiplier Skill: Level 1: Definition Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 74 Copyright © 2023 Pearson Education Ltd.

37) If the marginal propensity to consume is 0.85 and there are no imports or income taxes, the expenditure multiplier is equal to A) 1 - 0.85 = 0.15. B) 0.85 × the change in autonomous expenditure. C) 1 ÷ 0.85 = 1.176. D) 1 ÷ (1 - 0.85) = 1 ÷ 0.15 = 1.45. E) 0.85 ÷ 1 = 0.85. Answer: D Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 38) Which of the following reduces the magnitude of the expenditure multiplier? A) higher marginal tax rates B) decrease in imports C) decrease in saving D) decrease in government purchases of goods and services E) decrease in the marginal propensity to consume Answer: A Topic: Multiplier and income taxes Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 39) The ________ the marginal tax rate, the ________ the expenditure multiplier. A) smaller; smaller B) smaller; larger C) larger; larger D) larger; more negative E) None of the above is correct, because the expenditure multiplier is not related to the marginal tax rate. Answer: B Topic: Multiplier and marginal tax rate Skill: Level 1: Definition Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

40) The ________ the marginal tax rate, the ________ the effect on aggregate expenditure from a change in investment. A) larger; smaller B) larger; larger C) smaller; smaller D) smaller; larger E) More information about the effect on GDP is needed to answer the question. Answer: A Topic: Multiplier and marginal tax rate Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 41) The President proposes a reduction of personal income marginal tax rates in the United States. When marginal tax rates are reduced, there is A) an increase in the marginal propensity to consume. B) an increase in the magnitude of the expenditure multiplier. C) a decrease in the marginal propensity to consume. D) a decrease in the magnitude of the expenditure multiplier. E) no change in the slope of the AE line. Answer: B Topic: Multiplier and income taxes Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 42) The ________ the marginal propensity to import, the ________ the multiplier. A) smaller; smaller B) larger; larger C) larger; smaller D) larger; more negative E) None of the above is correct, because the expenditure multiplier is not related to the marginal propensity to import. Answer: C Topic: Multiplier and imports Skill: Level 1: Definition Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

43) The marginal propensity to import is larger in Mexico than in the United States. As a result A) the expenditure multiplier is larger in the United States. B) the expenditure multiplier is larger in Mexico. C) there is less autonomous investment in Mexico. D) there is more autonomous expenditure in Mexico. E) induced expenditure is larger in Mexico. Answer: A Topic: Multiplier and imports Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 44) Compared to the magnitude of the multiplier in an economy without imports, the multiplier in an identical economy with imports is A) always smaller. B) always larger. C) smaller only if imports exceed exports. D) larger only if exports exceed imports. E) exactly the same. Answer: A Topic: Multiplier and imports Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 45) The smaller the slope of the aggregate planned expenditure (AE) curve, the A) larger the multiplier. B) smaller the multiplier. C) larger is the marginal tax rate. D) larger are imports. E) larger are exports. Answer: B Topic: Multiplier and the AE curve Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

46) The formula,

, is equal to the

A) marginal propensity to consume. B) marginal propensity to export. C) expenditure multiplier. D) marginal tax rate. E) total amount of autonomous expenditure. Answer: C Topic: Multiplier and the AE curve Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 47) If the slope of the aggregate expenditure curve is 0.75, the expenditure multiplier is equal to A) 0.25. B) 0.75. C) 1.33. D) 4.00. E) 5.00. Answer: D Topic: Multiplier and the AE curve Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 48) If the expenditure multiplier is 5, the slope of the aggregate expenditure (AE) curve is A) 0.5. B) 0.6. C) 0.7. D) 0.8. E) 0.2. Answer: D Topic: Multiplier and the AE curve Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

49) If a country has an expenditure multiplier of 10, the slope of its aggregate planned expenditure (AE) curve is A) .10. B) .50. C) .90. D) 10.00. E) .80. Answer: C Topic: Multiplier and the AE curve Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 50) During 2019, exports increase from $1.0 trillion to $1.5 trillion. If the slope of the aggregate planned expenditure (AE) curve is 0.75, real GDP increases by A) $1.0 trillion. B) $2.0 trillion. C) $4.0 trillion. D) $6.0 trillion. E) $8.0 trillion. Answer: B Topic: Multiplier and the AE curve Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 51) During 2019, a country reported that its real GDP increased by $3.0 billion. If the slope of its aggregate planned expenditure curve is 0.9, then which of the following might have led to the increase in real GDP? A) Exports decreased by $0.3 billion. B) Exports increased by $0.3 billion. C) Imports increased by $0.3 billion. D) Government expenditure on goods and services increased by $3 billion. E) Investment decreased by $0.3 billion. Answer: B Topic: Multiplier and the AE curve Skill: Level 4: Applying models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

52) As the economy turns the corner into a recession, the level of unplanned inventories ________ and firms ________ production. A) increases; begin to decrease B) increases; begin to increase C) decreases; begin to decrease D) decreases; begin to increase E) increases; do not change Answer: A Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 53) During the start of an expansion, aggregate planned expenditure A) increases the magnitude of the expenditure multiplier. B) decreases the magnitude of the expenditure multiplier. C) exceeds real GDP. D) is less than real GDP. E) is slowly decreasing. Answer: C Topic: Business cycle Skill: Level 4: Applying models Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 54) ________ can trigger a recession. A) An increase in autonomous expenditure B) A decrease in autonomous expenditure C) Equality between aggregate expenditure and real GDP D) An increase in the expenditure multiplier E) An increase in induced expenditure Answer: B Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

55) ________ can trigger an expansion. A) An increase in autonomous expenditure B) A decrease in autonomous expenditure C) Equality between aggregate expenditure and real GDP D) A decrease in induced expenditure E) A downward shift of the AE line Answer: A Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 56) The multiplier effect A) explains what causes a recession. B) explains what causes an expansion. C) explains how the economy recovers from a recession. D) reinforces the negative effects of any reduction in spending. E) has no impact on equilibrium expenditure. Answer: D Topic: Business cycle Skill: Level 1: Definition Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 57) If the economy is in the expansion phase of a business cycle and investment increases, when the multiplier effect kicks in, the expansion A) picks up speed. B) slows down. C) peaks. D) is not effected. E) reverses. Answer: A Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

58) An insight into business cycles is gained by the fact that A) at a peak, autonomous expenditure increases, thereby leading to a recession. B) at a trough, induced expenditure decreases, thereby leading to an expansion. C) at a peak, a decrease in autonomous expenditure leads to a decrease in induced expenditure. D) changes in real GDP result in changes in autonomous expenditures. E) autonomous expenditure does not change at either a peak or a trough. Answer: C Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking 59) The expenditure multiplier is equal to the change in ________ divided by the change in ________. A) autonomous expenditure; equilibrium expenditure B) dependent expenditure; autonomous expenditure C) real GDP; equilibrium expenditure D) equilibrium expenditure; autonomous expenditure E) the price level; real GDP Answer: D Topic: Multiplier Skill: Level 1: Definition Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 60) The expenditure multiplier is larger than one because A) an increase in autonomous expenditure induces further increases in aggregate expenditure. B) additional expenditure induces lower incomes. C) an increase in autonomous expenditure brings about a reduction in the real interest rate. D) an increase in autonomous expenditure induces further decreases in aggregate expenditure. E) the price level rises, thereby reinforcing the initial effect. Answer: A Topic: Multiplier Skill: Level 1: Definition Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

61) The expenditure multiplier equals 5 and there is a $3 million increase in investment. Equilibrium expenditure A) decreases by $15 million. B) increases by $3 million. C) increases by $5 million. D) increases by $15 million. E) increases by $0.60 million. Answer: D Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 62) In an economy with no income taxes or imports, the marginal propensity to consume is 0.80. The expenditure multiplier is A) 0.20. B) 0.80. C) 1.25. D) 5.00. E) 10.0. Answer: D Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 63) An increase in the marginal tax rate A) increases the expenditure multiplier. B) decreases the expenditure multiplier but cannot make it negative. C) has no effect on the expenditure multiplier. D) can either increase or decrease the expenditure multiplier. E) decreases the expenditure multiplier and can make it negative. Answer: B Topic: Multiplier and income taxes Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

64) Which of the following increases the size of the expenditure multiplier? A) a decrease in the marginal propensity to consume B) an increase in autonomous spending C) an increase in the marginal income tax rate D) a decrease in the marginal propensity to import E) an increase in investment Answer: D Topic: Multiplier and imports Skill: Level 1: Definition Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 65) If the slope of the aggregate expenditure curve is 0.5, then the expenditure multiplier equals A) 5. B) 4. C) 3. D) 2. E) 0.5. Answer: D Topic: Multiplier and the AE curve Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 66) At the beginning of a recession, the expenditure multiplier A) offsets the initial cut in autonomous expenditure and slows the recession. B) reinforces the initial cut in autonomous expenditure and adds force to the recession. C) offsets the initial cut in autonomous expenditure and reverses the recession. D) reinforces the initial cut in autonomous expenditure and reverses the recession. E) has no effect on the recession. Answer: B Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

30.4 The AD Curve and Equilibrium Expenditure 1) When the price level ________, equilibrium expenditure ________ and the quantity of real GDP demanded ________. A) falls; increases; increases B) rises; increases; decreases C) falls; increases; decreases D) rises; decreases; increases E) rises; increases; increases Answer: A Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills 2) An increase in the price level A) lowers the purchasing power of wealth and cause consumption expenditures to decrease. B) shift the AE curve upward and increase equilibrium real GDP. C) shift the AE curve downward and increase equilibrium real GDP. D) increase the purchasing power of wealth and cause the consumption expenditures to increase. E) leads to a movement along the AE curve rather than a shift of the curve. Answer: A Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 3: Using models Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills 3) The level of equilibrium expenditure at each price level determines A) the points on the AD curve. B) aggregate planned production. C) the price level. D) full employment. E) the points on the AE curve. Answer: A Topic: Aggregate expenditure and aggregate demand Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Reflective thinking

4) The quantity of real GDP demanded on the AD curve is the equilibrium real GDP when A) aggregate planned expenditure equals real GDP. B) the price level equals the equilibrium price level. C) aggregate planned expenditure is greater than real GDP. D) aggregate planned expenditure is less than real GDP. E) equilibrium expenditure is greater than real GDP. Answer: A Topic: Aggregate expenditure and aggregate demand Skill: Level 1: Definition Section: Checkpoint 30.4 Status: Old AACSB: Reflective thinking 5) An increase in the price level shifts the AE curve A) upward and shifts the AD curve leftward. B) upward and shifts the AD curve rightward. C) downward and does not shift the AD curve. D) downward and shifts the AD curve leftward. E) downward and shifts the AD curve rightward. Answer: C Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills 6) A change in the price level ________ the AE curve and ________ the AD curve. A) shifts; shifts B) shifts; results in a movement along C) results in a movement along; shifts D) results in a movement along; results in a movement along E) has no effect on; results in a movement along Answer: B Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills

7) An increase in the price level leads to A) a downward shift in the AE curve and a movement upward along the AD curve. B) a downward shift in both the AE and AD curves. C) a downward shift in the AD curve and a movement downward along the AE curve. D) a leftward movement along both the AE and AD curves. E) an upward shift in the AE curve and a movement upward along the AD curve. Answer: A Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills 8) If the price level increases, the AE curve shifts A) upward and the AD curve shifts leftward. B) downward and the AD curve shifts rightward. C) upward and there is a movement along the AD curve. D) downward and there is a movement along the AD curve. E) upward and the AD curve shifts rightward. Answer: D Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills 9) When the AE curve shifts upward because the price level falls, the corresponding effect on the aggregate demand curve is A) a movement upward along the aggregate demand curve. B) a movement downward along the aggregate demand curve. C) a shift rightward of the aggregate demand curve. D) a shift leftward of the aggregate demand curve. E) nothing because aggregate demand does respond to changes in the price level. Answer: B Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills

10) A shift in the aggregate planned expenditure curve as a result of an increase in the price level results in A) a leftward shift in the aggregate demand curve. B) a downward movement along the aggregate demand curve. C) a rightward shift in the aggregate demand curve. D) an upward movement along the aggregate demand curve. E) no movement along the aggregate demand curve and no shift in the aggregate demand curve. Answer: D Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills 11) When the price level increases, aggregate planned expenditure decreases, which leads to A) a rightward shift of the aggregate demand curve. B) a leftward shift of the aggregate demand curve. C) an upward movement along the aggregate demand curve. D) a downward movement along the aggregate demand curve. E) neither a movement along nor a shift of the aggregate demand curve. Answer: C Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills 12) When the price level falls, the aggregate planned expenditure curve shifts ________, equilibrium expenditure ________ and there is a movement ________ along the aggregate demand curve. A) upward; increases; upward B) downward; decreases; downward C) upward; increases; downward D) downward; increases; upward E) upward; decreases; downward Answer: C Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills

13) When the price level increases, aggregate planned expenditure ________ and equilibrium real GDP ________. As a result, in the AS-AD model, the aggregate demand curve has a ________ slope. A) increases; increases; positive B) decreases; decreases; negative C) decreases; decreases; positive D) increases; decreases; negative E) decreases; increases; negative Answer: B Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills 14) A movement along the AE curve arises from a change in ________, and a movement along the AD curve arises from a change in ________. A) real GDP; the price level B) real GDP; investment C) the price level; the price level D) the price level; investment E) investment; the price level Answer: A Topic: Aggregate expenditure curve Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills 15) A change in the price level A) shifts the AE curve and creates a movement along the AD curve. B) creates a movement along the AE curve and shifts the AD curve. C) shifts the AE curve and the AD curve in the same direction. D) shifts the AE curve and the AD curve in opposite directions. E) creates a movement along both the AE curve and the AD curve. Answer: A Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills

16) The AD curve is the relationship between A) aggregate planned expenditure and the price level. B) aggregate planned expenditure and the quantity of real GDP demanded. C) the quantity of real GDP demanded and the quantity of real GDP supplied. D) the quantity of real GDP demanded and the unemployment rate. E) aggregate planned expenditure and real GDP when the price level is fixed. Answer: A Topic: Aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 30.4 Status: Old AACSB: Reflective thinking 17) The aggregate demand curve is downward sloping because A) a higher price level shifts the AE curve downward and decreases equilibrium GDP demanded. B) a higher price level shifts the AE curve downward and increases equilibrium GDP demanded. C) a higher price level shifts the AE curve upward and decreases equilibrium GDP demanded. D) a increase in real GDP must be accompanied by a decrease in the price level. E) None of the above are correct. Answer: A Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 4: Applying models Section: Checkpoint 30.4 Status: Old AACSB: Analytic skills

30.5 Chapter Figures

The above figure shows a nation's consumption function. 1) Using this consumption function, autonomous consumption is A) $0. B) between $1 and $2 trillion. C) more than $2 trillion and less that $5 trillion. D) more than $5 trillion and less than $8 trillion. E) more than $8 trillion. Answer: B Topic: Consumption function Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills

2) Using this consumption function, the marginal propensity to consume is A) 0. B) $1.5 trillion. C) $2 trillion. D) 1.33. E) 0.75. Answer: E Topic: Marginal propensity to consume Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills

The figure above shows three different consumption functions for a nation. 3) Which of the following events could result in the consumption function shifting from CF0 to CF1? A) an increase in disposable income B) a decrease in disposable income C) an increase in the real interest rate D) a decrease in wealth E) an increase in expected future income Answer: E Topic: Consumption function, expected future income Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 4) Which of the following events could result in the consumption function shifting from CF0 to CF2? A) an increase in disposable income B) a decrease in disposable income C) an increase in the real interest rate D) an increase in wealth E) an increase in expected future income Answer: C Topic: Consumption function, real interest rate Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 5) Which of the following events could result in the consumption function shifting from CF0 to CF2? A) an increase in disposable income B) a decrease in disposable income C) a decrease in the real interest rate D) a decrease in wealth E) an increase in expected future income Answer: D Topic: Consumption function, wealth Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills

The figure above shows two aggregate expenditure lines. 6) In the figure above, what is the size of the multiplier? A) 0.25 B) 4.0 C) $2 trillion D) $0.5 trillion E) More information is needed to determine the size of the multiplier. Answer: B Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Revised AACSB: Analytic skills

7) In the figure above, what would happen to the size of the multiplier if marginal income tax rates were increased? A) The multiplier would rise in value. B) The multiplier would fall in value but would not become negative. C) The multiplier would not change in value. D) The multiplier would fall in value and might become negative. E) More information is needed to determine the effect on the size of the multiplier. Answer: B Topic: Multiplier and income taxes Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Revised AACSB: Analytic skills 8) In the figure above, if the MPC increased, the aggregate expenditure lines would ________ and the multiplier would ________ in value. A) become steeper; rise B) become steeper; fall C) become less steep; rise D) not change; rise E) not change; fall Answer: A Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Revised AACSB: Analytic skills 9) In the figure above, if the marginal propensity to import increased, the aggregate expenditure lines would ________ and the multiplier would ________ in value. A) become steeper; rise B) become less steep; fall C) become less steep; rise D) not change; rise E) not change; fall Answer: B Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Revised AACSB: Analytic skills

30.6 Integrative Questions 1) The aggregate expenditure model predicts a business cycle expansion occurs when A) autonomous expenditure increases. B) aggregate supply increases. C) potential GDP increases. D) induced expenditure decreases. E) the aggregate planned expenditure curve shifts downward. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 2) Using the aggregate expenditure model, the equilibrium level of the aggregate expenditure can occur when the economy is producing A) only at full employment. B) only at above full employment. C) only at below full employment. D) at full employment, above full employment, or below full employment. E) at either below full employment or at full employment but never at above full employment. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 3) In the midst of the Great Depression, President Roosevelt in a radio address to the nation encouraged everyone to "spend ourselves into prosperity." His advice reflected A) Say's Law. B) the expenditure multiplier effect. C) his view that there should be no saving and no dissaving. D) the difference between actual aggregate expenditure and planned aggregate expenditure. E) his view that induced expenditure was less important than autonomous expenditure. Answer: B Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking

4) Investment decreases by $300 billion, government expenditure is unchanged, and exports increase by $500 billion. As a result, autonomous expenditure ________, the total expenditure ________, and equilibrium real GDP ________. A) decreases by $300 billion; decreases; decreases by more than $300 billion B) increases by $500 billion; is unchanged; increases by more than $500 billion C) is unchanged; is unchanged; is unchanged D) increases by $800 billion; increases; increases by more than $800 billion E) increases by $200 billion; increases; increases by more than $200 billion Answer: E Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 5) Exports decrease by $500 billion, investment increases by $300 billion, and government expenditure increases by $200 billion. As a result, autonomous expenditures ________, total expenditures ________, and equilibrium real GDP ________. A) decreases by $300 billion; decreases; decreases by more than $300 billion B) is unchanged; is unchanged; is unchanged C) decreases by $200 billion; decreases; decreases by more than $200 billion D) increases by $500 billion; increases; increases by more than $500 billion E) increases by $3500 billion; increases; increases by more than $300 billion Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 6) A ________ in the real interest rate ________ consumption expenditure and shifts the consumption function ________. A) fall; increases; upward B) fall, decreases; upward C) rise; decreases; upward D) rise, increases; downward E) fall; increases; downward Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

7) When firms reduce their target level of inventories, planned investment ________, and equilibrium expenditure and real GDP ________. A) falls; decrease B) falls; increase C) rises; decrease D) rises; increase E) falls; remains the same Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 8) When a(n) ________ in investment increases consumption and real GDP, part of the increase in expenditure is on ________, not ________ goods and services. A) increase; imports; foreign-produced B) decrease; imports; U.S.-produced C) decrease; exports; U.S.-produced D) increase; imports; U.S.-produced E) increase; exports; U.S.-produced Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 9) When an expansion is triggered by a(n) ________ in autonomous expenditure, the economy turns the corner into ________, and aggregate planned expenditure exceeds real GDP. Firms' inventories ________. A) increase; expansion; increase B) increase; recession; increase C) increase; recession; decrease D) decrease; expansion; decrease E) increase; expansion; decrease Answer: E Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

10) When a recession is triggered by a(n) ________ in autonomous expenditure, and as the economy turns the corner into ________, real GDP exceeds aggregate planned expenditure and unplanned inventories ________. A) decrease; recession; decrease B) decrease; recession; increase C) decrease; expansion; increase D) decrease; expansion; decrease E) increase; recession; increase Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 11) To cut inventories, firms produce ________ and real GDP ________, which ________ people's incomes. A) more; rises; raises B) more; falls; lowers C) less; falls; lowers D) less; rises; lowers E) less; rises; raises Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 12) The consumption function shifted upward from 1960 to 2018 because as economic growth brought ________ expected future income and ________ wealth, people chose to ________ their consumption expenditure from a given level of income. A) higher; less; increase B) higher; less; decrease C) lower; greater; increase D) higher; greater; increase E) higher; greater; decrease Answer: D Topic: Eye on the U.S. economy, the U.S. consumption function Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills

13) During the recession of 2009, the consumption function temporarily shifted ________ as a fall in house prices ________ wealth and encouraged people to ________ more. A) downward; lowered; spend B) downward; raised; save C) downward; raised; spend D) upward; lowered; save E) downward; lowered; save Answer: E Topic: Eye on the U.S. economy, the U.S. consumption function Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 30.7 Essay: Expenditure Plans and Real GDP 1) Define autonomous consumption and explain how it is represented on a consumption function graph. Answer: Autonomous consumption is the consumption expenditure that occurs when disposable income is zero. This situation is possible only in the short run because people can either spend past savings or borrow. The amount of autonomous consumption is shown by the vertical intercept of the consumption function. Topic: Autonomous consumption Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 2) What is the consumption function? What factor leads to a movement along the consumption function? Answer: The consumption function is the relationship between disposable income and the amount of consumption expenditure, other things remaining the same. A change in disposable income results in a movement along the consumption function. Topic: Consumption function Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Written and oral communication

3) List and explain factors that influence consumption expenditure. Answer: Disposable income is an important factor that influences consumption expenditure. There is a direct relationship between the two, so that an increase in disposable income leads to an increase in consumption expenditure. There also are three other factors that influence consumption expenditure: the real interest rate, wealth, and expected future disposable income. When the real interest rate falls, wealth increases, or expected future disposable income increases, consumption increases. Alternatively, when the real interest rate rises, wealth decreases, or expected future income decreases, consumption expenditure decreases. Topic: Consumption function Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Written and oral communication 4) How is it possible for consumption expenditure to be positive even when disposable income is zero? Answer: Consumption expenditure can be positive when disposable income is zero because people can "dissave," that is, they can use their past saving to finance current consumption expenditure. Dissaving cannot occur indefinitely because eventually people's savings will be dissipated. Topic: Consumption function, autonomous consumption Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Written and oral communication 5) What is the marginal propensity to consume? Can the marginal propensity to consume be greater than 1? Answer: The marginal propensity to consume is the change in consumption expenditure divided by the change in disposable income that brought it about. The marginal propensity to consume cannot be greater than 1. Indeed, it is less than 1 because people save part of an increase in disposable income. Topic: Marginal propensity to consume Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Written and oral communication

6) What does the marginal propensity to consume measure and how is it related to the consumption function? Answer: The marginal propensity to consume, or MPC, is the change in consumption expenditure divided by the change in disposable income. The MPC tells the proportion of any change in disposable income spent on consumption expenditure. The marginal propensity to consume is equal to the slope of the consumption function. Topic: Marginal propensity to consume Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Old AACSB: Written and oral communication 7) What is the relationship between U.S. real GDP and U.S. imports? Answer: When U.S. real GDP increases, so does U.S. income. And the increase in income leads to an increase in U.S. imports. Topic: Imports and GDP Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Reflective thinking 8) Discuss the link between real GDP and imports. Answer: Imports are one of two components that are influenced by changes in U.S. real GDP and so imports are referred to as an induced expenditure. Other things the same, an increase in U.S. real GDP leads to an increase in U.S. imports. As U.S. income increases, households purchase more domestic as well as more foreign goods and services. Topic: Imports and GDP Skill: Level 1: Definition Section: Checkpoint 30.1 Status: Old AACSB: Written and oral communication

9) The above table has data on the consumption function in the nation of Mojo. a. What is the amount of autonomous consumption expenditure? b. What is the marginal propensity to consume? Answer: a. Autonomous consumption expenditure equals the consumption expenditure when disposable income is $0, so autonomous consumption expenditure is $0.8 trillion. b. The marginal propensity to consume equals 0.80. Topic: Consumption function Skill: Level 2: Using definitions Section: Checkpoint 30.1 Status: Revised AACSB: Analytic skills 10) When disposal income is $5.0 trillion, consumption expenditure is $4.5 trillion. When disposal income is $6.0 trillion, consumption expenditure is $5.0 trillion. What is the marginal propensity to consume? Answer: The marginal propensity to consume is the change in consumption expenditure divided by the change in disposable income that brought it about. In this case, the marginal propensity to consume equals ($0.5 trillion ÷ $1.0 trillion) = 0.50. Topic: Marginal propensity to consume Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills 11) At $10,000 of disposable income, Audrey's consumption expenditure was $11,000. At $20,000 of disposable income, Audrey's consumption expenditure was $19,000. What is Audrey's marginal propensity to consume? Answer: The marginal propensity to consume is the change in consumption expenditure divided by the change in disposable income that brought it about. In this case, the marginal propensity to consume equals ($8,000 ÷ $10,000) = 0.80. Topic: Marginal propensity to consume Skill: Level 3: Using models Section: Checkpoint 30.1 Status: Old AACSB: Analytic skills

30.8 Essay: Equilibrium Expenditure 1) What is the difference between induced and autonomous expenditure? Which components of aggregate expenditure fall under which category? Answer: Induced expenditure is expenditure that depends on the level of real GDP, so that when real GDP changes, induced expenditure changes. Autonomous expenditure is independent of the level of real GDP, so that when real GDP changes, autonomous expenditure does not change. Consumption expenditure includes elements of both autonomous and induced expenditure. So, too, do imports. However, investment, government expenditure on goods and services, and exports are all autonomous expenditure. Topic: Autonomous versus induced expenditures Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication 2) Define induced expenditure and autonomous expenditure. Which expenditure items are induced expenditure and which are autonomous expenditure? Answer: Induced expenditure is aggregate expenditure that changes as real GDP changes. Consumption expenditure and imports respond to changes in real GDP, so they have induced components. Autonomous expenditure is aggregate expenditure that does not change as real GDP changes. Investment, government expenditure, and exports are autonomous expenditure. Consumption expenditure also has an autonomous component. Topic: Autonomous versus induced expenditures Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication 3) List the components of aggregate expenditure and describe how each of them changes as real GDP increases. Answer: The components of aggregate expenditure are consumption expenditure, investment, government expenditures on goods and services, exports, and imports. As real GDP increases, consumption expenditure and imports increase. However, investment, government expenditure on goods and services, and exports do not change—they are examples of autonomous expenditure, spending that does not change when real GDP changes. Topic: Autonomous versus induced expenditures Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication

4) "Similar to imports, U.S. exports depend on the level of U.S. real GDP so that if real GDP increases, U.S. exports increase." Explain whether the previous sentence is correct or incorrect. Answer: The sentence is incorrect along two dimensions. First, U.S., exports do not depend on U.S. real GDP. Indeed, U.S. exports are part of autonomous spending. Second, because U.S. exports do not depend on U.S. real GDP, they definitely do not increase when U.S. real GDP increases. Topic: Autonomous expenditure, exports Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication 5) "Aggregate planned expenditure is the sum of planned consumption expenditure, investment, government expenditures on goods and services, and exports minus imports." Is the previous statement correct or incorrect? Answer: The statement accurately describes aggregate planned expenditure. Topic: Aggregate expenditure Skill: Level 1: Definition Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking 6) What is unplanned investment? How does it occur? Answer: Unplanned investment occurs when inventories grow larger than planned. The difference between the actual change in inventories and the planned change is unplanned investment. Unplanned investment occurs when aggregate planned expenditure is less than real GDP so firms sell less output than they had planned. Topic: Unplanned inventory changes Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication 7) If unplanned inventory changes are positive, what is the relationship between aggregate planned expenditure and real GDP? Answer: If unplanned inventory changes are positive, firms are not selling all the goods and services they had produced. In this case, aggregate planned expenditure is less than real GDP. Topic: Unplanned inventory changes Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Reflective thinking

8) Explain the relationship between real GDP and aggregate planned expenditure, AE. What change to inventories takes place when the two are NOT equal? Answer: If the GDP and aggregate planned expenditure are equal, then there is an equilibrium. But if aggregate planned expenditure is not equal to real GDP, the economy is out of equilibrium. If aggregate planned expenditure is greater than real GDP, then households, firms, and governments plan to buy more goods and services than firms are producing. Firms meet the extra demand by allowing their inventories to decrease. The decrease is unplanned on the part of firms. So when aggregate planned expenditure exceeds real GDP, there is an unplanned decrease in inventories. Similarly, if aggregate planned expenditure is less than real GDP, households, firms, and governments plan to buy less than firms produce and so there is an unplanned increase in firms' inventories. Topic: Unplanned inventory changes Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication 9) If real GDP exceeds aggregate planned expenditure, what happens to a firm's unplanned inventories? Answer: If real GDP exceeds aggregate planned expenditure, firms are producing more goods and services than households, firms, and governments are planning to buy. As a result, firms will not be able to sell all of their production. The unsold amounts will wind up in their inventories and so unplanned inventory increases. Topic: Unplanned inventory changes Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication 10) At the equilibrium level of aggregate expenditure, what does aggregate expenditure equal? What happens at other levels of real GDP to bring about an equilibrium? Answer: At the equilibrium level of aggregate expenditure, aggregate expenditure is equal to real GDP. At levels of real GDP where aggregate expenditure is greater than real GDP, business inventories are less than their target levels. In this situation, businesses increase their production, so output increases and real GDP increases. At levels of real GDP where aggregate expenditure is less than real GDP, business inventories are greater than their target levels. In this situation, businesses decrease their production, so output decreases and real GDP decreases. Topic: Equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication

11) "If aggregate planned expenditure exceeds real GDP, then aggregate expenditure and real GDP will increase." Explain whether the previous sentence is correct or incorrect. Answer: The sentence is correct. If aggregate planned expenditure exceeds real GDP, then firms find that their inventories are being decreased more than planned. As a result, firms increase production in order to restore their inventories back to their planned levels. When firms increase their production of goods and services, real GDP increases. Topic: Equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication 12) Suppose that firms find that their inventories are less than planned. In this case, what is the initial relationship between aggregate planned expenditure and real GDP? Using the aggregate expenditure model, what adjustments, if any, take place? Answer: If inventories are less than planned, aggregate planned expenditure exceeds real GDP. In order to restore their inventories to their desired levels, firms will increase their production. As a result, real GDP increases. Inventories remain less than planned and real GDP continues to increase until eventually real GDP reaches its equilibrium level, at which point actual and planned inventories are equal. Topic: Adjustment to equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication 13) How do firms respond to unplanned inventory changes? What is the effect on their production and GDP? Answer: If inventories are above their target levels, that is, more than planned, firms decrease their production. As a result, GDP decreases. Conversely, if inventories are below their target levels, that is, less than planned, firms increase their production. In this case, GDP increases. Topic: Adjustment to equilibrium expenditure Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication

14) A country reports that it has an unplanned inventory increase of $1.0 trillion. Discuss how the economy adjusts until it reaches an unplanned inventory change of $0.0 trillion. Answer: When unplanned inventory changes are positive, real GDP exceeds aggregate planned expenditures. There is an inventory buildup, so firms decrease production and as a result real GDP decreases. Firms continue to decrease production until real GDP equals aggregate planned expenditures and unplanned inventory changes equal zero. Topic: Adjustment to equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication 15) Describe the relationship between aggregate planned expenditure, real GDP, and unplanned inventory changes. Answer: When aggregate planned expenditure exceeds real GDP, unplanned inventory changes are negative. When aggregate planned expenditure is less than real GDP, unplanned inventory changes are positive. When aggregate planned expenditure equals real GDP, unplanned inventory changes are zero, that is, there are no unplanned changes in inventories. Topic: Adjustment to equilibrium expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication 16) Who was Jean-Baptiste Say? How does his theory (or "law") compare with that of John Maynard Keynes? Answer: Jean-Baptiste Say was a French economist born in 1767. He reasoned, in his bestselling book, Treatise in Political Economy, that the supply side of the market is the dominant factor in the market in achieving the equilibrium. He argued that the production of goods and services would create the income necessary to demand these goods and service, hence the phrase "supply creates its own demand." This idea became known as Say's Law. On the other hand, John Maynard Keynes, a British economist born in 1883 and a key figure in establishing the International Monetary Fund (IMF), took the opposite view of his predecessor. He advocated that it is the effective demand that rules the roost in determining the real GDP and that the mere production of goods and services was no guarantee that there would exist demand for them. Topic: Eye on the past, Say's law and Keynes' principle of effective demand Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication

17) Compare and contrast Say's views of the macroeconomy with that of Keynes. What does each have to say about the economy in relationship to its potential level of real GDP? Answer: Jean-Baptiste Say, a prominent French economist of the 19th century, reasoned that "supply creates its own demand." In Say's view, the production of goods and services creates enough income so that there will be a demand for all the goods and services produced. The economy adjusts so that aggregate expenditure equals potential GDP and, as a result, real GDP equals potential GDP. John Maynard Keynes, a prominent 20th century English economist disagreed. He reasoned that supply does not create its own demand and that it is effective demand that determines real GDP. If businesses fail to invest as much as people save, aggregate planned expenditures will be less than potential GDP. Prices and wages are sticky and so, in this case, resources can become unemployed and remain unemployed indefinitely. Real GDP will be less than potential GDP. Topic: Eye on the past, Say's law and Keynes' principle of effective demand Skill: Level 2: Using definitions Section: Checkpoint 30.2 Status: Old AACSB: Written and oral communication

18) The above table presents data for the nation of Economica. a. What is the aggregate planned expenditure and unplanned inventory change at each level of real GDP? b. At what level of real GDP is equilibrium expenditure achieved? Answer: a. When real GDP is $0, aggregate planned expenditure (the sum of C + I + G + X - M) equals $4.5 trillion and unplanned inventory change (the difference between GDP and aggregate planned investment) is -$4.5 trillion. When real GDP is $2.5 trillion, aggregate planned expenditure is $5.5 trillion and unplanned inventory change is -$3.0 trillion. When real GDP is $5.0 trillion, aggregate planned expenditure is $6.5 trillion and unplanned inventory change is $1.5 trillion. When real GDP is $7.5 trillion, aggregate planned expenditure is $7.5 trillion and unplanned inventory change is $0. And when real GDP is $10 trillion, aggregate planned expenditure is $8.5 trillion and unplanned inventory change is $1.5 trillion. b. Equilibrium expenditure occurs when unplanned inventory change is $0, or, equivalently, when real GDP equals aggregate planned expenditure. In this problem, equilibrium expenditure occurs when real GDP is $7.5 trillion. Topic: AE model Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

19) The above table gives information for the nation of North Hampton. There are no imports to or exports from North Hampton. a. Find aggregate planned expenditure for each level of real GDP. b. What is the equilibrium level of real GDP? Answer:

a. To calculate aggregate expenditure, for each level of real GDP sum consumption expenditure plus investment plus government purchases. The above table has the answers for each level of real GDP. b. Equilibrium real GDP is $800 billion because that is the level of real GDP that equals aggregate planned expenditure. Topic: AE model Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

20) The above table gives information for the nation of East Hampton. a. Find aggregate planned expenditure for each level of real GDP. b. What is the MPC? c. What is the equilibrium level of real GDP? Answer:

a. To calculate aggregate expenditure, for each level of real GDP add consumption expenditure plus investment plus government purchases plus exports and then subtract imports. The above table has the answers for each level of real GDP. b. The MPC equals 0.80, the change in consumption expenditure divided by the change in disposable income that brought it about. c. Equilibrium real GDP is $1,000 billion because that is the level of real GDP that equals aggregate planned expenditure. Topic: AE model Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills

21) The above figure shows the AE curve and 45° line for an economy. a. If real GDP equals $10 trillion, how do firms' inventories compare to their planned inventories? b. If real GDP equals $20 trillion, how do firms' inventories compare to their planned inventories? c. What is the equilibrium level of expenditure? Why is this amount the equilibrium? Answer: a. If real GDP equals $10 trillion, aggregate expenditure exceeds GDP and so firms' inventories are less than planned. b. If real GDP equals $20 trillion, aggregate expenditure is less than GDP and so firms' inventories are more than planned. c. The equilibrium level of expenditure is $15 trillion because at this level of GDP, aggregate expenditure equals GDP. As a result, firms' inventories equal planned inventories so firms have no incentive to either increase or decrease production. Topic: AE model Skill: Level 3: Using models Section: Checkpoint 30.2 Status: Revised AACSB: Analytic skills 30.9 Essay: Expenditure Multipliers 1) What effect does an increase in the MPC have on the slope of the AE curve? Answer: An increase in the MPC increases the slope of the AE curve and thereby makes it steeper. Topic: MPC and the AE curve Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

2) Explain what happens to equilibrium expenditure if autonomous expenditure increases by $100 million. Answer: Equilibrium expenditure will increase by more than $100 million because of the multiplier. Basically, the $100 million increase in spending will induce further increases in aggregate expenditure because the initial increase in expenditure increases income, which, in turn, causes further increases in expenditure and income. Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Written and oral communication 3) Explain why the expenditure multiplier is greater than 1. Answer: The expenditure multiplier is greater than 1 because increases in real GDP induce further increases in expenditure. For instance, suppose Intel spends $500 million building a new factory. As a result, the disposable income of the workers constructing the factory increases. With the increase in their disposable income, these workers increase their consumption expenditure. Perhaps they all purchase new Ford SUVs. Ford must employ additional workers to build these SUVs, and so these workers' incomes increase. Possibly the Ford workers all buy new stoves. Hence the initial increase in Intel's investment has induced additional consumption expenditure upon SUVs and stoves. And the process won't stop with the stoves because the workers who make the stoves will increase their consumption expenditure. All of the added consumption expenditure makes the expenditure multiplier greater than 1. Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Written and oral communication

4) Explain the basic idea of the expenditure multiplier and the role consumers play in determining its magnitude. Answer: The basic idea of the expenditure multiplier is that any increase in expenditure will increase real GDP by a larger (a multiple) amount. The magnitude of the expenditure multiplier basically depends on how strongly consumers respond to additional income. Any initial increase in expenditure increases aggregate expenditure, which leads to more production and an increase in real GDP and income. Thus an increase, say in investment, will generate an increase in income and this increase, in turn, will induce an increase in consumption expenditure. The second round, the increase in consumption expenditure, is the result of the first round, the increase in investment. But the story does not stop with just two rounds. The initial increase in expenditure sets off a chain of increases because the second round increase in consumption leads to yet another increase in GDP and income. As a result of this next increase in income, consumption expenditure increases another time and a third round of expenditure increases occurs. The final result of all the rounds has real GDP increasing many fold compared to the initial increase in investment. Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Written and oral communication 5) "If the marginal tax rate is high enough, the expenditure multiplier can be negative." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The higher the marginal tax rate, the smaller the expenditure multiplier, but the expenditure multiplier always remains positive. Topic: Expenditure multiplier and income taxes Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Reflective thinking

6) Discuss how the marginal propensity to consume, imports, and marginal tax rates influence the expenditure multiplier. Answer: The simple expenditure multiplier, in an economy with no imports or income taxes, is 1/(1 - MPC), where MPC is the marginal propensity to consume. The MPC measures how much consumption changes when disposable income changes. The larger is the MPC, the larger is the expenditure multiplier. Both the taxes and imports decrease the size of the expenditure multiplier because both taxes and imports "divert" changes in GDP from consumption expenditure on domestic goods and services. The larger the marginal tax rate and the larger the marginal propensity to import, the smaller the expenditure multiplier. The larger the marginal tax rate, the smaller the change in disposable income from any change in GDP and, as a result, the smaller than induced change in consumption expenditure. The larger the marginal propensity to import, the more increased consumption expenditure falls on imported goods and so the smaller the effect on domestically produced goods and services. Topic: Expenditure multiplier, imports, and income taxes Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Written and oral communication 7) Briefly describe how imports and taxes affect the size of the expenditure multiplier. Answer: Both imports and taxes make the expenditure multiplier smaller. When the marginal propensity to import is larger, more of the induced consumption expenditure goes towards foreign goods, which have no effect on domestic production or income. When the tax rate is higher, more of the induced change in income goes towards taxes, leaving less available for spending. Topic: Expenditure multiplier, imports, and income taxes Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Written and oral communication 8) What is the relationship between the slope of the aggregate expenditure curve and the expenditure multiplier? Answer: The expenditure multiplier equals . This relationship exists regardless of the existence or absence of imports or income taxes. Topic: Expenditure multiplier, imports, and income taxes Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Written and oral communication

9) List and explain factors that determine the size of the expenditure multiplier in the expenditure model when prices are constant. Answer: The size of the expenditure multiplier depends on three factors: the marginal propensity to consume, the marginal propensity to import, and the marginal income tax rate. The larger the marginal propensity to import and the larger the marginal tax rate, the smaller the multiplier. These two factors work to decrease the size of the multiplier because imports reduce spending on U.S. produced products and income taxes reduce the impact of a change in real GDP on consumption expenditure. On the other hand, the larger the marginal propensity to consume, the larger the multiplier. Topic: Expenditure multiplier, imports, and income taxes Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Written and oral communication 10) "A country's expenditure multiplier is constant over time." Explain whether the previous statement is correct or incorrect. Answer: The statement is incorrect. The expenditure multiplier changes as marginal income tax rates change, as the marginal propensity to import changes, and as the marginal propensity to consume changes over time. Topic: Expenditure multiplier Skill: Level 4: Applying models Section: Checkpoint 30.3 Status: Old AACSB: Written and oral communication 11) Discuss the relationship between the business cycle and changes in autonomous expenditures. Answer: An increase in autonomous expenditure increases aggregate planned expenditure. At the moment the economy turns the corner into expansion, aggregate planned expenditure exceeds real GDP. Firms' inventories become less than their target levels, so firms increase production in order to build up their inventories. The reverse happens when a recession begins. A decrease in autonomous expenditure decreases aggregate planned expenditure. When the economy turns the corner into recession, aggregate planned expenditure is less than real GDP. As a result firms' inventories exceed their target levels, and so firms decrease production in order to decrease their inventories. Topic: Business cycle Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Written and oral communication

12) Suppose an economy has no income taxes or imports. If the MPC is 0.75, what does the expenditure multiplier equal? Answer: The expenditure multiplier equals , so in this case it equals = = 4.0. Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 13) Suppose the economy has no income taxes or imports. The MPC equals 0.8. What does the expenditure model predict will be the change in real GDP if investment increases by $200 billion? Answer: The expenditure multiplier equals , so for the case in the question, the expenditure multiplier equals

= 5.0. The change in real GDP equals the

expenditure multiplier multiplied by the change in investment, or 5.0 × $200 billion = $1,000 billion. Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 14) Suppose the economy has no income taxes or imports. How is the size of the expenditure multiplier related to the marginal propensity to consume? What is the multiplier if the MPC equals 0.25? If the MPC equals 0.50? If the MPC equals 0.90? Answer: The multiplier equals , so the larger the MPC, the larger the multiplier. If the MPC is 0.25, the multiplier equals equals

= 1.3. If the MPC is 0.50, the multiplier

= 2.0. And if the MPC is 0.90, the multiplier equals

10.0. So, the larger the MPC, the larger the multiplier. Topic: Multiplier Skill: Level 3: Using models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

15) If an economy experiences a $0.8 trillion increase in investment resulting in an increase in real GDP from $10 trillion to $12 trillion, a. what is the change in equilibrium expenditure? b. what is the change in autonomous expenditure? c. what is the multiplier? d. how would an increase in the marginal tax rate effect the multiplier? Answer: a. The change in equilibrium expenditure is $2.0 trillion. b. The change in autonomous expenditure is $0.8 trillion. c. The multiplier is 2.5. d. An increase in the marginal tax rate decreases the size of the multiplier. Topic: Multiplier Skill: Level 2: Using definitions Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills 16) The slope of the AE curve is .80. What is the expenditure multiplier? Everything else the same, by how much does equilibrium aggregate expenditure increase if a. exports increase from $1.75 trillion to $2.25 trillion? b. government expenditure on goods and services decrease from $2.0 trillion to $1.8 trillion? c. investment increases from $1.2 trillion to $2.3 trillion? Answer: The multiplier is 5. a. The change in equilibrium aggregate expenditure equals the multiplier times the change in autonomous expenditure, which is $0.5 trillion. So the change in equilibrium expenditure is . b. The change in equilibrium aggregate expenditure equals the multiplier times the change in autonomous expenditure, which is -$0.2 trillion, that is, government expenditures decrease by . So the change in equilibrium expenditure is 5 × (-$0.2 trillion) = -$1.0 billion. c. The change in equilibrium aggregate expenditure equals the multiplier times the change in autonomous expenditure, which is $1.1 trillion. So the change in equilibrium expenditure is . Topic: Multiplier and the AE curve Skill: Level 4: Applying models Section: Checkpoint 30.3 Status: Old AACSB: Analytic skills

30.10 Essay: The AD Curve and Equilibrium Expenditure 1) "When the price level increases, aggregate planned expenditure increases and equilibrium expenditure increases." Is the preceding statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. An increase in the price level decreases aggregate planned expenditure because the purchasing power of money falls, the real interest rises, and the price of imports become less expensive relative to domestically produced goods. Because aggregate planned expenditure decreases, equilibrium expenditure decreases. Topic: Aggregate expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Written and oral communication 2) An increase in the price level shifts the aggregate planned expenditure curve downward and results in a movement along the aggregate demand curve. Why does an increase in the price level result in a shift in the aggregate planned expenditure curve rather than a movement along it? Answer: The increase in the price level shifts the aggregate planned expenditure curve because the aggregate planned expenditure curve plots expenditure against real GDP. In other words, the curve shows how aggregate planned expenditure changes when real GDP changes. Thus a change in real GDP results in a movement along the aggregate planned expenditure curve. But the effect from an increase in the price level creates a shift in the curve because at any level of real GDP, a higher price level means a lower level of expenditure. Because the effect of the higher price level applies at ALL levels of real GDP, the aggregate planned expenditure curve shifts downward. Topic: Aggregate expenditure Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Written and oral communication 3) What is the relationship between the aggregate planned expenditure curve and the aggregate demand curve? Explain the relationship. Answer: The aggregate demand curve is derived using the aggregate planned expenditure curve. The aggregate planned expenditure curve shows how equilibrium expenditure changes when the price level changes. Then the aggregate demand curve plots the price level and the resulting equilibrium expenditure to illustrate how equilibrium expenditure (and hence the aggregate quantity of real GDP demanded) depends on the price level. Topic: Aggregate expenditure and aggregate demand Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Written and oral communication

4) How does an increase in the price level affect the aggregate planned expenditure curve and the aggregate demand curve? Answer: An increase in the price level shifts the aggregate planned expenditure curve downward and leads to a movement upward along the aggregate demand curve. Topic: Aggregate expenditure, aggregate demand, and the price level Skill: Level 2: Using definitions Section: Checkpoint 30.4 Status: Old AACSB: Reflective thinking

Foundations of Economics, 9e (Bade), GE Chapter 15 The Short-Run Policy Tradeoff 31.1 The Short-Run Phillips Curve 1) If the economy is at full employment, then the unemployment rate A) is greater than the natural unemployment rate. B) is equal to the natural unemployment rate. C) is below the natural unemployment rate. D) can be anywhere on a short-run Phillips curve. E) is equal to zero. Answer: B Topic: Full employment Skill: Level 4: Applying models Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 2) The short-run Phillips curve shows A) potential GDP. B) a tradeoff between the unemployment rate and the inflation rate. C) the natural unemployment rate. D) the expected inflation rate. E) a tradeoff between real GDP and unemployment. Answer: B Topic: Short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 3) The short-run Phillips curve shows the relationship between the A) natural unemployment rate and the expected inflation rate. B) natural unemployment rate and the real interest rate. C) inflation rate and the unemployment rate. D) expected inflation rate and the unemployment rate. E) inflation rate and the nominal interest rate. Answer: C Topic: Short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

4) The short-run Phillips curve is a curve that shows the relationship, other things being constant, between ________ and ________. A) the inflation rate; the unemployment rate B) the unemployment rate; real GDP C) potential GDP; the natural unemployment rate D) the inflation rate; the expected inflation rate E) the inflation rate; the nominal interest rate Answer: A Topic: Short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 5) The short-run Phillips curve shows the relationship between the inflation rate and the unemployment rate when ________ remain(s) constant. A) monetary policy B) the natural unemployment rate and the expected inflation rate C) fiscal policy D) interest rates E) aggregate demand Answer: B Topic: Short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 6) The natural unemployment rate and the expected inflation rate are constant when moving along the ________, which shows a tradeoff between ________ and ________. A) short-run Phillips curve; inflation; unemployment B) aggregate demand curve; inflation; employment C) aggregate supply curve; inflation; unemployment D) long-run Phillips curve; inflation; unemployment E) short-run Phillips curve; inflation; employment Answer: A Topic: Short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

7) The short-run Phillips curve illustrates ________ relationship between the unemployment rate and the inflation rate. A) a positive B) a negative C) a mixed D) no E) an upside-down U-shaped Answer: B Topic: Short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 8) The short-run Phillips curve is A) downward sloping. B) upward sloping. C) vertical at a constant rate of unemployment. D) horizontal at a constant rate of inflation. E) U-shaped. Answer: A Topic: Short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 9) The short-run Phillips curve is ________ curve along which an increase in the unemployment rate is associated with ________ in the inflation rate. A) a vertical; no change B) a downward sloping; a decrease C) an upward sloping; an increase D) a horizontal; no change E) a downward sloping; no change Answer: B Topic: Short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

10) The tradeoff exhibited by the short-run Phillips curve is A) higher inflation with higher unemployment. B) lower inflation with lower unemployment. C) higher unemployment with lower inflation. D) changing inflation with constant unemployment. E) higher price level with lower real GDP. Answer: C Topic: Short-run Phillips curve, tradeoff Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 11) The short-run Phillips curve i. is drawn with the ACTUAL inflation rate on the vertical axis. ii. is drawn with the EXPECTED inflation rate on the vertical axis. iii. shows a negative relationship between inflation and unemployment. A) i only B) ii only C) iii only D) i and ii only E) i and iii only Answer: E Topic: Short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 12) Moving along the short-run Phillips curve, if ________ increases, then ________ decreases. A) inflation; unemployment B) inflation; the price level C) inflation; real GDP D) unemployment; the price level E) unemployment; the expected inflation rate Answer: A Topic: Short-run Phillips curve, tradeoff Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

13) Moving along the short-run Phillips curve, a ________ unemployment rate can only be achieved by paying the cost of ________. A) lower; a higher inflation rate B) lower; a lower inflation rate C) lower; a higher expected inflation rate D) lower; a lower price level E) higher; a higher inflation rate Answer: A Topic: Short-run Phillips curve, tradeoff Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 14) During a recession, there is a(n) ________ the short-run Phillips curve, while during an expansion there is a(n) ________ the short-run Phillips curve. A) movement closer to; movement further from B) downward movement along; upward movement along C) upward movement along; downward movement along D) rightward shift of; leftward shift of E) leftward shift of; rightward shift of Answer: B Topic: Short-run Phillips curve Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

15) The curve shown in the figure above is the A) aggregate demand curve. B) aggregate supply curve. C) demand for money curve. D) Phillips curve. E) potential GDP curve. Answer: D Topic: Short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 16) The short-run Phillips curve presents a tradeoff because a A) higher unemployment rate can be achieved at the cost of a higher inflation rate. B) lower unemployment rate can be achieved at the cost of a lower inflation rate. C) lower unemployment rate can be achieved at the cost of a higher inflation rate. D) higher inflation leads to a higher nominal interest rate. E) higher price level leads to a lower real GDP. Answer: C Topic: Short-run Phillips curve, tradeoff Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

17) Along a short-run Phillips curve, the A) short-run cost of lower unemployment is higher inflation. B) short-run benefit of lower unemployment is lower inflation. C) short-run cost of lower inflation is higher interest rates. D) long-run cost of lower inflation is higher unemployment. E) short-run cost of higher inflation is a higher real interest rate. Answer: A Topic: Short-run Phillips curve, tradeoff Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 18) The short-run Phillips curve is another way of looking at A) aggregate demand. B) aggregate supply. C) the natural rate of unemployment. D) Okun's Law as applied to aggregate demand. E) potential GDP. Answer: B Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 19) Comparing the aggregate supply curve and the short-run Phillips curve, we see that they A) each describe different parts of the economy. B) both exist since money wages are flexible. C) describe the same phenomena but contradict each other. D) both exist because money wage rate is fixed in the short run. E) both exist because real wage rate is fixed in the short run. Answer: D Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

20) ________ is fixed when moving along the aggregate supply curve. A) The money wage rate B) The real wage rate C) Employment D) Real GDP E) The price level Answer: A Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 21) Comparing the AS-AD model and the Phillips curve, we see that A) they both are graphed as a relationship between the rate of inflation and the unemployment rate. B) the Phillips curve is graphed as a relationship between the price level and the unemployment rate. C) the AS-AD model is graphed as a relationship between the inflation rate and the rate of real GDP. D) the AS-AD model uses the price level and the Phillips curve uses the rate of inflation. E) the AS-AD model uses the price level and the Phillips curve uses real GDP. Answer: D Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 22) According to the AS-AD model, when real GDP exceeds potential GDP, the unemployment rate is definitely A) less than the natural unemployment rate. B) equal to the natural unemployment rate. C) greater than the natural unemployment rate. D) falling. E) rising. Answer: A Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

23) According to the AS-AD model, when real GDP exceeds potential GDP, then definitely A) the unemployment rate is less than the natural unemployment rate. B) the unemployment rate is equal to the natural unemployment rate. C) the unemployment rate is greater than the natural unemployment rate. D) the actual inflation rate is equal to the expected inflation rate. E) the actual inflation rate is less than the expected inflation rate. Answer: A Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 24) In the short run, if the economy is at full employment, then the quantity of real GDP A) is equal to potential GDP, and the unemployment rate is equal to the natural unemployment rate. B) does not necessarily equal potential GDP, but the unemployment rate is equal to the natural unemployment rate. C) exceeds potential GDP, and the unemployment rate is less than the natural unemployment rate. D) is equal to potential GDP, but the unemployment rate is less than the natural unemployment rate. E) is equal to potential GDP, but the unemployment rate does not necessarily equal the natural unemployment rate. Answer: A Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 25) If the economy is on its short-run Phillips curve at the natural unemployment rate, then in the AS-AD model, real GDP is definitely A) less than potential GDP. B) greater than potential GDP. C) equal to potential GDP. D) increasing. E) decreasing. Answer: C Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

26) According to the AS-AD model, when real GDP is less than potential GDP, the unemployment rate is definitely A) less than the natural unemployment rate. B) equal to the natural unemployment rate. C) greater than the natural unemployment rate. D) falling. E) rising. Answer: C Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 27) The short-run tradeoff between the unemployment rate and the inflation rate shown by the Phillips curve is represented in the AS-AD model by A) the upward-sloping aggregate supply curve. B) the vertical potential GDP line. C) the downward-sloping aggregate demand curve. D) rightward shifts of the aggregate supply curve. E) leftward shifts of the aggregate supply curve. Answer: A Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 28) Moving upward along the aggregate supply curve is equivalent to A) moving downward along the short-run Phillips curve. B) moving upward along the short-run Phillips curve. C) shifting the short-run Phillips curve rightward. D) shifting the short-run Phillips curve leftward. E) shifting the short-run Phillips curve upward. Answer: B Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

29) Moving ________ the short-run Phillips curve is equivalent to moving ________. A) downward along; downward along the aggregate demand curve B) downward along; upward along the aggregate demand curve C) upward along; upward along the aggregate supply curve D) downward along; upward along the potential GDP line E) downward along; downward along the potential GDP line Answer: C Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 30) Okun's Law states that A) supply creates its own demand. B) as the real wage rate falls, the quantity of labor demanded increases. C) as the unemployment rate rises, the inflation rate falls. D) there is a relationship between the unemployment rate, real GDP, and potential GDP. E) a higher inflation rate leads to a higher nominal interest rate. Answer: D Topic: Okun's Law Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 31) Okun's Law says that the difference between the unemployment rate and the natural unemployment rate determines A) potential GDP. B) real GDP. C) the gap between potential GDP and real GDP. D) the gap between the inflation rate and the unemployment rate. E) the real interest rate. Answer: C Topic: Okun's Law Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

32) According to ________, when real GDP is ________ percentage points greater than potential GDP, the unemployment rate is one percentage point ________ the natural unemployment rate. A) Keynes' Law; two; below B) Okun's Law; two; below C) Phillip's Law; four; above D) Say's Law; two; above E) Okun's Law; four; below Answer: B Topic: Okun's Law Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 33) According to Okun's Law, for each 1 percentage point that the unemployment rate is above the natural unemployment rate, then A) the inflation rate is less than the expected inflation rate by 1 percentage point. B) real GDP is below potential GDP by 2 percent. C) real GDP is above potential GDP by 2 percent. D) the inflation rate is greater than the expected inflation rate by 2 percentage points. E) the real interest rate is below the natural real interest rate by 1 percentage point. Answer: B Topic: Okun's Law Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 34) Okun's Law states that for each percentage point that the unemployment rate is above its natural rate, there is a ________ percent gap between real GDP and potential GDP. A) 2 B) 4 C) 6 D) 8 E) random Answer: A Topic: Okun's Law Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

35) If the natural unemployment rate is 5 percent and the actual unemployment is 3 percent, then Okun's Law concludes that real GDP is A) 2 percent greater than potential GDP. B) 4 percent greater than potential GDP. C) 2 percent less than potential GDP. D) 4 percent less than potential GDP. E) 3 percent greater than potential GDP. Answer: B Topic: Okun's Law Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 36) According to Okun's Law, if the unemployment rate is 7 percent and the natural unemployment rate is 5 percent, potential GDP is ________ than real GDP. A) 2 percent less B) 4 percent less C) 7 percent less D) 2 percent greater E) 4 percent greater Answer: B Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 37) Suppose the natural unemployment rate is 5 percent, the actual unemployment rate is 6 percent, and potential GDP is $5,000 billion. Based on Okun's Law, real GDP is equal to ________ billion. A) $5,000 B) $5,100 C) $4,900 D) $4,000 E) $5,900 Answer: C Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills

38) If the natural unemployment rate is 5 percent, the actual unemployment rate is 8 percent, and potential GDP is $15 trillion, then according to Okun's Law, real GDP is A) $14.25 trillion. B) $14.1 trillion. C) $13.8 trillion. D) $13.05 trillion. E) $15.9 trillion. Answer: B Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 39) If the natural unemployment rate is 4 percent and potential GDP is $30 billion, then according to Okun's Law, when the unemployment rate falls to 3 percent, real GDP A) decreases to $29.4 billion. B) remains constant at $30 billion. C) first decreases by 4 percent and then increases by 4 percent. D) increases to $30.6 billion. E) increases to $60 billion. Answer: D Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 40) Suppose the unemployment rate is 8 percent and the natural unemployment rate is 6 percent. If potential GDP is $8 trillion, using Okun's Law what does real GDP equal? A) $7.68 trillion B) $8.32 trillion C) $7.84 trillion D) $8.16 trillion E) $8.00 trillion Answer: A Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills

41) According to Okun's Law, when the natural employment rate is 6 percent and potential GDP is $10 trillion, then when actual employment is 7 percent, real GDP is A) $10.2 trillion. B) $9.8 trillion. C) $9.9 trillion. D) $10.1 trillion. E) $8 trillion. Answer: B Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 42) According to Okun's Law, when the natural employment rate is 6 percent and potential GDP is $10 trillion, then when actual employment is 5 percent, real GDP is A) $10.2 trillion. B) $9.8 trillion. C) $9.9 trillion. D) $10.1 trillion. E) $8 trillion. Answer: A Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 43) Suppose potential GDP is $100 billion and the natural unemployment rate is 5 percent. If the unemployment rate is 6 percent, then according to Okun's Law real GDP is A) $98 billion. B) $101 billion. C) $99 billion. D) $102 billion. E) $100 billion. Answer: A Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills

44) If the price level is 100 in one year and rises to 102 the next year, then the inflation rate is A) 2.0 percent. B) 0.02 percent. C) 102 percent. D) 100 percent. E) unable to be determined without knowing potential GDP. Answer: A Topic: Inflation rate Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 45) If the price level rises from 100 to 110 then the inflation rate is A) 1.0 percent. B) 10.0 percent. C) 100 percent. D) 110 percent. E) None of the above answers is correct. Answer: B Topic: Inflation rate Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 46) When the aggregate demand curve shifts A) the short-run Phillips curve shifts. B) there is a movement along the short-run Phillips curve. C) there is a change in potential GDP. D) there is a change in the natural unemployment rate. E) the inflation rate does not change. Answer: B Topic: Aggregate demand fluctuations Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

47) A rightward shift of the aggregate demand curve leads to A) a leftward shift of the short-run Phillips curve. B) a rightward shift of the short-run Phillips curve. C) an upward movement along the short-run Phillips curve. D) a downward movement along the short-run Phillips curve. E) neither a movement along nor a shift in the short-run Phillips curve. Answer: C Topic: Aggregate demand fluctuations Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 48) When the aggregate demand curve shifts rightward, the price level ________ and the unemployment rate ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases E) does not change; does not change Answer: B Topic: Aggregate demand fluctuations Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 49) An increase in aggregate demand results in A) a higher unemployment rate and a lower price level. B) a lower unemployment rate and a higher price level. C) an increase in real GDP and a decrease in the price level. D) a decrease in real GDP and a decrease in the price level. E) a lower unemployment rate and a lower price level. Answer: B Topic: Aggregate demand fluctuations Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills

50) If aggregate demand decreases, the A) short-run Phillips curve shifts rightward. B) short-run Phillips curve shifts leftward. C) economy moves to a higher inflation rate along its short-run Phillips curve. D) economy moves to a lower inflation rate along its short-run Phillips curve. E) short-run Phillips curve does not shift nor is there a movement along it. Answer: D Topic: Aggregate demand fluctuations Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 51) When an economy experiences a recession there is A) a leftward shift of the short-run Phillips curve. B) a rightward shift of the short-run Phillips curve. C) an upward movement along the short-run Phillips curve. D) a downward movement along the short-run Phillips curve. E) no change in the short-run Phillips curve. Answer: D Topic: Aggregate demand fluctuations Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 52) In the short run, a decrease in aggregate demand will lead to A) a decrease in the price level and an increase in real GDP. B) an increase in the price level and a decrease in real GDP. C) a decrease in the price level and an increase in the unemployment rate. D) an increase in the price level and an increase in real GDP. E) no change in the price level and a decrease in real GDP. Answer: C Topic: Aggregate demand fluctuations Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills

53) If the economy moves upward along its short-run Phillips curve, in the AS-AD diagram, this movement is shown by a A) movement upward along the AS curve as a result of a rightward shift of the AD curve. B) rightward shift of potential GDP. C) movement downward along the AS curve as a result of a leftward shift of the AD curve. D) rightward shift of the AS curve and a movement along the AD curve. E) leftward shift of the AS curve and a movement along the AD curve. Answer: A Topic: Aggregate demand fluctuations Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 54) If aggregate demand increases, thereby leading to an increase in real GDP and inflation, there is A) a movement downward along the short-run Phillips curve. B) a movement upward along the short-run Phillips curve. C) a rightward shift in the short-run Phillips curve. D) a leftward shift in the short-run Phillips curve. E) neither a movement along nor a shift in the short-run Phillips curve. Answer: B Topic: Aggregate demand fluctuations Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 55) The relationship between the AS-AD model and the Phillips curve points out that as aggregate demand increases, the unemployment rate A) decreases and the inflation rate rises. B) increases and the inflation rate falls. C) decreases and the price level falls. D) increases and the inflation rate rises. E) decreases and the inflation rate does not change, only the price level rises. Answer: A Topic: Aggregate demand fluctuations Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

56) Data from the United States and the United Kingdom show that the short-run Phillips curve exhibits A) a great deal of shifting. B) stability with shifts occurring only when external forces are strong. C) stability with shifts occurring only when there is an internal change of government. D) shifts that occur every five years or so. E) positive slopes in both nations. Answer: A Topic: Eye on the global economy, inflation and unemployment Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 57) Changes in which of the following shift the short-run Phillips curve? i. changes in the natural unemployment rate ii. changes in the expected inflation rate iii. changes in the inflation rate A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Shifts in the short-run Phillips curve Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 58) The short-run Phillips curve shows a relationship between the A) inflation rate and the interest rate. B) inflation rate and real GDP. C) unemployment rate and the interest rate. D) inflation rate and the unemployment rate. E) price level and real GDP. Answer: D Topic: Short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

59) The short-run Phillips curve is A) vertical at the natural unemployment rate. B) upward sloping. C) downward sloping. D) horizontal at the expected inflation rate. E) U-shaped. Answer: C Topic: Short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 60) Moving along the short-run Phillips curve, as the unemployment rate increases, the inflation rate A) decreases. B) increases. C) remains unchanged. D) initially decreases and then increases. E) initially increases and then decreases. Answer: A Topic: Short-run Phillips curve, tradeoff Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 61) When a movement up along the aggregate supply curve occurs, there is also A) a movement down along the short-run Phillips curve. B) a movement up along the short-run Phillips curve. C) a rightward shift of the short-run Phillips curve. D) a leftward shift of the short-run Phillips curve. E) no movement along nor a shift in the short-run Phillips curve. Answer: B Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking

62) If real GDP exceeds potential GDP, then employment is ________ full employment, and the unemployment rate is ________ the natural unemployment rate. A) below; above B) equal to; below C) above; below D) above; above E) equal to; equal to Answer: C Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 63) According to Okun's Law, if the natural unemployment rate is 5 percent, the actual unemployment rate is 4 percent, and potential GDP is $15 trillion, then actual real GDP is A) $12.0 trillion. B) $15.0 trillion. C) $14.7 trillion. D) $15.4 trillion. E) $15.3 trillion. Answer: E Topic: Okun's Law Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 64) When aggregate demand increases, there is a movement ________ along the AS curve and ________. A) up; a movement up along the short-run Phillips curve B) up; a movement down along the short-run Phillips curve C) up; an upward shift of the short-run Phillips curve D) down; a downward shift of the short-run Phillips curve E) down; a movement down along the short-run Phillips curve Answer: A Topic: Aggregate demand fluctuations Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills

31.2 Short-Run and Long-Run Phillips Curves 1) The curve that shows the relationship between inflation and unemployment when the economy is at full employment is the A) short-run Phillips curve. B) long-run Phillips curve. C) long-run Okun's curve. D) aggregate demand curve. E) aggregate supply curve. Answer: B Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 2) In the long run, the unemployment rate A) is zero. B) is equal to the natural unemployment rate. C) can take on any value. D) is equal to the expected unemployment rate. E) must be equal to the expected inflation rate. Answer: B Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 3) The long-run Phillips curve shows the relationship between A) the inflation rate and the unemployment rate. B) real GDP and potential GDP. C) the nominal interest rate and real interest rate. D) the inflation rate and the natural unemployment rate. E) real GDP and the natural unemployment rate. Answer: D Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

4) If the economy is at full employment, then the inflation rate A) exceeds the expected inflation rate. B) is less than the expected inflation rate. C) can be anywhere on a short-run Phillips curve. D) is equal to the expected inflation rate. E) is equal to zero. Answer: D Topic: Full employment Skill: Level 4: Applying models Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 5) At full employment A) real GDP exceeds potential GDP. B) the unemployment rate is equal to the natural unemployment rate. C) the unemployment rate is zero. D) the inflation rate is zero. E) the inflation rate must equal the natural unemployment rate. Answer: B Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 6) The long-run Phillips curve shows the relationship between the inflation rate and the unemployment rate when the economy is A) at full employment. B) in expansion. C) in recession. D) at full inflation. E) away from potential GDP. Answer: A Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

7) The long-run Phillips curve shows the relationship between ________ and ________ when the economy is at full employment. A) the natural inflation rate; the unemployment rate B) the unemployment rate; real GDP C) potential GDP; the natural unemployment rate D) the inflation rate; the unemployment rate E) the inflation rate; the nominal interest rate Answer: D Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 8) The long-run Phillips curve shows the relationship between A) inflation and unemployment at full employment. B) aggregate demand and aggregate supply at full employment. C) aggregate demand and interest rates at full employment. D) inflation and interest rates at full employment. E) the price level and real GDP when the economy is not at full employment. Answer: A Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 9) The long-run Phillips curve A) shows there is no tradeoff between inflation and unemployment in the long-run. B) is vertical at the natural rate of unemployment. C) assumes expected inflation is constant. D) assumes actual inflation is constant. E) Both A and B are correct. Answer: E Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

10) The long-run Phillips curve is a vertical line because A) the unemployment rate decreases when the inflation rate increases. B) there is no relationship between the natural unemployment rate and the inflation rate. C) the natural unemployment rate only depends on the inflation rate. D) real GDP does not depend on the unemployment rate. E) in the long run, the natural unemployment rate increases when inflation increases. Answer: B Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 11) The lack of a long-run tradeoff between the unemployment rate and the inflation rate means the long-run Phillips curve is A) upward sloping. B) horizontal. C) vertical. D) downward sloping. E) U-shaped, with higher inflation initially decreasing unemployment and then increasing it back to the natural unemployment rate. Answer: C Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 12) The long-run Phillips curve is a A) horizontal line indicating a positive relationship between inflation and unemployment. B) vertical line indicating a positive relationship between inflation and unemployment. C) vertical line that shows the relationship between inflation and unemployment when the economy is at full employment. D) horizontal line that shows the relationship between inflation and unemployment when the economy is at full employment. E) straight line with a 45 degree slope showing the long-run relationship between the inflation rate and the expected inflation rate. Answer: C Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

13) The long-run Phillips curve is ________ curve, and moving along the long-run Phillips curve, an increase in the inflation rate is associated with ________ in the natural unemployment rate. A) a vertical; no change B) a downward sloping; a decrease C) an upward sloping; an increase D) a horizontal; no change E) a downward sloping; no change Answer: A Topic: Long-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 14) The lack of a long-run tradeoff between the unemployment rate and the inflation rate means that A) only fiscal policy is effective to lower the natural unemployment rate. B) an increase in the inflation rate would not bring a reduction in the natural unemployment rate. C) only a decrease in the inflation rate would bring a reduction in the natural unemployment rate. D) only monetary policy is effective to lower the natural unemployment rate. E) the natural unemployment rate cannot change. Answer: B Topic: Long-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 15) The long-run Phillips curve applies when the economy is at full employment, so the long-run Phillips curve is A) vertical. B) horizontal. C) upward sloping. D) downward sloping. E) unnecessary. Answer: A Topic: Long-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

16) On the long-run Phillips curve, the unemployment rate A) and inflation rate can take any value. B) can be any value, but the inflation rate equals the expected inflation rate. C) equals the natural unemployment rate, but the inflation rate can be any value. D) equals the natural unemployment rate, and the inflation rate equals the expected inflation rate. E) decreases when the inflation rate increases. Answer: C Topic: Long-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 17) In the long run, the inflation rate A) is equal to the natural inflation rate. B) is zero. C) can take on any value. D) must be equal to the natural unemployment rate. E) cannot be negative. Answer: C Topic: Long-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 18) The long-run Phillips curve indicates that A) any inflation rate is possible at the natural unemployment rate. B) there is a tradeoff between the inflation rate and the unemployment rate in the long-run. C) there is no way to control the inflation rate in the long run. D) potential GDP can never be achieved. E) any unemployment rate is possible at the natural inflation rate. Answer: A Topic: Long-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

19) Along the long-run Phillips curve, the unemployment rate ________, and the inflation rate ________. A) is equal to the natural unemployment rate; can be any value B) can be any value; is equal to the natural inflation rate C) is equal to the natural unemployment rate; is equal to the natural inflation rate D) can be any value; can be any value E) None of the above answers is correct. Answer: A Topic: Long-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 20) The long-run Phillips curve applies when the economy is at full employment, so the long-run Phillips curve is ________, which demonstrates that changes in the inflation rate ________ effect on unemployment. A) vertical; have no B) vertical; have an C) a downward sloping straight line with a 45 degree slope; have an D) an upward sloping straight line with a 45 degree slope; have an E) horizontal; have no Answer: A Topic: Long-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 21) Burger King is paying $9 an hour to its workers. If the expected inflation rate equals the actual inflation rate and both are 10 percent a year, then to keep the real wage rate constant in a year the money wage rate must A) rise to $9.90 an hour. B) fall to $8.10 an hour. C) stay at $9.00 an hour. D) rise to $10.00 an hour. E) rise to $9.45 an hour. Answer: A Topic: Expected inflation rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills

22) The short-run Phillips curve shows only a short-run tradeoff between the unemployment rate and the inflation rate because in the long run the A) natural unemployment rate increases. B) expected inflation rate increases. C) unemployment rate returns to the natural unemployment rate and so there is no long-run tradeoff between the inflation rate and the unemployment rate. D) inflation rate returns to the natural inflation rate and so there is no long-run tradeoff between the inflation rate and the unemployment rate. E) inflation rate returns to the natural inflation rate and the unemployment rate returns to the natural unemployment rate. Answer: C Topic: Short-run and long-run Phillips curves Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 23) The short-run Phillips curve is ________, and the long-run Phillips curve is ________. A) upward sloping; vertical B) vertical; upward sloping C) vertical; downward sloping D) downward sloping; vertical E) downward sloping; downward sloping Answer: D Topic: Short-run and long-run Phillips curves Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 24) The short-run Phillips curve shows ________ between the unemployment rate and the inflation rate, and the long-run Phillips curve shows ________ between the unemployment rate and the inflation rate. A) a negative relationship; no relationship B) a negative relationship; a positive relationship C) no relationship; no relationship D) no relationship; a negative relationship E) a positive relationship; a negative relationship Answer: A Topic: Short-run and long-run Phillips curves Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

25) The short-run Phillips curve is downward sloping because A) the expected inflation rate is zero in the short run. B) the unemployment rate can be above or below the natural unemployment rate. C) reducing the unemployment rate will reduce the inflation rate in the short run. D) the economy always returns to full employment. E) in the long run, the expected inflation rate equals the actual inflation rate. Answer: B Topic: Short-run and long-run Phillips curves Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 26) In the long run, there is A) a tradeoff between unemployment and inflation. B) a tradeoff between unemployment and real GDP. C) no tradeoff between fiscal policy and monetary policy. D) no tradeoff between unemployment and inflation. E) a tradeoff between unemployment and natural unemployment. Answer: D Topic: Short-run and long-run Phillips curves Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

27) In the figure above, the natural unemployment rate is A) 0 percent. B) 2 percent. C) 4 percent. D) 6 percent. E) 8 percent. Answer: C Topic: Long-run Phillips curve Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills 28) In the figure above, the expected inflation rate is A) 0 percent. B) 2 percent. C) 4 percent. D) 6 percent. E) 8 percent. Answer: D Topic: Long-run Phillips curve Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills

29) In the figure above, the natural unemployment rate is A) 0 percent. B) 2 percent. C) 4 percent. D) 6 percent. E) 8 percent. Answer: D Topic: Long-run Phillips curve Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills 30) In the figure above, the expected inflation rate is A) 0 percent. B) 2 percent. C) 4 percent. D) 6 percent. E) 8 percent. Answer: C Topic: Long-run Phillips curve Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills

31) In the figure above, if the actual inflation rate is 8 percent, then A) it is less than the expected inflation rate. B) it equals the expected inflation rate. C) it is more than the expected inflation rate. D) there is no relationship between it and the expected inflation rate because it is not equal to the inflation rate at which the SRPC crosses the LRPC. E) more information is needed to determine the relationship between the expected and actual inflation rates. Answer: C Topic: Long-run Phillips curve Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills 32) Comparing the short-run Phillips curve and the long-run Phillips curve, we see that there is A) a tradeoff in both curves. B) only a long-run tradeoff between inflation and unemployment but not a short-run tradeoff. C) no tradeoff in either curve. D) only a short-run tradeoff between inflation and unemployment but not a long-run tradeoff. E) no relationship between the two curves. Answer: D Topic: Tradeoffs Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 33) The expected inflation rate is the inflation rate that people forecast and use to help set A) the money wage rate. B) the real wage rate. C) the natural rate of unemployment. D) real GDP. E) the price level. Answer: A Topic: Expected inflation rate Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

34) At full employment, the expected inflation rate is A) equal to the inflation rate. B) higher than the inflation rate. C) lower than the inflation rate. D) unrelated to the inflation rate. E) unknown. Answer: A Topic: Expected inflation rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 35) In order to keep the real wage rate constant, the A) money wage rate must increase by the same amount as the inflation rate. B) inflation rate must be exactly one half of the expected inflation rate. C) nominal interest rate must be equal to the inflation rate. D) money wage rate must increase when the price level falls. E) money wage rate must decrease by the same amount as the inflation rate. Answer: A Topic: Expected inflation rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

36) Based on the above table, if the current price level is 100 and the natural unemployment rate is 5 percent, what is the expected inflation rate? A) 2 percent B) 3 percent C) 5 percent D) 8 percent E) 12 percent Answer: C Topic: Expected inflation rate Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Revised AACSB: Analytic skills 35 Copyright © 2023 Pearson Education Ltd.

37) Based on the above table, if the current price level is 100 and the unemployment rate is 4 percent, then the A) inflation rate is 8 percent. B) expected inflation rate is 8 percent. C) inflation rate is 2.8 percent. D) expected inflation rate is 2.8 percent. E) inflation rate is 108 percent. Answer: A Topic: Expected inflation rate Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Revised AACSB: Analytic skills 38) According to the natural rate hypothesis, in the short run an increase in the inflation rate brings A) a decrease in the unemployment rate. B) an increase in the unemployment rate. C) no change in the unemployment rate. D) a decrease in the natural unemployment rate. E) an increase in the natural unemployment rate. Answer: A Topic: Natural rate hypothesis Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 39) The natural rate hypothesis asserts that A) when prices change, the inflation rate changes temporarily and then returns to its natural rate. B) changes in the unemployment rate are natural and long-lasting. C) price changes occur at a natural rate, near a 6 percent average inflation rate. D) changes in the unemployment rate from changes in the inflation rate are temporary. E) changes in the natural unemployment rate are only temporary. Answer: D Topic: Natural rate hypothesis Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

40) The natural rate hypothesis states that when the inflation rate ________, in the short run the unemployment rate ________ and in the long run the unemployment rate ________. A) rises; decreases; returns to the natural unemployment rate B) rises; decreases; decreases C) falls; decreases; decreases D) falls; decreases; returns to the natural unemployment rate E) falls; increases; decreases Answer: A Topic: Natural rate hypothesis Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 41) The natural rate hypothesis states that when the inflation rate A) increases, the unemployment rate will decrease permanently. B) decreases, the inflation rate will decrease permanently. C) changes, the unemployment rate changes temporarily and eventually returns to the natural unemployment rate. D) changes, the change is only temporary, and eventually the inflation rate returns to the natural inflation rate. E) increases, the natural unemployment rate increases. Answer: C Topic: Natural rate hypothesis Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 42) The natural rate hypothesis concludes that the inflation rate increases, then in the short run there is A) an upward movement along the short-run Phillips curve. B) a downward movement along the short-run Phillips curve. C) an upward shift of the short-run Phillips curve. D) a downward shift of the short-run Phillips curve. E) no change at all in the short-run Phillips curve. Answer: A Topic: Natural rate hypothesis Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

43) The natural rate hypothesis concludes that when the inflation rate increases, then in the long run there is A) an upward movement along the short-run Phillips curve. B) a downward movement along the short-run Phillips curve. C) an upward shift of the short-run Phillips curve. D) a downward shift of the short-run Phillips curve. E) no change at all in the short-run Phillips curve. Answer: C Topic: Natural rate hypothesis Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 44) The natural rate hypothesis concludes that when the inflation rate unexpectedly increases, the unemployment rate ________. But when the higher inflation rate becomes the expected inflation rate, the unemployment rate then ________ until it reaches the ________ unemployment rate. A) decreases; increases; maximum B) increases; decreases; minimum C) decreases; increases; natural D) decreases; decreases; natural E) increases; decreases; natural Answer: C Topic: Natural rate hypothesis Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 45) According to the natural rate hypothesis, if the economy begins at full employment with an unemployment rate of 5 percent and then the inflation rate increases from 2 percent to 4 percent, then the economy will A) have lower unemployment but then return to its natural rate with an inflation rate of 4 percent. B) stay at the 4 percent inflation rate and the natural unemployment rate will fall. C) not see any lower unemployment, even temporarily, just higher inflation. D) eventually return to its natural rate of 2 percent inflation and a new lower unemployment rate. E) eventually return to its natural rate of 2 percent inflation and its natural unemployment rate of 5 percent. Answer: A Topic: Natural rate hypothesis Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

46) If the expected inflation rate changes, the long-run Phillips curve ________, and the shortrun Phillips curve ________. A) does not shift; does not shift B) does not shift; shifts upward C) shifts rightward; shifts upward D) shifts rightward; shifts downward E) shifts rightward; does not shift Answer: B Topic: Shifts in the Phillips curves, expected inflation Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 47) The short run Phillips curve A) shows the tradeoff between the inflation rate and the unemployment rate and it shifts when the inflation rate changes. B) shows that any inflation rate can co-exist with the natural unemployment rate. C) shows the tradeoff between the inflation rate and the unemployment rate, and it shifts when the expected inflation rate changes. D) shows the relationship between the inflation rate and the expected inflation rate, and it shifts when the natural unemployment rate changes. E) shows the relationship between the inflation rate and the nominal interest rate, and it shifts when the natural unemployment rate changes. Answer: C Topic: Shifts in the Phillips curves, expected inflation Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 48) If the expected inflation rate rises, then the short-run Phillips curve ________ and the longrun Phillips curve ________. A) shifts; shifts B) shifts; does not shift C) does not shift; shifts D) does not shift; does not shift E) might shift; shifts only if the short-run Phillips curve shifts Answer: B Topic: Shifts in the Phillips curves, expected inflation Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

49) An increase in the expected inflation rate A) leads to a movement downward along the short-run Phillips curve. B) leads to a movement upward along the short-run Phillips curve. C) shifts the short-run Phillips curve upward. D) shifts the short-run Phillips curve downward. E) shifts the long-run Phillips curve upward. Answer: C Topic: Shifts in the Phillips curves, expected inflation Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 50) The short-run Phillips curve shifts upward when A) actual unemployment increases. B) actual unemployment decreases C) actual inflation increases. D) expected inflation increases. E) None of the above answers are correct. Answer: D Topic: Shifts in the Phillips curves, expected inflation Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 51) Suppose an economy experiences a permanent increase in its expected inflation rate. As a result, there is A) an upward movement along the short-run Phillips curve. B) a downward movement along the short-run Phillips curve. C) a downward shift of the short-run Phillips curve. D) an upward shift of the short-run Phillips curve. E) no change at all to the short-run Phillips curve. Answer: D Topic: Shifts in the Phillips curves, expected inflation Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

52) Economies with higher expected inflation rates have short-run Phillips curves that are A) upward sloping. B) further to the left. C) further to the right. D) always vertical. E) closer to being horizontal. Answer: C Topic: Shifts in the Phillips curves, expected inflation Skill: Level 5: Critical thinking Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

53) The shift of the short-run Phillips curve in the figure above is the result of A) an increase in the natural unemployment rate. B) a decrease in the natural unemployment rate. C) an increase in the expected inflation rate. D) a decrease in the expected inflation rate. E) a decrease in the actual inflation rate. Answer: D Topic: Shifts in the Phillips curves, expected inflation Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills

54) The short-run Phillips curve shifts when A) the actual unemployment rate changes and also when the expected unemployment rate changes. B) the expected unemployment rate changes and also when the expected inflation rate changes. C) the inflation rate increases and also when the unemployment rate decreases. D) the natural unemployment rate changes and also when the expected inflation rate changes. E) the actual inflation rate changes and also when the expected inflation rate changes. Answer: D Topic: Shifts in the short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 55) Suppose an economy experiences a permanent increase in its natural unemployment rate. This change leads to A) an upward movement along the short-run Phillips curve. B) a downward movement along the short-run Phillips curve. C) a rightward shift of the short-run Phillips curve. D) a leftward shift of the short-run Phillips curve. E) no change in the short-run Phillips curve. Answer: C Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 56) When the natural unemployment rate increases, the short-run Phillips curve ________ and the long-run Phillips curve ________. A) shifts rightward; does not shift B) shifts leftward; does not shift C) does not shift; shifts leftward D) shifts rightward; shifts rightward E) shifts leftward; shifts rightward Answer: D Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

57) When the natural unemployment rate increases A) both the long-run Phillips curve and the short-run Phillips curve shift rightward. B) the long-run Phillips curve shifts rightward, and the short-run Phillips curve shifts leftward. C) the long-run Phillips curve shifts leftward, and the short-run Phillips curve shifts rightward. D) both the long-run Phillips curve and the short-run Phillips curve shift leftward. E) there are no shifts of either the long-run Phillips curve or the short-run Phillips curve. Answer: A Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 58) When the natural unemployment rate ________, the short-run Phillips curve shifts ________ and the long-run Phillips curve shifts ________. A) increases; leftward; leftward B) decreases; rightward; rightward C) decreases; leftward; rightward D) increases; rightward; rightward E) increases; rightward; leftward Answer: D Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 59) Both the long-run and the short-run Phillips curves shift if A) the expected inflation rate changes. B) expected real GDP changes. C) the expected unemployment rate changes. D) the natural unemployment rate changes. E) the actual inflation rate changes. Answer: D Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

60) Which of the following decreases the natural unemployment rate? A) many young people entering the labor force B) a recession C) higher oil prices D) rapid technological change that increases the demand for labor E) a decrease in aggregate demand so that fewer workers are needed Answer: D Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 61) Changes in which of the following do NOT affect the natural unemployment rate? A) the quantity of money B) unemployment benefits C) structural change D) the minimum wage E) the birth rate or other demographic data Answer: A Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 62) Due to a "baby bust" in the 1960s and 1970s, fewer people entered the labor market in the 1980s and 1990s. This demographic event ________ the natural unemployment rate thereby shifting the short-run Phillips curve ________ and shifting the long-run Phillips curve ________. A) increased; rightward; rightward B) decreased; leftward; leftward C) increased; rightward; leftward D) increased; leftward; rightward E) decreased; rightward; rightward Answer: B Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

63) The baby boomers born in the 1940s and 1950s began entering the work force in the 1960s and 1970s. This demographic event ________ the natural unemployment rate, thereby shifting the short-run Phillips curve ________ and shifting the long-run Phillips curve ________. A) increased; rightward; rightward B) decreased; leftward; leftward C) increased; rightward; leftward D) increased; leftward; rightward E) decreased; rightward; rightward Answer: A Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

64) The shifts of the short-run and long-run Phillips curves in the figure above are the result of A) an increase in the natural unemployment rate. B) a decrease in the natural unemployment rate. C) an increase in the expected inflation rate. D) a decrease in the expected inflation rate. E) an increase in the actual inflation rate. Answer: A Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills

65) When inflation expectations changed during the 1967-1971 period, this change led to A) the long-run Phillips curve shifting rightward. B) the short-run Phillips curve shifting upward. C) an increase in the natural unemployment rate. D) the short-run and the long-run Phillips curve both shifting upward. E) the long-run Phillips curve shifting leftward. Answer: B Topic: Eye on the past, a live test of the natural rate hypothesis Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 66) The short-run Phillips curve tradeoff becomes less favorable if either A) the expected inflation rate increases or the natural unemployment rate decreases. B) the expected inflation rate or the natural unemployment rate increases. C) potential GDP or the natural unemployment rate increases. D) the level of real GDP decreases or the natural unemployment rate decreases. E) potential GDP or the natural unemployment rate decreases. Answer: B Topic: Eye on the U.S. economy, the shifting short-run tradeoff Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 67) The long-run Phillips curve is the relationship between A) unemployment and the price level at full employment. B) unemployment and the inflation rate at the expected price level. C) inflation and real GDP at full employment. D) inflation and unemployment when the economy is at full employment. E) inflation and the expected inflation rate. Answer: D Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

68) The long-run Phillips curve is A) upward sloping. B) downward sloping. C) horizontal. D) vertical. E) upside-down U-shaped. Answer: D Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 69) The inflation rate that is used to set the money wage rate and other money prices is the A) natural inflation rate. B) actual inflation rate. C) expected inflation rate. D) cost of living inflation rate. E) wage inflation rate. Answer: C Topic: Expected inflation rate Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 70) When the expected inflation rate ________, the short-run Phillips curve ________. A) falls; shifts upward B) rises; shifts upward C) rises; shifts downward D) falls; does not shift E) rises; might shift upward or downward depending on how the long-run Phillips curve shifts Answer: B Topic: Shifts in the Phillips curves, expected inflation Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills

71) The natural rate hypothesis states that A) only natural economic policies can bring a permanent reduction in the unemployment rate. B) changes in the inflation rate temporarily change the unemployment rate. C) it is natural for the unemployment rate to exceed the inflation rate. D) it is natural for the unemployment rate to be less than the natural unemployment rate. E) changes in the inflation rate temporarily change the natural unemployment rate. Answer: B Topic: Natural rate hypothesis Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 72) If the natural unemployment rate decreases, then the short-run Phillips curve ________ and the long-run Phillips curve ________. A) does not shift; shifts leftward B) shifts leftward; shifts leftward C) shifts rightward; shifts leftward D) shifts rightward; shifts rightward E) shifts leftward; does not shift Answer: B Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills 73) The natural unemployment rate A) increases when job search increases. B) never changes. C) always increases. D) decreases when the inflation rate rises. E) increases when the expected inflation rate rises. Answer: A Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

31.3 Influencing Inflation and Unemployment 1) The expected inflation rate is the A) inflation rate that people forecast and use to set the money wage and other money prices. B) rate that people expect the Bureau of Labor Statistics to announce each month, on which bookies take bets. C) inter-annual, non-energy inflation rate. D) inflation rate that the Federal Reserve system announces as the policy goal for the year. E) same as the actual inflation rate. Answer: A Topic: Expected inflation rate Skill: Level 1: Definition Section: Checkpoint 31.3 Status: Old AACSB: Reflective thinking 2) When people use all the relevant data and principles of economics to forecast inflation, they are making A) a mistake. B) what is called a "rational expectation." C) an exaggerated forecast. D) an always accurate forecast. E) what is called a "data-based forecast." Answer: B Topic: Expected inflation rate Skill: Level 1: Definition Section: Checkpoint 31.3 Status: Old AACSB: Reflective thinking 3) A major factor in determining the rational expectation of inflation is A) forecasts of fiscal policy. B) forecasts of the Fed's monetary policy. C) the previous month's unemployment rate. D) the recent past behavior of the stock market. E) the size of the budget deficit. Answer: B Topic: Expected inflation rate Skill: Level 1: Definition Section: Checkpoint 31.3 Status: Old AACSB: Reflective thinking

4) When all relevant information is used to forecast inflation, the resulting forecast is called A) a rational expectation. B) an expected forecast. C) a natural expectation. D) an expansionary expectation. E) the expected expectation. Answer: A Topic: Expected inflation rate Skill: Level 1: Definition Section: Checkpoint 31.3 Status: Old AACSB: Reflective thinking 5) A country reports that its inflation rate and unemployment rate have both increased. These changes could be the result of A) a movement upward along the short-run Phillips curve. B) a movement downward along the short-run Phillips curve. C) an upward shift of the short-run Phillips curve. D) a downward shift of the short-run Phillips curve. E) a leftward shift of the long-run Phillips curve. Answer: C Topic: Short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Old AACSB: Reflective thinking 6) During early 2001, the Fed unexpectedly increased the money supply. The effect of this policy was a A) movement downward along the short-run Phillips curve. B) movement upward along the short-run Phillips curve. C) upward shift of the short-run Phillips curve. D) downward shift of the short-run Phillips curve. E) rightward shift of the long-run Phillips curve. Answer: B Topic: Short-run Phillips curve Skill: Level 4: Applying models Section: Checkpoint 31.3 Status: Old AACSB: Analytic skills

7) In the short run, an increase in inflation by the Fed not matched by an increase in the expected inflation rate results in ________ in the long-run Phillips curve and ________ in the short-run Phillips curve. A) no change; no change B) a leftward shift; an upward shift C) no change; a downward shift D) a rightward shift; an upward shift E) a rightward shift; a downward shift Answer: A Topic: Targeting the unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Old AACSB: Reflective thinking 8) If the Fed raises the inflation rate and initially expected inflation does not change, in the short run the unemployment rate ________ the natural unemployment rate, and in the long run the unemployment rate ________ the natural unemployment rate. A) is less than; is less than B) is larger than; equals C) is larger than; is larger than D) is less than; is larger than E) is less than; equals Answer: E Topic: Targeting the unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Old AACSB: Reflective thinking 9) If the Fed lowers the inflation rate and initially expected inflation does not change, in the short run the unemployment rate ________, and in the long run the unemployment rate ________ the natural unemployment rate. A) does not change; is equal to B) falls; is equal to C) rises; is equal to D) rises; is greater than E) does not change; is greater than Answer: C Topic: Inflation reduction in practice Skill: Level 4: Applying models Section: Checkpoint 31.3 Status: Old AACSB: Reflective thinking

10) The inflation-reduction episode of 1981 was an example of an A) unexpected inflation reduction fiscal policy by Congress. B) unexpected inflation reduction by the Fed. C) expected inflation reduction by the Fed. D) expected inflation reduction fiscal policy by Congress. E) unexpected inflation reduction by the Fed combined with an expected inflation reduction fiscal policy by Congress. Answer: B Topic: Inflation reduction in practice Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Revised AACSB: Reflective thinking 11) A rational expectation of the inflation rate is A) a forecast based on the forecasted actions of the Fed and other relevant determinant factors. B) an expected inflation rate between 1 percent and 5 percent. C) a forecast based only on the historical evolution of inflation over the last 100 years. D) an expected inflation rate between 5 percent and 10 percent. E) always correct. Answer: A Topic: Expected inflation rate Skill: Level 1: Definition Section: Checkpoint 31.3 Status: Old AACSB: Reflective thinking 12) Because money growth is a major component determining the inflation rate, in order to forecast inflation we should forecast actions by the A) Office of the Treasury. B) President. C) Congress. D) Fed. E) U.S. Mint. Answer: D Topic: Expected inflation rate Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Old AACSB: Reflective thinking

13) If the Fed tries to lower the unemployment rate so it is lower than the natural unemployment rate, before the expected inflation rate changes, the inflation rate ________ and the unemployment rate ________. A) does not change; falls B) falls; falls C) rises; falls D) rises; does not change E) falls; rises Answer: C Topic: Targeting the unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Old AACSB: Analytic skills 14) If the Fed tries to lower the unemployment rate so it is lower than the natural unemployment rate, in the short run before the expected inflation rate changes, the SRPC ________ and the LRPC ________. A) does not change; does not change B) shifts downward; shifts leftward C) shifts upward; does not change D) shifts downward; does not change E) does not change; shifts rightward Answer: A Topic: Targeting the unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Old AACSB: Analytic skills 15) If the Fed tries to lower the unemployment rate so it is lower than the natural unemployment rate, in the long run the SRPC ________ and the LRPC ________. A) does not change; does not change B) shifts downward; shifts leftward C) shifts upward; does not change D) shifts downward; does not change E) does not change; shifts rightward Answer: C Topic: Targeting the unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Old AACSB: Analytic skills

16) In 1981, the Fed A) created an unexpected inflation reduction policy and created an expansion. B) created an unexpected inflation reduction policy and created a recession. C) publicly announced an inflation reduction policy and created a recession. D) publicly announced an inflation reduction policy and created an expansion. E) took no action so that the inflation rate skyrocketed. Answer: B Topic: Inflation reduction in practice Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Old AACSB: Reflective thinking

31.4 Chapter Figures

The figure above shows some Phillips curves for an economy. 1) The short-run Phillips curve shifts from SRPC0 to SRPC1 as a result of A) an increase in the natural unemployment rate. B) a decrease in the natural unemployment rate. C) a rise in the expected inflation rate. D) a fall in the expected inflation rate. E) None of the above answers is correct. Answer: D Topic: Short-run Phillips curve Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills

2) Along the short-run Phillips curve SRPC0 the expected inflation rate is A) 3 percent. B) 6 percent. C) 7 percent. D) an amount that can be determined from the figure, but none of the above answers is correct. E) an amount that cannot be determined from the figure. Answer: A Topic: Short-run Phillips curve Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills 3) Along the short-run Phillips curve SRPC0 the natural unemployment rate is A) 3 percent. B) 6 percent. C) 7 percent. D) an amount that can be determined from the figure, but none of the above answers is correct. E) an amount that cannot be determined from the figure. Answer: B Topic: Short-run Phillips curve Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills

The figure above shows some Phillips curves for an economy. 4) Along the short-run Phillips curve SRPC0 the natural unemployment rate is A) 3 percent. B) 6 percent. C) 4 percent. D) 8 percent. E) an amount that can be determined from the figure but none of the above answers is correct. Answer: B Topic: Short-run and long-run Phillips curves Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills 5) Along the short-run Phillips curve SRPC2 the natural unemployment rate is A) 3 percent. B) 6 percent. C) 4 percent. D) 8 percent. E) an amount that can be determined from the figure but none of the above answers is correct. Answer: C Topic: Short-run and long-run Phillips curves Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills 57 Copyright © 2023 Pearson Education Ltd.

6) In the figure above, the shift from the short-run Phillips curve SRPC0 and the long-run Phillips curve LRPC0 to the short-run Phillips curve SRPC1 and the long-run Phillips curve LRPC1 is the result of ________ in the expected inflation rate and ________ in the natural unemployment rate. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) an increase; no change E) a decrease; no change Answer: C Topic: Short-run and long-run Phillips curves Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills 7) In the figure above, the shift from the short-run Phillips curve SRPC0 and the long-run Phillips curve LRPC0 to the short-run Phillips curve SRPC2 and the long-run Phillips curve LRPC2 is the result of ________ in the expected inflation rate and ________ in the natural unemployment rate. A) an increase; an increase B) a decrease; a decrease C) no change; a decrease D) an increase; no change E) a decrease; an increase Answer: C Topic: Short-run and long-run Phillips curves Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills

31.5 Integrative Questions 1) Moving along a short-run Phillips curve, a reduction in the unemployment rate is achieved by A) shifting the aggregate supply curve leftward. B) running a federal budget deficit. C) reducing the size of the labor force. D) increasing the inflation rate. E) increasing potential GDP. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 2) Along a short-run Phillips curve when the inflation rate rises A) the real wage rate falls and more labor is hired. B) the money wage rate falls because the labor market becomes less tight. C) potential GDP decreases. D) the expected inflation rate rises. E) the expected inflation rate falls. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 3) The long-run Phillips curve shows the relationship between the ________ and the ________ when there is no ________ unemployment. A) inflation rate; unemployment rate; cyclical B) inflation rate; unemployment rate; structural C) inflation rate; employment rate; seasonal D) nominal interest rate; real interest rate; frictional E) nominal interest rate; unemployment rate; cyclical Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

4) The long-run Phillips curve represents the relationship between the inflation rate and the unemployment rate when there is no ________ unemployment. A) cyclical B) structural C) seasonal D) frictional E) natural Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 5) In 1981 Fed policy created a severe recession because the Fed A) increased aggregate supply to reduce the inflation rate. B) undertook an unexpected reduction in the inflation rate. C) publicly announced an inflation reduction program. D) undertook an unexpected increase in the inflation rate. E) publicly announced an inflation increase program. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 6) In the United States during the 1970s, the unemployment rate rose from previous years, and the inflation rate increased rapidly. This set of events is best described by saying that the A) economy moved to a lower point on its short-run Phillips curve but the short-run Phillips curve did not shift. B) short-run Phillips curve shifted downward. C) short-run Phillips curve shifted upward. D) economy moved to a higher point on its short-run Phillips curve but the short-run Phillips curve did not shift. E) the long-run Phillips curve shifted leftward. Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

7) In the United States during the late 1990s, the unemployment rate fell from previous years and the inflation rate was lower than in previous years. This set of events is best described by saying that the A) economy moved to a lower point on its short-run Phillips curve but the short-run Phillips curve did not shift. B) short-run Phillips curve shifted downward. C) short-run Phillips curve shifted upward. D) economy moved to a higher point on its short-run Phillips curve but the short-run Phillips curve did not shift. E) long-run Phillips curve shifted rightward. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 8) Which of the following could create a movement along the short-run Phillips curve so that the unemployment rate temporarily falls below the natural unemployment rate? A) an increase in aggregate demand and a sticky wage rate B) a decrease in aggregate demand and a sticky wage rate C) an increase in aggregate demand and a quickly responsive wage rate D) a decrease in aggregate demand and a quickly responsive wage rate E) an increase in aggregate supply and a sticky wage rate Answer: A Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 9) Along a given ________ Phillips curve, a lower unemployment rate can be achieved only by paying the cost of a ________ inflation rate, and a lower inflation rate can be achieved only by paying the cost of a ________ unemployment rate. A) short-run; higher; higher B) short-run; higher; lower C) short-run; lower; higher D) long-run; higher; higher E) long-run; higher; lower Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

10) If ________ GDP exceeds ________ GDP, employment exceeds its full-employment level and the unemployment rate is ________ the natural unemployment rate. A) real; potential; below B) real; potential; above C) nominal; potential; below D) nominal; potential; above E) real; nominal; below Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 11) If real GDP is ________ than potential GDP, employment is ________ than its fullemployment level and the unemployment rate rises ________ the natural unemployment rate. A) less; more; above B) more; more; above C) less; less; above D) less; less; below E) more; less; above Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 12) The natural rate hypothesis asserts that in the ________, the money wage rate is fixed and the ________ in the inflation rate brings a(n) ________ in the unemployment rate. A) short-run; decrease; increase B) short-run; decrease; decrease C) long-run; increase; decrease D) short-run; increase; decrease E) short-run; increase; increase Answer: D Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills

13) If the inflation that results from targeting unemployment becomes unacceptably high, low inflation can be restored. Lower inflation can be obtained by ________ the growth rate of aggregate demand, by ________ money growth, and by________ interest rates. A) lowering; slowing; lowering B) lowering; accelerating; raising C) lowering; accelerating; lowering D) raising; slowing; raising E) lowering; slowing; raising Answer: E Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 14) If the Fed can ________ inflation expectations, it might achieve ________ inflation without ________ the unemployment rate. A) raise; higher; lowering B) lower; lower; lowering C) lower; lower; raising D) lower; higher; lowering E) raise; lower; raising Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 15) If the Fed decides that it wants to lower the unemployment rate, it ________ the growth rate of aggregate demand by ________ the growth rate of money and ________ interest rates. A) reduces; accelerates, lowering B) accelerates; reducing; lowering C) accelerates; reducing; raising D) accelerates; accelerating; lowering E) accelerates; accelerating; raising Answer: D Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills

31.6 Essay: The Short-Run Phillips Curve 1) Define the short-run Phillips curve. Answer: The short-run Phillips curve shows the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate do not change. The short-run Phillips curve is downward sloping, indicating that there is a tradeoff between inflation and unemployment: inflation can be lowered only at the cost of higher unemployment and unemployment can be lowered only at the cost of higher inflation. Topic: Short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 2) "The short-run Phillips curve shows the tradeoff between real GDP and inflation." Is the previous statement correct or incorrect? Briefly explain you answer. Answer: The statement is incorrect. The short-run Phillips curve shows the tradeoff between the unemployment rate and the inflation rate. Topic: Short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 3) "The short-run Phillips curve is vertical at the natural unemployment rate." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The LONG-RUN Phillips curve is vertical at the natural unemployment rate but the SHORT-RUN Phillips curve is downward sloping. Topic: Short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 4) What does the short-run Phillips curve indicate about the tradeoff between inflation and unemployment? Answer: Because the slope of the short-run Phillips curve is negative, the short-run Phillips curve indicates that a tradeoff between inflation and unemployment exists. Lower inflation can be obtained, but the price is higher unemployment. Similarly, lower unemployment is possible but the price is higher inflation. Topic: Short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Written and oral communication

5) "The short-run Phillips curve shifts leftward when the inflation rate rises." Is the previous statement correct or incorrect? Answer: The statement is incorrect. An increase in the inflation rate leads to a movement along the short-run Phillips curve. Topic: Short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 6) If the short-run Phillips curve shifts rightward, what happens to the tradeoff between inflation and unemployment? If the short-run Phillips curve shifts leftward, what happens to the tradeoff between inflation and unemployment? Answer: A rightward shift of the short-run Phillips curve worsens the tradeoff between inflation and unemployment. With the rightward shift, a given level of inflation is now associated with a higher unemployment rate, or stated another way, a given unemployment rate is now associated with a higher inflation rate. A leftward shift of the short-run Phillips curve improves the tradeoff between inflation and unemployment. With the leftward shift, a given level of inflation is now associated with a lower unemployment rate, or stated another way, a given unemployment rate is now associated with a lower inflation rate. Topic: Short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Written and oral communication 7) "As the economy moves upward along its aggregate supply curve, the economy also moves upward along its short-run Phillips curve." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is correct. As the economy moves upward along its aggregate supply curve, the price level rises so that there is inflation. And as the economy moves upward along its aggregate supply curve, real GDP increases so that the unemployment rate decreases. Therefore moving upward along the aggregate supply curve is associated with inflation and lower unemployment, which is what we see when we move along the short-run Phillips curve. Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Written and oral communication

8) Discuss the relationship between the aggregate supply curve and the short-run Phillips curve. Answer: The short-run Phillips curve and the aggregate supply curve arise because the money wage rate does not change in the short run. When the price level increases, the inflation rate is positive. And when the price level increases, the money wage rate does not change, so the real wage rate declines. As a result of the lower real wage rate, the quantity of labor employed increases so that the quantity of real GDP increases and the unemployment rate decreases. Therefore the higher price level is associated with an increase in real GDP and a higher inflation rate is associated with a decrease in unemployment. Topic: Aggregate supply curve and the short-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.1 Status: Old AACSB: Written and oral communication 9) What is Okun's Law? Answer: Okun's Law says that for each percentage point that the unemployment rate is above the natural unemployment rate, there is a 2 percent gap between real GDP and potential GDP. Topic: Okun's Law Skill: Level 1: Definition Section: Checkpoint 31.1 Status: Old AACSB: Reflective thinking 10) A country reports a potential GDP of $6 trillion, a natural unemployment rate of 4 percent and an expected inflation rate of 2 percent. Using Okun's Law, if the unemployment rate is 5 percent, what is real GDP? Answer: Real GDP = $5.88 trillion (= $6 trillion × 0.98). Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 11) If the economy has a natural unemployment rate of 4 percent and potential GDP of $5 trillion, what will be real GDP according to Okun's Law if the unemployment rate rises to 5 percent? Answer: Real GDP is $4.9 trillion. Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills

12) The natural unemployment rate is 4 percent and the actual unemployment rate is 7 percent. According to Okun's Law, how does of real GDP compare to potential GDP? Answer: The gap between the natural unemployment rate and actual unemployment rate is 7 percent minus 4 percent, which is 3 percentage points. According to Okun's Law, for each percentage point gap in the unemployment rate, there is a 2 percent gap between real GDP and potential GDP. So real GDP is 3 percent × 2 = 6 percent below potential GDP. Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 13) Potential GDP is $5,000 billion and the natural unemployment rate is 5 percent. Based on these data, complete the table below by using Okun's Law to calculate real GDP for the different unemployment rates.

Answer:

The completed table is above. Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills

14) A country reports potential GDP of $10.0 trillion and a natural unemployment rate of 5 percent. Based on these data, use Okun's Law to complete the table below.

Answer:

The completed table is above. Topic: Okun's Law Skill: Level 3: Using models Section: Checkpoint 31.1 Status: Old AACSB: Analytic skills 31.7 Essay: Short-Run and Long-Run Phillips Curves 1) "The long-run Phillips curve is downward sloping." Is the previous statement correct or incorrect? Answer: The statement is incorrect because the long-run Phillips curve is vertical. The short-run Phillips curve is downward sloping. Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking

2) "The long-run Phillips curve is vertical at the expected rate of inflation." Is the previous statement correct or incorrect? Answer: The statement is incorrect because the long-run Phillips curve is vertical at the natural unemployment rate. Topic: Long-run Phillips curve Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Reflective thinking 3) Distinguish between the short-run and long-run Phillips curves. Answer: The long-run Phillips curve shows the relationship between inflation and unemployment when the unemployment rate equals the natural rate and the inflation rate equals the expected inflation rate. There is no long-run tradeoff between inflation and unemployment. The short-run Phillips curve, however, shows the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate do not change. The short-run Phillips curve is downward sloping, so that it shows a tradeoff between inflation and unemployment. Topic: Long-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Written and oral communication 4) In the long run, what is the tradeoff between inflation and unemployment? Explain your answer using Phillips curve analysis. Answer: In the long run, there is no tradeoff between inflation and unemployment. In particular, in the long run, changes in the inflation rate have no effect on the unemployment rate. The longrun Phillips curve is vertical, thereby showing that in the long run, ANY inflation rate can occur but in the long run the unemployment rate will equal the natural unemployment rate. Topic: Long-run Phillips curve Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Written and oral communication

5) Explain how the short-run and long-run Phillips curves are related. Answer: The short-run Phillips curve is the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate remain constant. The long-run Phillips curve is the relationship between the inflation rate and the unemployment rate when the economy is at full employment. The short-run Phillips curve is downward sloping, indicating that if the expected inflation rate and natural unemployment rate do not change, a higher inflation rate decreases the unemployment rate. The long-run Phillips curve is a vertical line illustrating that in the long run, the economy at full employment can have any inflation rate. The short-run Phillips curve intersects the long-run Phillips curve at the expected inflation rate. A change in the expected inflation rate shifts the short-run Phillips curve but has no effect on the long-run Phillips curve. An increase in the natural unemployment rate shifts both the short-run and the long-run Phillips curve. Topic: Short-run and long-run Phillips curves Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Written and oral communication 6) When the expected inflation rate changes, what happens to the short-run Phillips curve? To the long-run Phillips curve? Answer: When the expected inflation rate changes, the short-run Phillips curve shifts but the long-run Phillips curve does not shift. In particular, if the expected inflation rate increases, the short-run Phillips curve shifts upward and if the expected inflation rate decreases, the short-run Phillips curve shifts downward. Topic: Shifts in the Phillips curves, expected inflation Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Written and oral communication 7) When the natural unemployment rate changes, what happens to the short-run Phillips curve? To the long-run Phillips curve? Answer: When the natural unemployment rate changes, both the short-run Phillips curve and the long-run Phillips curve shift. If the natural unemployment rate increases, the Phillips curves shift rightward; if the natural unemployment rate decreases, the Phillips curves shift leftward. Topic: Shifts in the Phillips curves, natural unemployment rate Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Written and oral communication

8) What is the natural rate hypothesis? Answer: The natural rate hypothesis is the proposition that when the inflation rate changes, the unemployment rate changes TEMPORARILY. Eventually, however, the unemployment rate returns to the natural unemployment rate. Topic: Natural rate hypothesis Skill: Level 1: Definition Section: Checkpoint 31.2 Status: Old AACSB: Written and oral communication 9) Using the Phillips curves, what are the short-run and long-run effects of a decrease in the inflation rate? Answer: In the short run, there is first a downward movement along the short-run Phillips curve as the inflation rate falls and the unemployment rate increases. In the long run, however, the expected inflation rate falls and the short-run Phillips curve shifts downward. Therefore in the long run the inflation rate remains low and the unemployment rate returns to the natural unemployment rate. Topic: Natural rate hypothesis Skill: Level 2: Using definitions Section: Checkpoint 31.2 Status: Old AACSB: Written and oral communication 10) How does the natural rate hypothesis relate to the AS-AD model? Answer: The natural rate hypothesis is the proposition that when the inflation rate changes, the unemployment rate changes TEMPORARILY. Eventually, however, the unemployment rate returns to the natural unemployment rate. This definition is in terms of the Phillips curve. In terms of the AS-AD model, the natural rate hypothesis is that increases in aggregate demand TEMPORARILY increase real GDP so that it is greater than potential GDP. But eventually real GDP returns to potential GDP so the increase in real GDP above potential GDP is only temporary. Topic: Natural rate hypothesis Skill: Level 5: Critical thinking Section: Checkpoint 31.2 Status: Old AACSB: Written and oral communication

11) Suppose the natural unemployment rate is 4 percent and the expected inflation rate is 6 percent. In the figure below, illustrate the long-run Phillips curve. What does the long-run Phillips curve reveal abut the long-run tradeoff between inflation and unemployment?

Answer:

The long-run Phillips curve is illustrated in the above figure. It is vertical at the natural unemployment rate. The fact that the long-run Phillips curve is vertical means that in the long run there is no tradeoff between inflation and unemployment. In other words, in the long run higher inflation does not decrease unemployment nor does low inflation increase unemployment. Topic: Long-run Phillips curve Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills

12) In the above figure, what factor might have caused the shift in the short-run Phillips curve from SRPC1 to SRPC2? Answer: The long-run Phillips curve did not shift. Therefore the factor that shifted the short-run Phillips curve was an increase in the expected inflation rate. Topic: Shifts in the Phillips curves, expected inflation Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills

13) In the figure below, draw a short-run Phillips curve and a long-run Phillips curve if the expected inflation rate is 4 percent and the natural unemployment rate is 6 percent.

Explain how the two change in the short run if a. slower growth in aggregate demand causes a recession. b. the inflation rate increases. c. the natural unemployment rate increases.

Answer:

The figure with the Phillips curves is above. a. There is a downward movement along the short-run Phillips curve. b. There is an upward movement along the short-run Phillips curve. c. There is a rightward shift of both the long-run and short-run Phillips curves. Topic: Shifts in the Phillips curves Skill: Level 3: Using models Section: Checkpoint 31.2 Status: Old AACSB: Analytic skills 31.8 Essay: Influencing Inflation and Unemployment 1) What do people base their expected inflation rate upon? Answer: People's expected inflation rate depends on the recent data about inflation, that is, on their recent experiences with inflation. It also depends on economic principles that help to interpret the data of recent experience. People form a rational expectation of the inflation rate, which is the inflation forecast resulting from using all the relevant data and economic science. Topic: Expected inflation rate Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Old AACSB: Written and oral communication

2) How does the expected inflation rate affect the short-run Phillips curve tradeoff between inflation and unemployment? Answer: The expected inflation rate affects the short-run Phillips curve. If the expected inflation rate increases, then the short-run Phillips curve shifts upward, which means there is a worse tradeoff between inflation and unemployment. If, however, the expected inflation rate decreases, the short-run Phillips curve shifts downward, thereby improving the tradeoff between inflation and unemployment. Topic: Expected inflation rate Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Old AACSB: Written and oral communication 3) If the Fed increases the inflation rate in the short run before people's expected inflation changes, what occurs? What happens in the long run? Answer: Increasing the inflation rate with no change in the expected inflation rate moves the economy along its short-run Phillips curve. The inflation rate rises and the unemployment rate falls. The short-run Phillips curve does not shift. In the long run, however, people will revise their expected inflation rate upward to match the higher inflation. As this revision occurs, the short-run Phillips curve shifts upward. The unemployment rate and the inflation rate both increase. In the long run, when the higher inflation rate is fully expected, the short-run Phillips curve stops shifting upward. At this point, the unemployment rate has risen from its initial fall so that it now equals the natural unemployment rate. The inflation rate is permanently higher. Topic: Targeting the unemployment rate Skill: Level 3: Using models Section: Checkpoint 31.3 Status: Old AACSB: Written and oral communication 4) Discuss the effects of an unexpected decrease in the inflation rate policy on unemployment in the short run. If the reduction in inflation is permanent, what happens in the long run? Answer: If the reduction in inflation is unexpected, people do not revise their expected inflation rate. As a result, the short-run Phillips curve does not shift so that when the inflation rate is unexpectedly reduced, the economy moves along its (stationary) short-run Phillips curve. Thus the reduction in inflation is associated with an increase in unemployment. If the reduction in inflation is permanent, then as time passes, people revise downward their expected inflation rate. The short-run Phillips curve shifts downward and the unemployment rate falls. When all the adjustments are complete, people will have revised their expected inflation rate so that it equals the new, lower inflation rate. At this time, the unemployment rate will have fallen from its initial increase so that ultimately the unemployment rate equals the natural unemployment rate. Topic: Inflation reduction in practice Skill: Level 2: Using definitions Section: Checkpoint 31.3 Status: Old AACSB: Written and oral communication

Foundations of Economics, 9e (Bade), GE Chapter 16 Fiscal Policy 32.1 The Federal Budget 1) The federal budget is defined as A) a monthly statement of expenditure laws passed by the U.S. government. B) a monthly statement of whether the U.S. government is in deficit or surplus. C) an annual statement of U.S. government violations of international laws. D) an annual statement of expenditures and tax revenues of the U.S. government. E) an annual statement of what policy actions the U.S. government has pursued. Answer: D Topic: Federal budget Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 2) The use of the federal budget to achieve macroeconomic objectives of full employment and sustainable economic growth is A) called fiscal policy. B) called monetary policy. C) done only when there is a budget surplus. D) called government GDP policy. E) done only when there is a budget deficit. Answer: A Topic: Fiscal policy Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 3) Transfer payments include i. social security benefits. ii. medicare and medicaid benefits. iii. unemployment benefits. A) i only. B) ii only. C) iii only. D) i, ii, and iii. E) i and iii only. Answer: D Topic: Federal budget Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 1 Copyright © 2023 Pearson Education Ltd.

4) In the United States for the year 2020, the federal government had a ________ so the national debt was ________. A) budget deficit; increasing B) balanced budget; not changing C) budget surplus; decreasing D) budget deficit; decreasing E) budget surplus; increasing Answer: A Topic: Federal budget Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Revised AACSB: Reflective thinking 5) If the federal government has a budget surplus, then it is definitely the case that A) tax revenues exceeds government outlays. B) tax revenues and government outlays are equal. C) tax revenues are falling and government outlays are rising. D) government outlays exceed tax revenues. E) tax revenues are rising and government outlays are falling. Answer: A Topic: Budget surplus Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 6) The government has a budget surplus if A) there is no national debt. B) tax revenues are greater than outlays. C) government outlays are greater than tax revenues. D) the budget is balanced. E) a fiscal stimulus is being used to combat a recession. Answer: B Topic: Budget surplus Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking

7) When tax revenues exceed the government's outlays, the budget A) has a deficit and the national debt is increasing. B) is balanced and the national debt is decreasing. C) has a surplus and the national debt is decreasing. D) has a surplus and the national debt is increasing. E) None of the above because by law tax revenue cannot exceed the government's expenditures. Answer: C Topic: Budget surplus Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 8) When tax revenues ________ outlays is positive, then the government has a budget ________. A) minus; surplus B) divided by; surplus C) minus; deficit D) plus; deficit E) plus; surplus Answer: A Topic: Budget surplus Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 9) When the government's expenditures exceed its tax revenues, the budget A) has a deficit and the national debt is increasing. B) is balanced and the national debt is increasing. C) has a surplus and the national debt is increasing. D) has a deficit and the national debt is decreasing. E) None of the above because by law the government's expenditures cannot exceed its tax revenue. Answer: A Topic: Budget deficit Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking

10) When government outlays exceed tax revenues, the situation is called a budget A) with a negative balance. B) deficit. C) surplus. D) debt. E) with no balance. Answer: B Topic: Budget deficit Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 11) When tax revenues ________ outlays is negative, then the government has a budget ________. A) minus; surplus B) divided by; surplus C) minus; deficit D) plus; deficit E) plus; surplus Answer: A Topic: Budget deficit Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 12) When tax revenues equal government outlays, the situation is referred to as A) a balanced budget. B) an equivalent budget. C) an equal budget. D) an equilibrium budget. E) a legal budget. Answer: A Topic: Balanced budget Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking

13) When the government's outlays equal its tax revenues, then the budget A) is in deficit. B) is in surplus. C) is balanced. D) could be either in surplus or deficit. E) is legal only because expenditures equal tax revenues. Answer: C Topic: Balanced budget Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 14) When tax revenues minus outlays is i. positive, the government has a budget surplus. ii. negative, the government has a budget deficit. iii. zero, the government has a balanced budget. A) i, ii, and iii B) i and ii only C) ii and iii only D) i only E) iii only Answer: A Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 15) The government collects tax revenues of $100 million and has $105 million in outlays. The budget balance is a A) surplus of $5 million. B) deficit of $5 million. C) surplus of $105 million. D) deficit of $105 million. E) surplus of $100 million and a deficit of $105 million. Answer: B Topic: Budget deficit Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking

16) The government collects tax revenues of $100 million and has $105 million in outlays. The budget balance is a A) surplus of $5 million. B) deficit of $5 million. C) surplus of $105 million. D) deficit of $105 million. E) surplus of $100 million and a deficit of $105 million. Answer: B Topic: Budget deficit Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 17) In 2010, the U.S. government had tax revenues of $2,703 billion and outlays were $3,973 billion. The budget A) surplus was $1,270 billion. B) deficit was $1,270 billion. C) surplus was $2,703 billion. D) deficit was $3,973 billion. E) was balanced because every dollar the government spends it must raise. Answer: B Topic: Budget deficit Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Analytic skills

The table above gives a nation's government outlays and tax revenues for 2015 through 2019. 18) During which years did the country have a budget surplus? A) 2015 and 2016 B) 2019 only C) 2018 only D) 2017 and 2019 E) all except 2018 Answer: A Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Revised AACSB: Analytic skills 19) During which years did the country have a budget deficit? A) 2015 and 2016 B) 2019 only C) 2018 only D) 2017 and 2019 E) all except 2018 Answer: D Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Revised AACSB: Analytic skills

20) During which years did the country have a balanced budget? A) 2015 and 2016 B) 2019 only C) 2018 only D) 2017 and 2019 E) all except 2018 Answer: C Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Revised AACSB: Analytic skills

21) The above table gives the government outlays and tax revenues from 2015 through 2019 for two countries. In 2018 country A had a ________ and country B had a ________. A) budget deficit; budget deficit B) balanced budget; budget surplus C) balanced budget; budget deficit D) budget surplus; budget surplus E) budget surplus; balanced budget Answer: C Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Revised AACSB: Analytic skills

22) The above table gives the government outlays and tax revenues from 2015 through 2019 for two countries. In 2017 country A had a ________ and country B had a ________. A) budget deficit; budget deficit B) budget deficit; budget surplus C) balanced budget; budget deficit D) budget surplus; budget surplus E) budget surplus; budget deficit Answer: B Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Revised AACSB: Analytic skills 23) The national debt A) equals tax revenues minus outlays. B) grows when the government runs a budget surplus. C) is the total amount of government debt outstanding. D) decreases when the government runs a budget deficit. E) equals tax revenues plus outlays. Answer: C Topic: National debt Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 24) The national debt is the amount A) by which government tax revenue exceed outlays in a given year. B) of debt outstanding that arises from past budget deficits. C) by which government outlays exceed tax revenue in a given year. D) of government outlays summed over time. E) of all future entitlement spending. Answer: B Topic: National debt Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking

25) The national debt is A) tax revenue minus government outlays. B) government outlays minus tax revenue. C) the amount borrowed by the government to finance past budget deficits. D) the amount lent by the government of past budget surpluses. E) the excess of this year's budget surplus minus this year's budget deficit. Answer: C Topic: National debt Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 26) When the government's outlays equal its tax revenue, the budget A) has a deficit and the national debt is increasing. B) is balanced and the national debt is not changing. C) has a surplus and the national debt is increasing. D) has a deficit and the national debt is decreasing. E) has a surplus and the national debt is decreasing. Answer: B Topic: Balanced budget Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 27) When the government's outlays exceed its tax revenues, the national debt A) shrinks thanks to the budget surplus. B) grows to finance the budget deficit. C) shrinks thanks to the budget deficit. D) grows to finance the budget surplus. E) does not change because it has nothing to do with government outlays and tax revenue. Answer: B Topic: National debt Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking

28) The national debt can only be reduced if A) the federal budget is in deficit. B) the federal budget is in surplus. C) there are no tax multiplier effects. D) the economy has a deflationary gap. E) the economy has an inflationary gap. Answer: B Topic: National debt Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 29) If tax revenues are $230 billion and the government's outlays are $235 billion, then the budget A) deficit is $5 billion and government debt will remain the same. B) surplus is $5 billion and government debt will increase by $5 billion. C) deficit is $5 billion and government debt will increase by $5 billion. D) deficit is $5 billion and government debt will decrease by $5 billion. E) surplus is $230 billion and the budget deficit is $235 billion. Answer: C Topic: National debt Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Analytic skills 30) What two parts of the government determine the federal budget? A) the Federal Reserve and the FOMC B) the President and the Federal Reserve C) the Congress and the Federal Reserve D) the Congress and the President E) the U.S. Treasury and the Federal Reserve Answer: D Topic: Federal budget process Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking

31) The federal budget A) is required to balance by law. B) can have a surplus but not a deficit. C) can have a deficit but not a surplus. D) can have a deficit or a surplus but cannot be balanced. E) can have a deficit, a surplus, or a balance. Answer: E Topic: Federal budget process Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 32) If we look at the federal government budget over the past 40 years we see that A) most years the government budget has been balanced. B) only occasionally has the budget been in deficit. C) most years the budget has been in deficit. D) the government has been running a budget deficit since 1997. E) most years the budget balance has not been calculated. Answer: C Topic: Eye on the past, federal revenues and expenditures Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 33) Since 2000, the U.S. government has generally had a government budget ________ and so the national debt has ________. A) surplus; decreased B) surplus; increased C) deficit; decreased D) deficit; increased E) deficit; not changed Answer: D Topic: Eye on the past, federal revenues and expenditures Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking

34) The annual statement of the outlays, tax revenues, and surplus or deficit of the government of the United States is the federal A) surplus record. B) deficit record. C) budget. D) spending. E) debt to the public. Answer: C Topic: Federal budget Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 35) When government outlays are less than tax revenues, the government has A) a budget with a positive balance. B) a budget deficit. C) a budget surplus. D) a budget with a negative debt. E) an illegal budget because outlays must exceed tax revenues. Answer: C Topic: Budget deficit Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 36) National debt decreases in a given year when a country has A) a budget deficit. B) a balanced budget. C) a budget supplement. D) a budget surplus. E) no discretionary fiscal policy. Answer: D Topic: National debt Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking

37) To eliminate the fiscal imbalance the government could A) lower benefits and lower tax rates. B) increase benefits and increase tax rates. C) lower benefits and increase tax rates. D) increase benefits and lower tax rates E) borrow more money. Answer: C Topic: Fiscal Imbalance Skill: Level 3: Using models Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 32.2 Fiscal Stimulus 1) Automatic stabilizers are defined as A) actions taken by the President without Congressional consent to stabilize the economy. B) actions taken by an act of Congress to stabilize the economy. C) policy that stabilizes without the need for action by the government. D) discretionary policy taken to stabilize the economy. E) policy that has no multiplier effects. Answer: C Topic: Automatic stabilizer Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 2) Automatic changes in tax revenues and expenditures that occur as a result of fluctuations in real GDP are referred to as automatic A) taxes and expenditure. B) discretionary taxes and expenditure. C) government. D) stabilizers. E) discretionary policy. Answer: D Topic: Automatic stabilizer Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

3) Fiscal policies that move the economy toward potential GDP without a change in policy are called A) routine stabilizers. B) automatic stabilizers. C) spending stabilizers. D) economic stabilizers. E) GDP stabilizers. Answer: B Topic: Automatic stabilizer Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 4) An example of automatic fiscal policy is A) Congress passing a tax rate reduction package. B) the federal government expanding spending at the Department of Education. C) expenditure for unemployment benefits increasing as economic growth slows. D) the Federal Reserve reducing interest rates as economic growth slows. E) a change in taxes that has no multiplier effect. Answer: C Topic: Automatic stabilizer Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 5) Which of the following is an example of an automatic fiscal policy action? A) increased unemployment benefit payments resulting from higher unemployment B) an increase in spending on defense goods resulting from increased world tensions C) an increase in the tax rate resulting from a desire to shrink the budget deficit D) a decrease in the tax rate resulting from an effort to increase aggregate demand to combat a recession E) None of the above answers is correct. Answer: A Topic: Automatic stabilizer Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

6) In an expansion, federal tax revenues increase proportionally more than real GDP without the need for any government policy. This increase is an example of A) discretionary monetary policy. B) automatic monetary policy. C) automatic fiscal policy. D) discretionary fiscal policy. E) the effect of deficit spending. Answer: C Topic: Automatic stabilizer, induced taxes Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 7) Taxes that change with the level of real GDP and income are called A) voluntary taxes. B) GDP taxes. C) induced taxes. D) forced taxes. E) flexible taxes. Answer: C Topic: Automatic stabilizer, induced taxes Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 8) Induced taxes are defined as taxes A) we are forced to pay for services from the government. B) that vary with real GDP. C) that are avoided with the use of legal tax shelters. D) enacted by Congress that explicitly state the amount to be paid. E) that rise in recessions and fall in expansions. Answer: B Topic: Automatic stabilizer, induced taxes Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

9) Needs-tested spending is defined as A) spending by Congress on its own perks of office. B) taxes paid by those qualified by their income. C) spending on programs for people qualified to receive benefits. D) spending by the President on the White House. E) spending that increases in expansions and decreases in recessions. Answer: C Topic: Automatic stabilizer, needs-tested spending Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 10) Needs-tested spending is best described as A) spending on programs that entitle qualified persons and businesses to receive benefits. B) spending on programs that have been tested in some manner. C) spending on programs that have proven over time to be sound investments. D) spending on programs that are considered necessities (needed) according to surveys of the public. E) not spending at all, but a reference to the reliability of budget. Answer: A Topic: Automatic stabilizer, needs-tested spending Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 11) Needs-tested spending A) increases as real GDP increases. B) increases as unemployment increases. C) decreases as unemployment increases. D) decreases in recession. E) makes recessions more severe. Answer: B Topic: Automatic stabilizer, needs-tested spending Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

12) During a recession, unemployment benefit payments increase without the need for any government action. This increase is an example of A) discretionary monetary policy. B) automatic monetary policy. C) automatic fiscal policy. D) discretionary fiscal policy. E) government expenditure but it is not an example of either discretionary or automatic policy. Answer: C Topic: Automatic stabilizer, needs-tested spending Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 13) Needs-tested spending A) increases in recessions and decreases in expansions. B) decreases in recessions and increases in expansions. C) does not change with the level of economic activity. D) is always increasing regardless of whether we are in an expansion or a recession. E) cannot be changed unless the government changes the spending laws. Answer: A Topic: Automatic stabilizer, needs-tested spending Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 14) Needs-tested spending A) is directing government spending and taxes to states that need the most help. B) is giving tax cuts to wealthy people so they will increase their spending. C) includes transfer payments such as food stamps and unemployment benefits. D) includes homeland defense spending. E) cannot be changed without changes in the laws. Answer: C Topic: Automatic stabilizer, needs-tested spending Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

15) Automatic stabilizers include A) changes in induced taxes and changes in needs-tested spending. B) increases or decreases of tax rates and changes in needs-tested spending. C) changes in induced taxes and changes in discretionary spending. D) changes in discretionary spending and changes in needs-tested spending. E) changes in the federal funds interest rate brought about by Fed policy. Answer: A Topic: Automatic stabilizer Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 16) In a recession, needs-tested spending ________ and induced taxes ________. A) increases; increase B) increases; decrease C) decreases; increase D) decreases; decrease E) increase; do not change Answer: B Topic: Automatic stabilizer Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 17) An economic expansion leads to ________ needs-tested spending and ________ induced taxes. A) higher; lower B) lower; higher C) higher; higher D) lower; lower E) lower; no change in Answer: B Topic: Automatic stabilizer Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

18) Automatic stabilizers decrease the impact of a recession on the level of economic activity because they A) reduce the interest rate and so allow firms to increase their level of investment. B) increase taxes so the budget is always balanced. C) raise the exchange rate so U.S. exports become more attractive to foreigners. D) mean disposable income does not change by as much as real GDP. E) increase the quantity of money in circulation. Answer: D Topic: Automatic stabilizer Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 19) Which of the following is TRUE? A) Automatic stabilizers are used to eliminate recessions. B) Discretionary fiscal policy cannot eliminate a recession. C) Automatic stabilizers help to reduce the impact of a recession. D) Discretionary fiscal policy can automatically eliminate a recession. E) Automatic stabilizers make discretionary policy more effective by increasing the magnitude of the multipliers. Answer: C Topic: Automatic stabilizer Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 20) Automatic stabilizers A) increase the magnitude of the government expenditure multiplier. B) decrease the magnitude of the government expenditure multiplier. C) have no effect on the magnitude of the government expenditure multiplier. D) reduce the government expenditure multiplier to zero. E) increase the magnitude of the tax multiplier. Answer: B Topic: Automatic stabilizer Skill: Level 5: Critical thinking Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

21) The structural deficit or surplus is the A) difference between actual government outlays and actual government revenues. B) change in national debt that will result from current budgetary policies. C) government budget deficit or surplus that would occur if the economy were at full employment. D) difference between actual government outlays and what would be government revenues if the economy were at full employment. E) actual government budget deficit or surplus minus expenditures for capital improvements. Answer: C Topic: Cyclical and structural balances Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 22) The structural deficit is the deficit A) during a recession. B) during an expansion. C) that would occur at full employment. D) caused by the business cycle. E) that does not increase the national debt. Answer: C Topic: Cyclical and structural balances Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 23) The structural surplus A) equals the actual surplus plus the cyclical surplus. B) is the government budget surplus that would exist if the economy was at full employment. C) is, by definition, equal to the negative of the cyclical deficit. D) is legally required to be positive. E) fluctuates over the business cycle. Answer: B Topic: Cyclical and structural balances Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

24) The cyclical deficit is the portion of the deficit A) created by fluctuations in real GDP. B) that is the result of nondiscretionary federal spending. C) that would exist if the economy were at full employment. D) that is the result of discretionary federal spending. E) that does not add to the national debt. Answer: A Topic: Cyclical and structural balances Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 25) A cyclical deficit is the budget deficit that occurs when i. actual output is at potential output. ii. the economy is at full-employment output. iii. tax revenues and outlays are not at their full-employment levels. A) i only. B) ii only. C) iii only. D) i and ii only. E) i and iii only. Answer: C Topic: Cyclical and structural deficits Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 26) When an economy is above full employment and the government has a budget deficit, that deficit A) exceeds the structural deficit. B) is equal to the cyclical deficit. C) is equal to the structural deficit minus the cyclical deficit. D) is equal to the cyclical deficit minus the structural deficit. E) is less than the structural deficit. Answer: E Topic: Cyclical and structural balances Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

27) The actual budget deficit is equal to the A) structural deficit. B) cyclical deficit. C) structural deficit minus the cyclical deficit. D) cyclical deficit minus the structural deficit. E) structural deficit plus the cyclical deficit. Answer: E Topic: Cyclical and structural balances Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 28) If the budget deficit is $50 billion and the structural deficit is $10 billion, the cyclical deficit is A) $10 billion. B) $40 billion. C) $60 billion. D) $50 billion. E) More information is need to answer the question. Answer: B Topic: Cyclical and structural deficits Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills 29) If the economy has a structural deficit of $25 billion and a cyclical deficit of $75, we can conclude that the current budget deficit is ________ billion. A) $0 B) $25 C) $50 D) $75 E) $100 Answer: E Topic: Cyclical and structural deficits Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills

30) Discretionary fiscal policy is defined as fiscal policy A) left to the discretion of military authorities. B) initiated by an act of Congress. C) initiated by a Presidential proclamation. D) triggered by the state of the economy. E) with multiplier effects. Answer: B Topic: Discretionary fiscal policy Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 31) In 2009, Congress passed tax laws to reduce income tax rates for some taxpayers. This action is called A) a discretionary fiscal policy. B) a discretionary revenue policy. C) an automatic fiscal policy. D) an annual tax policy. E) induced tax policy. Answer: A Topic: Discretionary fiscal policy Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 32) Discretionary fiscal policy is a fiscal policy action, such as A) an interest rate cut, initiated by an act of Congress. B) an increase in payments to the unemployed, initiated by the state of the economy. C) a tax cut, initiated by an act of Congress. D) a decrease in tax receipts, initiated by the state of the economy. E) an increase in the quantity of money. Answer: C Topic: Discretionary fiscal policy Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

33) The government expenditure multiplier is used to determine the A) extra scrutiny government action receives. B) amount aggregate demand is affected by a change in government expenditure. C) amount aggregate supply is affected by a change in government expenditure. D) amount private consumption is decreased by government expenditure. E) extent to which automatic stabilizers must be changed in order to avoid recessions. Answer: B Topic: Government expenditure multiplier Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 34) The magnitude of the government expenditure multiplier is ________ the magnitude of the tax multiplier. A) greater than B) equal to C) less than D) not comparable to E) greater than for expansionary policy and less than for contractionary policy Answer: A Topic: Government expenditure multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 35) If government expenditures on goods and services increases by $20 billion, then aggregate demand A) increases by $20 billion. B) increases by more than $20 billion. C) decreases by $20 billion. D) decreases by more than $20 billion. E) increases by less than $20 billion. Answer: B Topic: Government expenditure multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

36) If government expenditure on goods and services increase by $100 billion, then aggregate demand A) increases by $100 billion. B) increases by less than $100 billion. C) increases by more than $100 billion. D) remains unchanged. E) decreases by more than $100 billion. Answer: C Topic: Government expenditure multiplier Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 37) A $100 million decrease in government expenditure on goods and services leads to an even larger decrease in aggregate demand because of A) induced changes in consumption expenditures. B) automatic fiscal policy. C) induced changes in aggregate supply. D) discretionary fiscal policy. E) the reinforcing effect of monetary policy. Answer: A Topic: Government expenditure multiplier Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 38) If government expenditure on goods and services increase by $10 billion, then aggregate demand A) increases by $10 billion. B) increases by $10 billion multiplied by the government expenditure multiplier. C) increases by $10 billion multiplied by the tax multiplier. D) decreases by $10 billion. E) decreases by $10 billion multiplied by the government expenditure multiplier. Answer: B Topic: Government expenditure multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

39) If the government reduces expenditure on goods and services by $30 billion, then aggregate demand A) decreases by more than $30 billion and real GDP decreases. B) decreases by $30 billion and real GDP decreases. C) increases by $30 billion and real GDP increases. D) increases and potential GDP increases. E) increases by more than $30 billion and real GDP increases. Answer: A Topic: Government expenditure multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills 40) The tax multiplier is the A) magnification effect of a change in taxes on aggregate demand. B) magnification effect of a change in taxes on the budget deficit. C) magnification effect of a change in taxes on government expenditures. D) magnification effect of a change in taxes on aggregate supply. E) magnification effect of a change in taxes on the national debt. Answer: A Topic: Tax multiplier Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 41) The magnitude of the tax multiplier is smaller than the magnitude of the government expenditure multiplier because A) a change in taxes does not change expenditures. B) an increase in taxes decreases expenditures. C) a decrease in government expenditure decreases tax revenue. D) a change in taxes does not change expenditures by as much as the same size change in government expenditure. E) a change in taxes creates additional induced taxes. Answer: D Topic: Tax multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills

42) If a change in the tax laws leads to a $100 billion decrease in tax revenue, then aggregate demand A) increases by $100 billion. B) increases by less than $100 billion. C) increases by more than $100 billion. D) decreases by $100 billion. E) decreases by more than $100 billion. Answer: C Topic: Tax multiplier Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills 43) If federal taxes are cut by $10 billion, aggregate demand A) increases by $10 billion. B) increases by $10 billion multiplied by the government expenditure multiplier. C) increases by $10 billion multiplied by the tax multiplier. D) decreases by $10 billion. E) decreases by $10 billion multiplied by the tax multiplier. Answer: C Topic: Tax multiplier Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 44) The government expenditure multiplier and the tax multiplier are A) identical in size. B) different in size and the tax multiplier is larger. C) different in size and the government expenditure multiplier is larger. D) not comparable because the government expenditure multiplier applies to aggregate demand and the tax multiplier applies to aggregate supply. E) not comparable because the government expenditure multiplier applies to aggregate supply and the tax multiplier applies to aggregate demand. Answer: C Topic: Government expenditure multiplier, tax multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

45) Ignoring any supply-side effects, suppose the government is considering cutting taxes by $100 billion or increasing government expenditures on goods and services by $100 billion. Then A) both policies would increase aggregate demand by the same amount. B) both policies would increase aggregate demand but the tax cut has a smaller effect. C) both policies would increase aggregate demand but the increase in government expenditure has a smaller effect. D) the tax cut would decrease aggregate demand and the increase in government expenditure would increase aggregate demand. E) the tax cut would increase aggregate demand and the increase in government expenditure would decrease aggregate demand. Answer: B Topic: Government expenditure multiplier, tax multiplier Skill: Level 4: Applying models Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills 46) The balanced budget multiplier is A) positive because the magnitude of government expenditure multiplier is larger than the magnitude of tax multiplier. B) negative because the magnitude of government expenditure multiplier is larger than the magnitude of the tax multiplier. C) positive because the magnitude of government expenditure multiplier is smaller than the magnitude of tax multiplier. D) equal to zero. E) negative because the magnitude of the tax multiplier is larger than the magnitude of the government expenditure multiplier. Answer: A Topic: Balanced budget multiplier Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

47) When comparing a $100 billion increase in government expenditure to a $100 billion decrease in tax revenue, the effect of the increase in government expenditure on aggregate demand is A) greater than the effect of the tax decrease. B) equal to the effect of the tax decrease. C) less than the effect of the tax decrease. D) positive whereas the effect of the tax decrease is negative. E) negative whereas the effect of the tax decrease is positive. Answer: A Topic: Balanced budget multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills 48) The balanced budget multiplier is A) equal to zero because taxes and government expenditure are changed to leave the budget balanced. B) misnamed because it does not leave the budget balanced. C) greater than zero and less than the government expenditure multiplier. D) greater than zero and greater than the government expenditure multiplier. E) less than zero, that is, it is negative. Answer: C Topic: Balanced budget multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 49) The balanced budget multiplier is based on the point that the ________ multiplier is larger than the ________ multiplier so that an equal increase in government expenditure and taxes ________ aggregate demand. A) tax; expenditure; does not change B) expenditure; tax; does not change C) expenditure; tax; decreases D) expenditure; tax; increases E) tax; expenditure; decreases Answer: D Topic: Balanced budget multiplier Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

50) The balanced budget multiplier applies when a $50 billion increase in government expenditure is financed by a $50 billion ________ in tax revenue and the balanced budget multiplier shows that in this case there is ________ effect on aggregate demand. A) decrease; no B) decrease; a positive C) increase; no D) increase; a positive E) increase; a negative Answer: D Topic: Balanced budget multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills 51) If government expenditure increases by $200 billion and taxes simultaneously increase by $200 billion, then aggregate demand A) remains the same. B) decreases no matter what happens to aggregate supply. C) increases no matter what happens to aggregate supply. D) increases only if aggregate supply increases. E) increases only if aggregate supply decreases. Answer: C Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 52) Ignoring any supply-side effects, if government expenditure on goods and services increase by $10 billion and taxes increase by $10 billion, then real GDP ________ and the price level ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) does not change; does not change Answer: A Topic: Balanced budget multiplier Skill: Level 4: Applying models Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills

53) Ignoring any supply-side effects, if government expenditure on goods and services decrease by $10 billion and taxes decrease by $10 billion, then real GDP ________ and the price level ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) does not change; does not change Answer: D Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills 54) If the economy is in equilibrium with real GDP less than potential GDP, there is ________ gap, and a fiscal policy that ________ is appropriate. A) an inflationary; increases aggregate demand B) an inflationary; decreases aggregate demand C) a recessionary; increases aggregate demand D) a recessionary; decreases aggregate demand E) a recessionary; increases potential GDP Answer: C Topic: Fiscal stimulus Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 55) In order to help the economy recover from a recession using fiscal policy, the government can ________ so that aggregate demand increases. A) cut taxes B) raise taxes C) cut government expenditure on goods and services D) raise interest rates E) decrease the quantity of money Answer: A Topic: Fiscal stimulus Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

56) Which of the following is an example of a fiscal stimulus? A) decrease in government expenditure on goods and services B) decrease in transfer payments C) increase in taxes D) decrease in taxes E) none of the above Answer: D Topic: Fiscal stimulus Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 57) Suppose the economy is in an equilibrium in which real GDP is less than potential GDP. To increase real GDP, the government can use a fiscal stimulus of A) increasing taxes only. B) decreasing government expenditure only. C) decreasing taxes and/or increasing government expenditure. D) decreasing government expenditure and simultaneously increasing taxes. E) increasing the quantity of money. Answer: C Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 58) If the economy is in an equilibrium with real GDP less than potential GDP, a fiscal stimulus could move the economy toward potential GDP by simultaneously ________ taxes and ________ government expenditures on goods and services. A) raising; increasing B) raising; decreasing C) cutting; increasing D) cutting; decreasing E) raising; not changing Answer: C Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

59) To eliminate a recessionary gap, the government can ________ government expenditures on goods and services or ________ taxes. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: B Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 60) If the government uses fiscal policy to close a recessionary gap A) government expenditure must be increased by more than the gap because of the government expenditure multiplier. B) taxes must be cut by more than the gap because of the tax multiplier. C) government expenditure can be increased by less than the gap because of the government expenditure multiplier. D) taxes can be raised by less than the gap because of the tax multiplier. E) taxes must be raised by more than the gap because of the tax multiplier. Answer: C Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills 61) Ignoring any supply-side effects, to close a recessionary gap of $100 billion with a government expenditure multiplier of 5, the government could A) increase government expenditure on goods and services by $100 billion. B) increase government expenditure on goods and services by $20 billion. C) raise taxes by $100 billion. D) raise taxes by more than $20 billion. E) decrease government expenditure on goods and services by $20 billion. Answer: B Topic: Fiscal stimulus Skill: Level 5: Critical thinking Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills

62) An economy is at a short-run equilibrium as illustrated in the above figure. An appropriate FISCAL policy option to move the economy to full employment is to A) increase government expenditure and move the economy to a full-employment equilibrium at point c. B) increase tax rates and move the economy to a full-employment equilibrium at point c. C) increase government expenditure and move the economy to a full-employment equilibrium at point b. D) increase tax rates and move the economy to a full-employment equilibrium at point b. E) lower the interest rate by increasing the quantity of money and move the economy to a fullemployment equilibrium at point b. Answer: C Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Revised AACSB: Analytic skills 63) If the government increases spending to eliminate the recessionary gap portrayed in the above figure, the result is ________ price level and ________ government budget deficit. A) a higher; a larger B) a higher; a lower C) a lower; a larger D) a lower; a lower E) no change in the; no change in the Answer: A Topic: Fiscal stimulus Skill: Level 4: Applying models Section: Checkpoint 32.2 Status: Revised AACSB: Analytic skills

64) Which of the following is a limitation of discretionary fiscal policy? i. law-making lags ii. estimating potential GDP iii. income gap A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Limitations of fiscal policy Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 65) The use of discretionary fiscal policy is hampered by i. difficulty of estimating the level of potential GDP. ii. lack of accuracy of economic forecasts. iii. the small impact tax cuts and increases in government expenditure have on aggregate demand. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Limitations of fiscal policy Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 66) There are four limitations to the effectiveness of discretionary fiscal policy. Which item below is NOT one of these limitations? A) shrinking area of law-maker discretion B) law-making time lag C) estimating potential GDP D) fiscal multiplier E) economic forecasting Answer: D Topic: Limitations of fiscal policy Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 36 Copyright © 2023 Pearson Education Ltd.

67) The law-making time lag is best described as the time that it takes A) Congress to REALIZE that new laws must be passed to change taxes or spending. B) a newly passed law to become the norm in daily lives. C) the President to sign a bill sent from Congress. D) a jury to render a verdict. E) Congress to PASS laws needed to change taxes or spending. Answer: E Topic: Limitations of fiscal policy Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 68) A reason why discretionary fiscal policy might move the economy away from potential GDP instead of toward potential GDP is that A) economic forecasts consistently underestimate the impact of fiscal policy. B) it is difficult to know whether real GDP is above or below potential GDP. C) during a recession, politicians prefer increases in government spending over decreasing taxes. D) government programs automatically move real GDP away from potential GDP. E) government programs are always expansionary. Answer: B Topic: Limitations of fiscal policy Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 69) In order for the United States to use discretionary fiscal policy to deal with a recessionary gap A) the public must elect members of Congress that understand economics. B) the President and Congress must agree on which taxes to hike. C) time must pass in order for Congress to decide what taxes and government programs to change. D) the President's and Congress's economic advisors must agree on the proper government programs to slash. E) since 2002, the President has been given the authority to make up to a 10 percentage point change in government expenditure programs. Answer: C Topic: Limitations of fiscal policy Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

70) The ________ view says that fiscal stimulus has a multiplier effect that makes it a ________ tool to fight a deep recession. A) mainstream; powerful B) "free lunch"; powerful C) Keynesian; powerful D) Keynesian; weak E) None of the above answers is correct. Answer: C Topic: Macroeconomic schools of thought Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 71) An example of automatic fiscal policy is A) an interest rate cut, initiated by an act of Congress. B) an increase in the quantity of money. C) a tax cut, initiated by an act of Congress. D) a decrease in tax revenues, triggered by the state of the economy. E) any change in the interest rate, regardless of its cause. Answer: D Topic: Automatic fiscal policy Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 72) If the structural deficit is $800 billion and the cyclical deficit is $600 billion, the actual budget deficit is A) $200 billion. B) $600 billion. C) $800 billion. D) $1,400 billion. E) None of the above answers is correct. Answer: D Topic: Cyclical and structural deficits Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills

73) The government expenditure multiplier reflects the magnification on ________ from a change in government expenditure on goods and services. A) aggregate demand B) the budget deficit C) tax receipts D) aggregate supply E) potential GDP Answer: A Topic: Government expenditure multiplier Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 74) The magnitude of the tax multiplier is ________ the magnitude of the government expenditure multiplier. A) equal to B) greater than C) smaller than D) the inverse of E) exactly one half Answer: C Topic: Balanced budget multiplier Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 75) An example of a discretionary fiscal stimulus policy is A) the automatic increase in needs-tested spending during a recession. B) induced taxes. C) decreasing government expenditure. D) decreasing needs-tested spending. E) cutting taxes. Answer: E Topic: Fiscal stimulus Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

76) A fiscal stimulus works to close a recessionary gap by shifting the A) AD curve leftward. B) AS curve leftward. C) AD curve leftward and AS curve leftward. D) AD curve rightward. E) potential GDP line leftward. Answer: D Topic: Fiscal stimulus Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills 77) Discretionary fiscal policy is handicapped by A) induced taxes and automatic stabilizers. B) law-making time lags, estimation of potential GDP, and economic forecasting. C) economic forecasting, law-making time lags, and induced taxes. D) automatic stabilizers, law-making time lags, and potential GDP estimation. E) automatic stabilizers and induced taxes. Answer: B Topic: Limitations of fiscal policy Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 32.3 The Supply Side: Potential GDP and Growth 1) Government expenditure ________ change potential GDP and taxes ________ change potential GDP. A) can; can B) cannot; can C) can; cannot D) cannot; cannot E) None of the above answers is correct. Answer: A Topic: Fiscal policy and potential GDP Skill: Level 1: Definition Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking

2) An increase in government expenditure can ________ potential GDP and an increase in taxes can ________ potential GDP. A) increase; increase B) increase; never change C) decrease; decrease D) never change; never change E) increase; decrease Answer: E Topic: Fiscal policy and potential GDP Skill: Level 1: Definition Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking 3) Looking at the supply-side effects on aggregate supply shows that a tax hike on labor income A) weakens the incentive to work. B) decreases potential GDP. C) increases potential GDP because people work more to pay the higher taxes. D) Both answers A and B are correct. E) None of the above is correct. Answer: D Topic: Taxes and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking 4) Once supply side effects are taken into account, tax cuts for labor income can change i. the supply of labor. ii. potential GDP. iii. the growth rate of potential GDP. A) i only B) i and ii C) iii only D) ii only E) i and iii Answer: B Topic: Taxes and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking

5) The supply-side effects of a change in taxes on labor income means that ________ in taxes on labor income shifts the ________. A) an increase; labor supply curve rightward B) an increase; labor supply curve leftward C) an increase; labor supply curve leftward and the labor demand curve rightward D) a decrease; labor demand curve rightward E) a decrease; labor demand curve leftward Answer: B Topic: Taxes and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking 6) An increase in taxes on labor income shifts the labor supply curve ________, and the ________. A) leftward; after-tax wage rate falls B) rightward; before-tax wage rate rises C) leftward; after-tax wage rate does not change D) leftward; after-tax wage rate rises E) leftward; before-tax wage rate does not change Answer: A Topic: Taxes and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills 7) An income tax hike A) increases potential GDP. B) increases employment. C) decreases potential GDP. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: C Topic: Taxes and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking

8) An increase in the income tax ________ potential GDP by shifting the labor ________ curve ________. A) increases; demand; rightward B) decreases; supply; rightward C) decreases; demand; leftward D) increases; supply; rightward E) decreases; supply; leftward Answer: E Topic: Taxes and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills 9) The supply-side effects show that a tax cut on labor income ________ employment and ________ potential GDP. A) increases; increases B) increases; does not change C) increases; decreases D) decreases; increases E) decreases; decreases Answer: A Topic: Taxes and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking 10) The supply-side effects show that a tax cut on labor income ________ the supply of labor and ________ employment. A) increases; increases B) increases; does not change C) increases; decreases D) decreases; increases E) decreases; decreases Answer: A Topic: Taxes and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking

11) If a tax cut increases people's labor supply, then the tax cut A) increases potential GDP. B) decreases aggregate demand. C) decreases potential GDP because the real wage rate falls. D) does not affect aggregate demand. E) Both answers B and C are correct. Answer: A Topic: Taxes and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills 12) An increase in income taxes ________ employment and ________ potential GDP. A) increases; increases B) increases; does not change C) decreases; decreases D) does not change; does not change E) increases; decreases Answer: C Topic: Taxes and potential GDP Skill: Level 1: Definition Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills 13) The greater the tax wedge, the ________ the amount of employment and the ________ potential GDP. A) larger; larger B) larger; smaller C) smaller; smaller D) smaller; larger E) None of the above because the tax wedge does not affect employment or potential GDP. Answer: C Topic: Taxes and potential GDP Skill: Level 3: Using models Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills

14) In the labor market, the income tax creates a tax wedge which raises the ________ wage rate, reduces the ________ wage rate, and ________ employment. A) before-tax; after-tax; does not affect B) before-tax; after-tax; increases C) after-tax; before-tax; does not affect. D) before-tax; after-tax; decreases E) after-tax; before-tax; decreases Answer: D Topic: Tax wedge Skill: Level 3: Using models Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills 15) A cut in the income tax rate ________ the tax wedge and ________ employment, saving, and investment. A) decreases; increases B) does not change; increases C) increases; increases D) decreases; does not change E) increases; decreases Answer: A Topic: Tax wedge Skill: Level 3: Using models Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills 16) If we compare the United States to France, the U.S. tax wedge is ________ the French tax wedge. A) larger than B) equal to C) smaller than D) not comparable to E) smaller in the labor market and larger in the goods market than Answer: C Topic: Eye on the global economy, real-world tax wedges Skill: Level 1: Definition Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking

17) If we compare the United States to France, we see that potential GDP per person in France is ________ that in the United States because the French tax wedge is ________ the U.S. tax wedge. A) greater than; larger than B) greater than; smaller than C) the same as; the same as D) less than; larger than E) less than; smaller than Answer: D Topic: Eye on the global economy, real-world tax wedges Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking 18) Suppose the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the inflation rate is 4 percent. In this case, the real after-tax interest rate is A) .5 percent. B) 3.5 percent. C) 1.0 percent. D) 4.0 percent. E) 2.0 percent. Answer: E Topic: After-tax real interest rate Skill: Level 3: Using models Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills 19) The crowding out effect refers to the ________ from ________ in the government's budget deficit. A) decrease in investment; an increase B) decrease in employment; an increase C) decrease in consumption; a decrease D) increase in consumption; an increase E) increase in investment; an increase Answer: A Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking

20) A tax cut that increases the budget deficit results in ________ in the ________ loanable funds. A) an increase; demand for B) an increase; supply of C) a decrease; demand for D) a decrease; supply of E) no change; either the demand for or the supply of Answer: A Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking 21) The standard view in economics is that tax cuts without ________ will ________ the budget deficit resulting in ________. A) spending cuts; increase; crowding out investment B) spending cuts; decrease; crowding out investment C) increasing spending; decrease; unemployment D) increasing spending; increase; crowding out investment E) spending cuts; decrease; unemployment Answer: A Topic: Crowding-out effect Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking 22) If a tax cut increases aggregate demand more than aggregate supply, real GDP ________ and the price level ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) increases; does not change Answer: A Topic: Fiscal policy, combined supply-side and demand-side effects Skill: Level 3: Using models Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills

23) How could an expansionary fiscal policy increase real GDP and lower the price level? A) if aggregate supply decreases more than aggregate demand increases B) if aggregate supply increases more than aggregate demand increases C) if the aggregate supply increases equals the aggregate demand increase D) if aggregate supply decreases more than aggregate demand decreases E) if aggregate supply decreases less than aggregate demand decreases Answer: B Topic: Fiscal policy, combined supply-side and demand-side effects Skill: Level 4: Applying models Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills 24) When taxes are cut, aggregate demand ________ and aggregate supply ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: A Topic: Fiscal policy, combined supply-side and demand-side effects Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking 25) The quantity of employment is determined in the ________ market and that quantity, along with the ________, determines potential GDP. A) loanable funds; production function B) goods and services; labor market C) labor market; tax rate D) labor market; production function E) labor market; tax wedge Answer: D Topic: Potential GDP Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking

26) Increasing the income tax rate ________ the ________. A) decreases; demand for labor B) increases; supply of labor C) decreases; supply of labor D) does not change; supply of labor E) increases; demand for labor Answer: C Topic: Taxes and the labor market Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking 27) Increasing the income tax rate ________ the before-tax real wage rate and ________ the after-tax real wage rate. A) raises; raises B) does not change; raises C) lowers; lowers D) lowers; raises E) raises; lowers Answer: E Topic: Taxes and the labor market Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills 28) If the income tax rate is 20 percent and the tax rate on consumption expenditure is 15 percent, then the tax wedge is A) 2 percent. B) 5 percent. C) 35 percent. D) 300 percent. E) None of the above answers is correct. Answer: C Topic: Tax wedge Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills

29) The supply-side effects of an income tax cut ________ potential GDP and ________ aggregate supply. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increases; do not change Answer: A Topic: Taxes, supply-side effects Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking 30) An income tax on labor income decreases the ________ of potential GDP, and a tax on interest income decreases the ________ of potential GDP. A) level; growth rate B) growth rate; level C) level; level D) growth rate; growth rate E) None of the above answers is correct. Answer: A Topic: Taxes and potential GDP Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Reflective thinking 31) If the nominal interest rate is 10 percent, the inflation rate is 6 percent, and the tax rate on interest income is 25 percent, what is the after-tax real interest rate? A) 4.0 percent B) 6.0 percent C) 3.0 percent D) 1.5 percent E) 3.5 percent Answer: D Topic: After-tax real interest rate Skill: Level 3: Using models Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills

32) An income tax cut ________ aggregate demand and ________ aggregate supply. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; increases Answer: A Topic: Fiscal policy, combined supply-side and demand-side effects Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills 33) If fiscal stimulus creates a large budget ________, then in the long run economic growth ________. A) surplus; increases B) surplus; decreases C) deficit; increases D) deficit; decreases E) None of the above answers is correct. Answer: D Topic: Fiscal policy, combined supply-side and demand-side effects Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Analytic skills

32.4 Chapter Figures

The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP. 1) In the figure above, the ________ gap is one trillion dollars. To close the gap, the government can change expenditure by ________ one trillion dollars. A) recessionary; less than B) inflationary; exactly C) inflationary; more than D) recessionary; more than E) recessionary; exactly Answer: A Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Revised AACSB: Analytic skills

2) In the figure above, the ________ gap is equal to ________. A) recessionary; $1 trillion B) inflationary; $1 trillion C) recessionary; $12 trillion D) inflationary; $12 trillion E) recessionary; $13 trillion Answer: A Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Revised AACSB: Analytic skills 3) In the figure above, the ________ gap is one trillion dollars. To close the gap, the government can ________ government expenditure and/or ________ taxes. A) recessionary; increase; decrease B) inflationary; decrease; increase C) inflationary; increase; increase D) recessionary; decrease; decrease E) recessionary; decrease; increase Answer: A Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Revised AACSB: Analytic skills 4) In the figure above, the ________ gap is one trillion dollars. To close the gap, the government can ________ government expenditure and/or ________ taxes. A) recessionary; increase; decrease B) inflationary; decrease; increase C) inflationary; increase; increase D) recessionary; decrease; decrease E) recessionary; decrease; increase Answer: A Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Revised AACSB: Analytic skills

5) In the figure above, to use fiscal policy to move the economy back to potential GDP, the government must increase government expenditure by ________ $1 trillion and/or decrease taxes by ________ $1 trillion. A) exactly; exactly B) more than; less than C) less than; more than D) less than; less than E) more than; more than Answer: D Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Revised AACSB: Analytic skills

The figure above shows an economy aggregate demand curve and aggregate supply curves. 6) Suppose the shift from AD0 to AD1 and from AS0 to AS1 is the result of fiscal policy. Which of the policies below could lead to these shifts? i. An increase in government expenditure ii. A tax cut iii. A decrease in government expenditure iv. A tax hike A) i only B) iv only C) i and ii D) iii and iv E) i and iv Answer: C Topic: Fiscal policy, combined supply-side and demand-side effects Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Revised AACSB: Analytic skills

7) Suppose the shift from AD0 to AD1 and from AS0 to AS1 is the result of fiscal policy. If the effect on aggregate supply was larger than the figure above shows, as a result the price level would be ________ 110 and real GDP would be ________ $21 trillion. A) equal to; equal to B) higher than; larger than C) lower than; larger than D) equal to; larger than E) lower than; less than Answer: C Topic: Fiscal policy, combined supply-side and demand-side effects Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Revised AACSB: Analytic skills 8) Suppose the shift from AD0 to AD1 and from AS0 to AS1 is the result of fiscal policy. If the effect on aggregate demand was larger than the figure above shows, as a result the price level would be ________ 110 and real GDP would be ________ $21 trillion. A) equal to; equal to B) higher than; larger than C) lower than; larger than D) equal to; larger than E) lower than; less than Answer: B Topic: Fiscal policy, combined supply-side and demand-side effects Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Revised AACSB: Analytic skills

The figure above shows a labor market with an income tax. 9) According to the figure above, if there is no income tax, the equilibrium real wage rate is ________ and the equilibrium hours of labor are ________. A) $20; 200 billion B) $30; 250 billion C) $35; 200 billion D) $30; 200 billion E) The equilibrium is not shown. Answer: B Topic: Taxes and potential GDP Skill: Level 3: Using models Section: Checkpoint 32.3 Status: Revised AACSB: Analytic skills 10) The tax wedge in the figure above is equal to ________ per hour, which creates an after-tax real wage rate of ________ per hour and employment of ________ billion hours per year. A) $10; $35; 250 B) $15; $20; 200 C) $10; $35; 200 D) $5; $35; 200 E) $15; $30; 250 Answer: B Topic: Taxes and potential GDP Skill: Level 3: Using models Section: Checkpoint 32.3 Status: Revised AACSB: Analytic skills

11) In the figure above, the tax wedge is equal ________ per hour, the after-tax real wage rate is equal to ________, and the before-tax real wage rate is equal to ________. A) $10; $30; $30 B) $15; $20; $35 C) $20; $30; $35 D) $20; $30; $20 E) $30; $20; $35 Answer: B Topic: Taxes and potential GDP Skill: Level 3: Using models Section: Checkpoint 32.3 Status: Revised AACSB: Analytic skills 32.5 Integrative Questions 1) Do automatic fiscal stabilizers eliminate business cycles? A) Yes B) No, because they have no effect if the business cycle is the result of some unanticipated change. C) No, but they do moderate business cycles. D) No, they increase the likelihood that a business cycle occurs. E) No, they make business cycle fluctuations more severe. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 2) President Reagan often stated he preferred supply side policies. Which of the following federal government policies would be considered supply side? i. Decrease the quantity of money. ii. Lower taxes. iii. Lower the interest rate. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 58 Copyright © 2023 Pearson Education Ltd.

3) When the economy is in a recession, ________ taxes decrease while ________ spending increases and, as a result of this automatic fiscal policy, aggregate demand ________. A) needs-tested; induced; decreases B) induced; needs-tested; increases C) induced; discretionary; is not changed D) discretionary; needs-tested; increases E) discretionary; induced; is not changed Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 4) Government tax revenues ________ during an expansion and ________ during a recession, which leads to larger budget deficits during the ________ phase of the business cycle. A) increase; decrease; recession B) increase; increase; recession C) decrease; increase; expansion D) decrease; decrease; expansion E) increase; decrease; expansion Answer: E Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 5) Need-based spending ________ during an expansion and ________ during a recession, which leads to larger budget deficits during the ________ phase of the business cycle. A) increases; decreases; recession B) decreases; increases; expansion C) decreases; increases; recession D) decreases; decreases; expansion E) increases; decreases; expansion Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills

6) Assume the federal government raises taxes (a contractionary fiscal policy). If the tax increase affects AS and AD equally, then real GDP will ________ and the price level will ________. A) decrease; decrease B) increase; be unchanged C) increase; increase D) decrease; be unchanged E) increase; decrease Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 7) When an economy faces an inflationary gap, an appropriate fiscal policy is to A) decrease government expenditure. B) decrease taxes. C) increase aggregate demand. D) increase the quantity of money. E) decrease the quantity of money. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 8) If an economy is in an equilibrium with an inflationary gap, policymakers can use A) discretionary fiscal policy and increase government expenditure. B) automatic fiscal policy and increase government expenditure. C) automatic fiscal policy and cut taxes. D) discretionary fiscal policy and decrease government expenditure. E) discretionary fiscal policy and cut taxes. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

9) A decrease in taxes should be applied in a situation with A) a recessionary gap. B) a inflationary gap. C) low unemployment. D) high demand for goods and services. E) no tax multiplier. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 10) If the economy has been producing at a point where real GDP is less than potential GDP, what fiscal policy can the federal government use to restore real GDP to potential GDP? A) cut government expenditure on goods and services B) increase taxes C) cut taxes D) raise the interest rate E) decrease the quantity of money Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 11) In order to reduce inflationary pressure on the economy, what fiscal policy can the government use? A) raise taxes B) cut taxes C) increase government expenditure on goods and services D) cut interest rates E) increase the quantity of money Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

12) To eliminate an inflationary gap using fiscal policy, the government could A) increase government expenditure on goods and services and simultaneously increase taxes by an equal amount. B) only decrease taxes. C) increase government expenditure on goods and services and simultaneously decrease taxes by an equal amount. D) increase taxes. E) decrease the quantity of money. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 13) Ignoring any supply-side effects, when taxes are hiked, real GDP ________ and the price level ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) decreases; does not change Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 14) Ignoring any supply-side effects, to close an inflationary gap of $100 billion with a government expenditure multiplier of 5, the government could A) decrease government expenditure on goods and services by $100 billion. B) decrease government expenditure on goods and services by $20 billion. C) lower taxes by $100 billion. D) lower taxes by more than $20 billion. E) increase government expenditure on goods and services by $20 billion. Answer: B Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills

15) If an economy is at the short-run equilibrium illustrated by the figure above, a discretionary FISCAL policy to adjust the economy to full employment is to A) decrease taxes. B) decrease the quantity of money. C) increase government spending. D) increase taxes and decrease government spending simultaneously. E) increase the quantity of money. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Revised AACSB: Analytic skills 16) Aggregate demand changes when government expenditure on national defense increases by $100 billion. Aggregate demand ________ by ________ than $100 billion because government expenditure ________ induced expenditure. A) increases; more; increases B) increases; more; decreases C) decreases; more; decreases D) increases; less; increases E) decreases; less; increases Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

17) When the government cuts the income tax rate, the supply of labor ________, the demand for labor ________, and the equilibrium level of employment ________. A) increases; increases; increases B) increases; decreases; increases C) decreases; increases; increases D) increases; does not change; increases E) increases; does not change; decreases Answer: D Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking 18) When the government cuts the income tax rate, the real wage rate paid by employers ________ and the real wage rate received by workers ________ and potential GDP ________. A) decreases; decreases; increases B) decreases; increases; decreases C) increases; increases; increases D) increases; decreases; increases E) decreases; increases; increases Answer: E Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking 19) When there is a cut in payroll taxes, there is a(n) ________ in the tax wedge that lowers the cost of labor. This tax cut will ________ the quantity of labor demanded and ________ the quantity of labor employed. A) increase; increase; increase B) decrease; increase; increase C) decrease; decrease; increase D) decrease; increase; decrease E) increase; decrease; decrease Answer: B Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking

20) Income taxes create a wedge between the wage rate paid by ________ and received by workers and thereby ________ employment and ________ potential GDP. A) firms; lower; increase B) firms; raise; increase C) households; lower; decrease D) firms; lower; decrease E) firms; raise; decrease Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 21) A government budget deficit ________ the ________ interest rate and crowds out private investment, which ________ real GDP growth. A) raises; nominal; slows B) raises; real; accelerates C) lowers; real; slows D) lowers; nominal; slows E) raises; real; slows Answer: E Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Application of knowledge 32.6 Essay: The Federal Budget 1) "The federal budget is required by law to balance." Is the previous statement correct or incorrect? Answer: The statement is incorrect because the federal budget is not legally required to balance. It is legal for the government to run a budget surplus or a budget deficit. Topic: Federal budget Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking

2) Depending on the relative size of the federal government's expenditures and tax revenues, the federal government's budget can be in three possible conditions. What are the three possible conditions and what is the relationship of federal government expenditures and tax revenues for each? Answer: The federal government's budget could have a budget surplus, a budget deficit, or a balanced budget. A budget surplus occurs when tax revenues are greater than government expenditures; a deficit occurs when tax receipts are less than government expenditures; and a balanced budget occurs when tax revenues are equal to government expenditures. Topic: Federal budget Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Written and oral communication 3) When government outlays exceed tax revenues, does the government have a budget deficit or surplus? Answer: When government outlays exceed tax revenues, the government is running a budget deficit. Topic: Budget surplus Skill: Level 1: Definition Section: Checkpoint 32.1 Status: Old AACSB: Reflective thinking 4) Discuss the federal budget history of the United States since 1970. Make sure to note specifically the budget position of the United States during the last of the 1990s and compare it to the situation in 2017. Answer: Starting in the early 1970s, the federal budget went into deficit and remained there until 1997. Then from 1997 to 2001, the government had a budget surplus, that changed back to a deficit in 2002. Some of the budget deficits, particularly those in the 1980s and in recent years, were quite large. In the late 1990s the U.S. budget surplus was, at times, large—over $200 billion a year. In 2017, the budget deficit was very large, over $600 billion. Topic: Eye on the past, federal revenues and expenditures Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Written and oral communication 5) A country reports that its government outlays total $0.8 trillion and its tax revenues total $0.6 trillion. Does the country have a budget surplus or deficit and what is the surplus or deficit? Answer: The country has a budget deficit. The deficit equals $0.2 trillion. Topic: Budget deficit Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Analytic skills 66 Copyright © 2023 Pearson Education Ltd.

6) The above table gives a country's government outlays and tax revenue for 2012 through 2016. During which years did the country have a balanced budget, budget surplus, and budget deficit? Answer: The country had a balanced budget in 2015 because in that year government outlays equaled tax revenues. The country had a budget surplus in 2012 and 2011 because in those years tax revenues exceeded government outlays. The country had a budget deficit in 2014 and 2015 because in those years government outlays exceeded tax revenues. Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 32.1 Status: Old AACSB: Analytic skills 32.7 Essay: Fiscal Stimulus 1) Describe the difference between discretionary and automatic fiscal policy. Answer: Discretionary fiscal policy is initiated by an act of Congress. Automatic fiscal policy is determined by the state of the economy; no act of Congress is necessary to initiate automatic fiscal policy. Topic: Discretionary and automatic fiscal policy Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking 2) Explain the difference between discretionary and automatic fiscal policy. Provide examples of each. Answer: Discretionary policy is an action that is initiated by an act of Congress such as implementation of a spending program or a change to tax law. Automatic fiscal policy is triggered by the state of economy and happens naturally such as a decrease in tax revenues as a result of a fall in incomes or an increase in unemployment payments due to an increase in the unemployment rate. Topic: Discretionary and automatic fiscal policy Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Reflective thinking

3) What are automatic stabilizers? How do they affect the budget deficit and/or budget surplus during a recession and during an expansion? Answer: Automatic stabilizers are features of fiscal policy that stabilize real GDP without the need for explicit policy action by the government. Automatic stabilizers include induced taxes and needs-tested spending. During a recession, induced taxes decrease and needs-tested spending increases, so the budget deficit increases (or the budget surplus decreases). During an expansion, induced taxes increase and means-tested spending decreases, so the budget deficit decreases (or the budget surplus increases). Topic: Automatic stabilizer Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication 4) What are automatic stabilizers? How do they help stabilize real GDP? Answer: Automatic stabilizers are features of fiscal policy that stabilize real GDP without the need for explicit policy action by the government. Automatic stabilizers include induced taxes and needs-tested spending. To see how automatic stabilizers work, consider a decrease in real GDP, that is, a recession. As GDP decreases, people's incomes decrease and so induced taxes, such as income taxes, decrease. As a result, people's disposable incomes do not decrease by as much as their total income and so consumption expenditure does not decrease by as much as it would otherwise. Moreover, as the economy moves into a recession, needs-tested spending, such as unemployment benefits, increases. The increase in needs-tested spending helps keep people's disposable incomes higher than otherwise and so, once again, consumption expenditure does not decrease by as much as it would otherwise. Because consumption expenditure is greater than otherwise, aggregate demand remains greater than otherwise and so the decrease in real GDP is lessened. Topic: Automatic stabilizer Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication 5) Explain how tax revenue can be both an automatic fiscal policy and a discretionary fiscal policy. Answer: When Congress changes the tax law, it is a discretionary policy. For any given set of tax laws, a change in the state of the economy will automatically change the tax revenue. Hence for a given set of tax laws, tax revenues operate as an automatic fiscal policy. Topic: Discretionary and automatic fiscal policy Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication

6) "Discretionary fiscal policy is a fiscal action initiated by an act of the Federal Reserve, while automatic fiscal policy is a fiscal action induced by the state of the economy." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. The statement is correct about automatic fiscal policy. But it is incorrect about discretionary fiscal policy because discretionary fiscal policy is not initiated by the Federal Reserve—it is initiated by an act of Congress. Topic: Discretionary and automatic fiscal policy Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication 7) "As the saying goes, the only sure things in life are death and taxes. This saying points out the result that everything having to do with taxes is an automatic fiscal policy." Is the preceding analysis correct or incorrect? Explain your answer. Answer: The analysis is incorrect because whenever Congress changes the tax law, it is a discretionary fiscal policy. For instance, if Congress passes a tax cut, the change in taxes is a discretionary fiscal policy. However, for any given set of tax laws, a change in the state of the economy will automatically change the tax revenues and so for a given set of tax laws, tax revenue do operate as an automatic fiscal policy. Topic: Discretionary and automatic fiscal policy Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication 8) Ignoring any supply-side effects, how does the magnitude of the government expenditure multiplier compare to the magnitude of the tax multiplier? Explain your answer. Answer: The magnitude of the government expenditure multiplier is larger than the magnitude of the tax multiplier. The government expenditure multiplier is larger because a $1 change in government expenditures has an initial effect on aggregate demand of $1. In other words, a $1 increase in government expenditures initially increases aggregate demand by the entire $1. However, a $1 change in taxes does not initially affect aggregate demand by the entire $1. Instead, it affects aggregate demand by less than $1. For instance, a $1 decrease in taxes increases aggregate demand by less than $1. Why? Because part of the $1 decrease in taxes is saved and the amount saved does not increase aggregate demand. Topic: Government expenditure multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication

9) "As long as supply-side effects are ignored, the balanced budget multiplier is equal to zero." Is the previous statement correct or incorrect? Define the balanced budget multiplier and then explain your answer. Answer: The statement is incorrect because, even ignoring any supply-side effects, the balanced budget multiplier is greater than zero. The balanced budget multiplier shows the effect on aggregate demand from a simultaneous change in government expenditure and taxes that leaves the budget balance unchanged. (Say, for instance, a simultaneous increase in government expenditures of $50 billion is balanced by a simultaneous increase in tax receipts of $50 billion.) Why is the balanced budget multiplier greater than zero? Suppose the government increases its expenditure and taxes by the same amount, say $50 billion. The $50 billion tax increase decreases aggregate demand while the $50 billion increase in government expenditure increases aggregate demand. The balanced budget multiplier gives the net effect on aggregate demand. And, the increase in aggregate demand from the increase in government expenditure is greater than the decrease in aggregate demand from the increase in taxes. So on net aggregate demand increases and the amount of the increase is given by the balanced budget multiplier. Topic: Balanced budget multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication 10) Define the balanced budget multiplier and explain how it works. In your answer, ignore any supply-side effects. Answer: The balanced budget multiplier indicates the effect on aggregate demand of a simultaneous change in government expenditure and taxes that leaves the budget balance unchanged. Suppose the government increases its expenditure and taxes by the same amount. The tax increase decreases aggregate demand but the increase in expenditure increases aggregate demand. The increase in aggregate demand from the increase in government expenditure is greater than the decrease in aggregate demand from the increase in taxes. Thus, on net, aggregate demand increases and the amount of the increase is indicated by the balanced budget multiplier. Topic: Balanced budget multiplier Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication

11) If the government increases expenditure by $40 billion and increases tax revenues by $40 billion, what is the impact on aggregate demand? Explain your answer. Answer: Aggregate demand increases. The government expenditure multiplier shows that the increase in government expenditure increases aggregate demand by more than $40 billion. And the government tax multiplier shows that the increase in tax revenue decreases real GDP by more than $40 billion. But, the magnitude of the government expenditure multiplier exceeds the magnitude of the tax multiplier, so the net effect, which is the balanced budget multiplier, is that aggregate demand increases. Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication 12) Which has a larger effect on aggregate demand: an increase in government expenditure or an equal sized decrease in taxes? Explain your answer. Answer: The multiplier for a change in government expenditure is larger than the multiplier for a tax cut so the effect on aggregate demand from the increase in government expenditure exceeds that from the decrease in taxes. The difference occurs because with an increase in government expenditure on goods and services, real GDP is immediately increased. This increase then leads to a multiplier effect as household's incomes increase and so their consumption expenditure increases. With an equal sized tax cut, however, households save part of the increase in disposable income. As a result, the first impact on real GDP is smaller, which leads to a smaller effect after the multiplier is taken into account. Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication 13) To eliminate a recessionary gap, what fiscal policy should the government pursue? Answer: A recessionary gap occurs when real GDP is less than potential GDP. To restore full employment, the government should increase its expenditures on goods or services or decrease its taxes. Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills

14) What is the effect on aggregate demand and the AD curve from either an increase in government expenditure or a cut in taxes? Answer: Both an increase in government expenditure and a cut in taxes increase aggregate demand and shift the AD curve rightward. Topic: Fiscal stimulus Skill: Level 1: Definition Section: Checkpoint 32.2 Status: Old AACSB: Analytic skills 15) An economy is experiencing a recession and policy makers are considering using discretionary fiscal policy to eliminate the recessionary gap. What are the four limitations that policymakers face when using discretionary fiscal policy? Briefly discuss each. Answer: The limitations are law-making time lags, a shrinking area of law-maker discretion, problems estimating potential GDP, and difficulty making economic forecasts. The law-making time lag refers to the point that after all the Congressional debate is concluded and the act is finally signed into law, the lag involved means that the economy might no longer be in recession. The shrinking area of law-maker discretion points out that more and more of the government budget is "out of bounds" for change. For instance, the government is highly unlikely in the near future to decrease expenditure on Social Security. As the budget includes more of these "untouchables," there is less room left for changes needed for fiscal policy. The problem with estimating potential GDP means that the recession might be less severe than believed. As a result, fiscal policy might be too strong and although it eliminates the recession, the fiscal policy might increase real GDP so much that it moves the economy farther away from potential GDP. Finally, the difficulty making economic forecasts means that forecasters cannot be sure what will be the state of the economy when the fiscal policy is finally implemented. If the economy is naturally recovering from the recession and this recovery is not forecast, then when the fiscal policy is implemented, the policy might push the economy well past potential GDP. Topic: Limitations of fiscal policy Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication

16) Explain four reasons why it is difficult to use discretionary fiscal policy to eliminate a deflationary or inflationary gap. Answer: Three limitations of using discretionary fiscal policy are the law-making lag (the point that the policy making process is slow), the shrinking area of law-maker discretion (the point that an increasingly large part of the budget is effectively off limits to change), the difficulty in determining potential GDP at any given time (the point that at times it is difficult to know if the economy is in a recession or an expansion), and the difficulty in forecasting real GDP (the point that the proper policy depends on where real GDP is relative to potential GDP in the future when the policy is actually implemented). Topic: Limitations of fiscal policy Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication 17) What are law-making lags? What effect do they have on the use of discretionary fiscal policy? Answer: Law-making lags refer to the fact that before discretionary policy can be implemented, Congress must pass an act. There can be significant time involved for Congress to debate and reach consensus on a specific piece of legislation. The time it takes is called the "law-making lag." Law-making lags make discretionary fiscal policy more difficult because by the time the policy is actually implemented, the state of the economy might have changed and so the newly enacted discretionary fiscal policy might now be the wrong policy. Topic: Law-making lags Skill: Level 2: Using definitions Section: Checkpoint 32.2 Status: Old AACSB: Written and oral communication

18) Does the figure above illustrate a recessionary or an inflationary gap? What do potential GDP and real GDP equal? What is an appropriate fiscal policy to restore real GDP to potential real GDP? Answer: A recessionary gap occurs when real GDP is less than potential GDP, which is precisely what the figure illustrates. In the figure, potential GDP equals $20.5 trillion but real GDP equals only $20.0 trillion. In order to restore real GDP back to potential GDP using fiscal policy, the government could increase government expenditures on goods and services and/or decrease taxes. Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 32.2 Status: Revised AACSB: Analytic skills 32.8 Essay: The Supply Side: Potential GDP and Growth 1) Explain how an increase in government expenditure designed to increase aggregate demand can increase potential GDP and aggregate supply. Answer: Some types of government expenditure provide goods and services that increase the nation's production possibilities. For instance, additional government spending on law and order, public education, public health, social infrastructure such as roads and bridges, and productive capital all increase the economy's production possibilities. So an increase in government expenditure that provides these goods and services all increase potential GDP and increase aggregate supply. Topic: Discretionary fiscal policy, supply-side effects Skill: Level 2: Using definitions Section: Checkpoint 32.3 Status: Old AACSB: Written and oral communication

2) If the government raises taxes on labor income and interest income, explain how potential GDP and economic growth are affected. Answer: Tax increases on labor income decrease the supply of labor and so decrease equilibrium employment, which decreases potential GDP. Tax increases on the income from interest income capital decrease saving and so decrease the supply of capital, which decreases equilibrium investment and capital and so decreases economic growth. Topic: Discretionary fiscal policy, supply-side effects Skill: Level 3: Using models Section: Checkpoint 32.3 Status: Old AACSB: Written and oral communication 3) Explain how a tax cut effects employment, labor productivity, and potential GDP. Answer: A tax cut increases the incentive to work thereby increasing the labor supply and employment. A tax cut also increases the incentive to save and invest thereby increasing the quantity of capital which in turn increases productivity. These two items, increased employment and increased labor productivity, both result in an increase in potential GDP. Topic: Taxes and potential GDP Skill: Level 4: Applying models Section: Checkpoint 32.3 Status: Old AACSB: Written and oral communication

Foundations of Economics, 9e (Bade), GE Chapter 17 Monetary Policy 33.1 How the Fed Conducts Monetary Policy 1) The main goals of monetary policy include all of the following EXCEPT A) keeping the long term nominal interest rate equal to the real interest rate plus the inflation rate. B) keeping the inflation rate low. C) keeping the unemployment rate close to the natural unemployment rate. D) attaining the maximum sustainable growth of potential GDP. E) keeping the long-term interest rate at a moderate level. Answer: A Topic: Monetary policy, dual mandate Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 2) Which of the following is a monetary policy goal? i. keeping the inflation rate low ii. attaining maximum employment iii. keeping the long-term interest rate at a moderate level A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Monetary policy, dual mandate Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

3) Monetary policy goals include i. maximum employment. ii. stable prices. iii. moderate long-term interest rates. A) i only B) ii only C) i and iii only D) i and ii only E) i, ii, and iii Answer: E Topic: Monetary policy, dual mandate Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 4) Which of the following is NOT a monetary policy goal? A) keeping long-term interest rates moderate B) keeping a high exchange rate for the dollar C) promoting maximum employment D) maintaining stable prices E) All of the above are monetary policy goals. Answer: B Topic: Monetary policy, dual mandate Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 5) The Federal Reserve monetary policy goals of maximum employment means A) a zero percent unemployment rate. B) a zero percent natural unemployment rate. C) aiming for an amount of employment that exceeds full employment. D) keeping the unemployment rate close to the natural unemployment rate. E) cyclical unemployment should not necessarily be minimized. Answer: D Topic: Monetary policy, dual mandate Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

6) The output gap is the A) percentage deviation of real GDP from potential GDP. B) difference between actual inflation and core inflation. C) percentage increase in the growth rate of real GDP minus the unemployment rate. D) difference in graduation levels between high school and college. E) percentage increase in the growth rate of real GDP. Answer: A Topic: Output gap Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 7) When real GDP is less than potential GDP, there is ________ which leads the unemployment rate to ________. A) an inflationary gap; rise B) a recessionary gap; decline C) a recessionary gap; remain at the natural level D) an inflationary gap; remain at the natural level E) a recessionary gap; rise Answer: E Topic: Output gap Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 8) When real GDP is greater than potential GDP, there is ________ which leads the inflation rate to ________. A) an inflationary gap; rise B) a recessionary gap; remain stable C) a recessionary gap; rise D) an inflationary gap; fall E) a recessionary gap; fall Answer: A Topic: Output gap Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

9) When the output gap is positive, it represents ________ gap, and when it is negative, it represents ________ gap. A) a recessionary; an inflationary B) an inflationary; an employment C) an inflationary; a recessionary D) an employment; an unemployment E) None of the above answers is correct. Answer: C Topic: Output gap Skill: Level 3: Using models Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 10) To determine whether the goal of stable prices is being achieved, the Federal Reserve monitors A) the core GDP deflator inflation rate. B) the CPI. C) the producer price index. D) the core Personal Consumption Expenditure Price Index (PCEPI) inflation rate. E) the GDP price deflator. Answer: D Topic: Core inflation Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 11) The core Personal Consumption Expenditure Price Index (PCEPI) inflation rate measures changes in the A) price of only two consumer goods: food and fuel. B) prices of all consumer goods. C) prices of consumer goods except food and fuel. D) prices of consumer goods except health care. E) prices of all the "core" goods and services a typical family buys. Answer: C Topic: Core inflation Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

12) To determine whether the goal of stable prices is being achieved, the Federal Reserve monitors the ________; to determine whether the goal of maximum employment is being achieved, the Federal Reserve monitors ________. A) Personal Consumption Expenditure Price Index (PCEPI) inflation rate; the natural unemployment rate B) CPI; the gap between nominal GDP and real GDP C) core GDP deflator inflation rate; the natural unemployment rate D) Personal Consumption Expenditure Price Index (PCEPI) inflation rate; the output gap E) GDP price deflator; real GDP Answer: D Topic: Monetary policy goals Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 13) Control of monetary policy rests with A) Congress. B) the President. C) the Federal Reserve. D) the Comptroller of the Currency. E) the U.S. Treasury. Answer: C Topic: Monetary policy process Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 14) In the United States A) Congress must approve monetary policy changes. B) Congress initializes changes in monetary policy and the Fed approves the changes. C) the Federal Reserve sets monetary policy. D) the Federal Reserve sets monetary and fiscal policies. E) the President initializes changes in monetary policy and the Fed approves the changes. Answer: C Topic: Monetary policy process Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

15) Which of the following statements are correct? i. The Federal Reserve's monetary policy must be approved by the President of the United States. ii. The Federal Reserve Board of Directors meets approximately every six months to review the state of the economy and determine monetary policy. iii. The Federal Reserve has determined it will use the monetary base as its policy instrument. A) i and ii B) ii only C) i only D) iii only E) None of the above answers is correct. Answer: E Topic: Monetary policy Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 16) Which of the following statements are correct? i. Congress does not play a role in making monetary policy decisions. ii. The FOMC meets eight times a year to make monetary policy decisions. iii. The President of the United States appoints members of the Board of Governors and the Chairman of the Board of Governors, but the President has little other formal authority over monetary policy. A) i, ii, and iii B) i,and ii C) ii only D) i and iii E) ii and iii Answer: A Topic: Monetary policy Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

17) Monetary policy decisions are made by the A) Federal Reserve Economic Committee. B) Federal Open Market Committee. C) Council of Economic Advisors. D) Congress of the United States. E) U.S. Mint. Answer: B Topic: Monetary policy process Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 18) The FOMC is the A) report the Fed gives to Congress twice a year. B) group within the Fed that makes monetary policy. C) report that summarizes the economy across Fed districts. D) name of the meeting the Fed has with Congress twice a year. E) interest rate the Fed most directly influences. Answer: B Topic: Monetary policy process Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 19) The federal funds rate is A) the interest rate banks charge each other on overnight loans. B) the interest rate on the 3-month Treasury bill. C) another name for the real interest rate. D) the interest rate on the 30-year treasury bond. E) also known as the prime rate. Answer: A Topic: The Fed's policy tools Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

20) Which of the following is a potential monetary policy instrument for the Fed? A) federal funds rate B) loanable funds C) inflation rate D) real interest rate E) profit rates Answer: A Topic: Policy instrument Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 21) The interest rate banks charge each other on loans of reserves is called the A) federal funds rate. B) coupon rate. C) required reserve rate. D) discount rate. E) real interest rate. Answer: A Topic: The Fed's policy tools Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 22) The federal funds rate is ________ of the Fed. A) a technique B) a monetary policy rule C) an objective D) the monetary policy instrument E) a goal Answer: D Topic: Policy instrument Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

23) The monetary policy instrument the Federal Reserve chooses to use is the A) discount rate. B) federal funds rate. C) monetary base. D) flexible exchange rate. E) fixed exchange rate. Answer: B Topic: Policy instrument Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 24) The monetary policy instrument the Federal Reserve chooses to use is the A) quantity of money. B) exchange rate. C) monetary base. D) federal funds rate. E) required reserves rate. Answer: D Topic: Policy instrument Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 25) Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic goals? i. government expenditure on goods and services and taxes ii. the government budget deficit or surplus iii. changes in the federal funds rate A) i and ii B) iii only C) i and iii D) ii and iii E) ii only Answer: B Topic: Policy instrument Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

26) Currently the Fed targets A) both the monetary base and the federal funds rate simultaneously. B) the exchange rate. C) the inflation rate. D) the federal funds rate. E) the price level. Answer: D Topic: Policy instrument Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 27) The Federal Funds rate A) is a monetary policy target of the Federal reserve. B) is controlled by the nation's banks, so the Fed observes it carefully. C) is paid by the Fed to banks. D) is paid by banks to the Fed. E) None of the above are correct. Answer: A Topic: Policy instrument Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 28) To change the federal funds rate, the Fed A) tells banks how much to charge. B) coordinates with banks on establishing the new rate. C) increases or removes money from the stock market. D) uses open market operations to change the quantity of reserves. E) changes the income tax rate on interest income. Answer: D Topic: The market for reserves Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

29) In the short run, if the Fed wants to raise the federal funds rate, it A) instructs large commercial banks to sell government securities in the open market. B) instructs the New York Fed to sell government securities in the open market. C) tells large commercial banks to raise their interest rates. D) instructs the New York Fed to sell government securities in the foreign exchange market. E) instructs the New York Fed to buy government securities in the open market. Answer: B Topic: The market for reserves Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 30) By using open market operations, the Federal Reserve A) adjusts the supply of reserves to keep the federal funds interest rate equal to its target. B) adjusts the supply AND demand of reserves to keep the federal funds interest rate equal to its target. C) adjusts the demand of reserves to keep bank rates in line with the federal funds rate target. D) controls banks' demand for reserves, thereby keeping the federal funds rate equal to its target. E) None of the above answers is correct. Answer: A Topic: The market for reserves Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 31) The higher the federal funds rate, the ________ the opportunity cost of holding reserves, which ________ the incentive to economize on reserves. A) higher; increases B) higher; decreases C) lower; increases D) lower; does not change E) lower; decreases Answer: A Topic: The market for reserves Skill: Level 4: Applying models Section: Checkpoint 33.1 Status: Old AACSB: Analytic skills

32) Equilibrium in the market for bank reserves determines the A) federal funds rate. B) inflation rate. C) price level. D) 30-year Treasury bond rate. E) exchange rate. Answer: A Topic: The market for reserves Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 33) If the Fed increases the quantity of reserves, a new equilibrium is reached by a A) rightward shift of the demand for reserves curve. B) movement down the demand for reserves curve. C) leftward shift of the demand for reserves curve. D) movement up the demand for reserves curve. E) None of the above answers is correct. Answer: B Topic: The market for reserves Skill: Level 3: Using models Section: Checkpoint 33.1 Status: Old AACSB: Analytic skills 34) In the market for bank reserves, if the federal funds rate target is higher than the federal funds rate, the Fed will take action to ________ reserves. A) decrease the supply of B) increase the supply of C) increase both the demand for and the supply of D) increase the demand for E) decrease the demand for Answer: A Topic: The market for reserves Skill: Level 3: Using models Section: Checkpoint 33.1 Status: Old AACSB: Analytic skills

35) Maximum employment and moderate long-term interest rates are best achieved with A) high and stable inflation rates. B) high and variable inflation rates. C) high real interest rates. D) high short-term interest rates. E) price stability. Answer: E Topic: Policy goals Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 36) The operational goals the Fed uses for its monetary policy objectives are A) the federal funds rate and the supply of reserves. B) the demand for reserves and the supply of reserves. C) the supply of reserves and the output gap. D) the core inflation rate and the output gap. E) the federal funds rate and the core inflation rate. Answer: D Topic: Policy goals Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking 37) Which of the following is the Fed's monetary policy instrument? A) the output gap B) the core inflation rate C) the federal funds rate D) the supply of reserves E) the demand for reserves Answer: C Topic: Monetary policy instruments Skill: Level 1: Definition Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

38) To lower the federal funds rate, the Fed conducts an open market ________ of securities which ________. A) sale; increases the demand for reserves B) sale; increases the supply of reserves C) purchase; increases the demand for reserves D) purchase; decreases the demand for reserves E) None of the above answers is correct. Answer: E Topic: Changing the interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 33.1 Status: Old AACSB: Analytic skills 33.2 Monetary Policy Transmission 1) Steps in the transmission of monetary policy are A) Congress increases government expenditures on goods and services, leading to an increase in aggregate demand. B) Congress increases the money supply, which lowers the interest rate, and leads to an increase in aggregate demand. C) the Federal Reserve increases government expenditures on goods and services, leading to an increase in aggregate demand. D) the Federal Reserve lowers the federal funds rate, which lowers the real interest rate, and leads to an increase in aggregate demand. E) Congress increases the budget deficit, which increases the money supply, which increases aggregate supply. Answer: D Topic: Monetary policy transmission Skill: Level 1: Definition Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 2) Which of the following is NOT an effect from a change in the federal funds rate? A) change in the real interest rate B) change in investment C) change in government expenditures D) change in aggregate demand E) change in the quantity of money Answer: C Topic: Monetary policy transmission Skill: Level 1: Definition Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 14 Copyright © 2023 Pearson Education Ltd.

3) If the Fed buys U.S. government securities A) the federal funds rate will fall. B) the federal funds rate will rise. C) the discount rate will fall. D) bank reserves will decrease. E) the discount rate will rise. Answer: A Topic: Changing the interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 4) If the Fed sells U.S. government securities A) the federal funds rate rises. B) the U.S. Treasury gains some revenue. C) the U.S. Treasury loses some revenue. D) banks' reserves increase. E) None of the above answers is correct. Answer: A Topic: Changing the interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 5) If the Fed carries out an open market operation and buys U.S. government securities, the federal funds rate ________ and the quantity of reserves ________. A) falls; increases B) rises; increases C) falls; decreases D) rises; does not change E) rises; decreases Answer: A Topic: Changing the interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

6) If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rate ________ and the quantity of reserves ________. A) falls; increases B) rises; increases C) rises; does not change D) falls; decreases E) rises; decreases Answer: E Topic: Changing the interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 7) In an open market purchase, the Fed ________ government securities, which ________ bank reserves and ________ the federal funds rate. A) buys; increases; raises B) buys; decreases; raises C) sells; increases; lowers D) sells; decreases; lowers E) buys; increases; lowers Answer: E Topic: Changing the interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 8) If the Fed buys U.S. government securities from banks, the federal funds rate ________ and banks' reserves ________. A) falls; increase B) rises; increase C) does not change; increases D) falls; decrease E) rises; decrease Answer: A Topic: Changing the interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

9) If the Fed sells U.S. government securities to banks, the federal funds rate ________ and banks' reserves ________. A) falls; increase B) rises; do not change C) rises; increase D) falls; decrease E) rises; decrease Answer: E Topic: Changing the interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 10) In the short run, to decrease the interest rate, the Federal Reserve ________ the quantity of money by ________ government securities. A) increases; selling B) increases; buying C) decreases; selling D) decreases; buying E) None of the above answers is correct because in the short run, the Federal Reserve cannot change the interest rate. Answer: B Topic: Changing the interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 11) In order to raise the federal funds rate, the Fed ________ government securities in open market operations, so that banks' reserves ________ and the quantity of money ________. A) buys; decrease; increases B) sells; decrease; decreases C) sells; increase; decreases D) buys; increase; increases E) buys; increase; decreases Answer: B Topic: Changing the interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

12) In order to lower the federal funds rate, the Fed ________ government securities in open market operations, so that banks' reserves ________ and the quantity of money ________. A) buys; decrease; increases B) sells; decrease; decreases C) sells; increase; decreases D) buys; increase; increases E) buys; decrease; decreases Answer: D Topic: Changing the interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 13) When the Fed sells government securities, banks' reserves ________, the quantity of money ________, and the federal funds rate ________. A) increase; increases; falls B) decrease; decreases; rises C) increase; decreases; rises D) decrease; increases; falls E) decrease; decreases; falls Answer: B Topic: Changing the interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 14) When the Fed buys government securities, banks' reserves ________, the quantity of money ________, and the federal funds rate ________. A) increase; increases; falls B) decrease; decreases; rises C) increase; decreases; rises D) decrease; increases; falls E) increase; increases; rises Answer: A Topic: Changing the interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

15) The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland undertakes an open market purchase of government securities that changes the quantity of reserves by $25 billion, then the federal funds rate will A) rise to 8 percent a year. B) remain at 6 percent a year. C) fall to 4 percent a year. D) change, but more information is needed to determine by how much. E) None of the above answers is correct. Answer: C Topic: Changing the interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills

16) The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland undertakes an open market sale of government securities that changes the quantity of reserves by $25 billion, then the federal funds rate will A) rise to 6 percent a year. B) remain at 4 percent a year. C) fall to 4 percent a year. D) change, but more information is needed to determine by how much. E) None of the above answers is correct. Answer: A Topic: Changing the interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 17) The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland lowers the target federal funds rate by 1 percentage point, the central bank will conduct an open market ________ of government securities of ________ to ________ the supply of reserves. A) sale; $75 billion; decrease B) purchase; $25 billion; decrease C) sale; $25 billion; increase D) purchase; $75 billion; increase E) purchase; $25 billion; increase Answer: E Topic: Changing the interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 18) If the Fed sells government securities, in the short run the nominal interest rate ________ and the real interest rate ________. A) rises; rises B) does not change; rises C) falls; falls D) rises; does not change E) rises; falls Answer: A Topic: Influencing the real interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

19) The Fed ________ influence the real interest rate in the short run and ________ influence the real interest rate in the long run. A) can; can B) can; cannot C) cannot; can D) cannot; cannot E) might be able to; might be able to Answer: B Topic: Influencing the real interest rate, Fed policy Skill: Level 5: Critical thinking Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 20) A hike in the federal funds rate results in ________ in the real interest rate which leads to a ________ in investment. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease E) a decrease; no change Answer: B Topic: Changing the interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 21) In the short run, when the Fed raises the federal funds rate A) the real interest rate is unchanged so investment and consumption expenditure are not changed. B) the real interest rate temporarily increases, thereby decreasing investment and consumption expenditure. C) the real interest rate temporarily falls, thereby increasing investment and consumption expenditure. D) investment and consumption expenditure increase, thereby raising the real interest rate temporarily. E) the real interest rate temporarily increases, thereby decreasing investment and increasing consumption expenditure. Answer: B Topic: Influencing the real interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

22) In the short run, when the Fed increases the nominal interest rate, the real interest rate A) temporarily rises. B) permanently rises. C) temporarily falls. D) permanently falls. E) does not change. Answer: A Topic: Influencing the real interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 23) In the short run, when the Fed increases the federal funds rate A) there is no effect on investment because investment depends on the real interest rate. B) the real interest rate falls and investment increases. C) the real interest rate rises and investment decreases. D) the real interest rate is unaffected but investment still decreases. E) the real interest rate rises and investment does not change. Answer: C Topic: Influencing the real interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 24) When the Fed ________ the federal funds rate, the opportunity cost of firms' investment ________ and so the quantity of investment ________. A) decreases; rises; decreases B) increases; rises; decreases C) increases; rises; increases D) decreases; falls; decreases E) increases; falls; increases Answer: B Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

25) If the Fed lowers the federal funds rate, which of the following occurs? A) Investment increases. B) Consumption expenditure decreases. C) The price of the dollar on the foreign exchange market increases. D) Net exports decreases. E) Government expenditures on goods and services increases. Answer: A Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 26) When the FOMC raises the federal funds rate, almost immediately ________, and a few weeks later the ________. A) short-term interest rates rise; quantity of money and supply of loanable funds decrease B) long-term interest rates rise; quantity of money and supply of loanable funds decrease C) short-term interest rates fall; quantity of money and supply of loanable funds decrease D) long-term interest rates rise; quantity of money and supply of loanable funds increase E) short-term interest rates fall; quantity of money and supply of loanable funds increase Answer: A Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 27) Suppose the Fed raises the federal funds rate. Put the following changes in order in which they occur, starting with the changes that take place almost immediately and ending with the changes that may occur up to two years afterwards i. Short-term interest rates rise. ii. Long-term interest rate rises. iii. Aggregate demand decreases. iv. Inflation rate decreases. A) i-ii-iii-iv B) ii-i-iii-iv C) i-ii-iv-iii D) i-iii-ii-iv E) ii-i-iv-iii Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills

28) Suppose the Federal Reserve lowers the federal funds rate. Put the following changes in order in which they occur, starting with the changes that take place almost immediately and ending with the changes that may occur up to a year afterwards i. Quantity of money increases. ii. Quantity of reserves increases. iii. Aggregate demand increases. iv. The long-term real interest rate falls. A) ii-i-iv-iii B) i-ii-iv-iii C) ii-i-iii-iv D) i-ii-iii-iv E) iii-iv-i-ii Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 29) The Fed raises the federal funds rate. Which of the following changes takes the longest time before it occurs? A) Short-term interest rates rise. B) Exchange rate rises. C) Quantity of money decreases. D) Supply of loanable funds decreases. E) Aggregate demand decreases. Answer: E Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 30) The Fed raises the federal funds rate. Which of the following changes occurs most rapidly? A) Exchange rate rises. B) Consumption expenditure decreases. C) Aggregate demand decreases. D) Real GDP growth decreases. E) Inflation rate decreases. Answer: A Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

31) In the long run, the real interest rate is determined by A) Fed actions. B) the expected inflation rate. C) the nominal interest rate. D) saving supply and investment demand. E) the multiplier effect. Answer: D Topic: Influencing the real interest rate, Fed policy Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 32) Which of the following statements about the ripple effects of monetary policy is FALSE? Monetary policy can A) raise the federal funds rate, thereby decreasing the quantity of money, raising the real interest rate, and decreasing investment. B) lower the federal funds rate, thereby increasing the supply of loanable funds, and lowering the exchange rate. C) lower the federal funds rate, thereby lowering the real interest rate and increasing aggregate demand. D) raise the federal funds rate and shift the aggregate demand curve leftward. E) raise the federal funds rate, thereby raising the real interest rate and increasing potential GDP. Answer: E Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 33) If the Federal Reserve lowers the Federal funds rate A) other short-term interest rates fall. B) net exports decrease. C) other short-term interest rates rise. D) the price level falls. E) Both answers A and C are correct. Answer: A Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

34) If the Fed raises the federal funds rate, which of the following happens? A) Net exports increase. B) The real interest rate falls. C) Aggregate demand decreases. D) Real GDP increases. E) The price level rises. Answer: C Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 35) The FOMC is concerned about inflation and has ________ the federal funds rate. Due to substitution effects, other ________ interest rates will ________ almost immediately. A) increased; short-term; increase B) decreased; long-term; decrease C) increased; long-term; increase D) increased; short-term; decrease E) decreased; short-term; decrease Answer: A Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 36) If the Federal Reserve decreases the Federal funds rate, other short-term interest rates ________ and the exchange rate ________. A) fall; falls B) do not change; rises C) fall; does not change D) fall; rises E) do not change; falls Answer: A Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

37) A decrease in the federal funds rate A) increases other short-term interest rates, decreases investment, and decreases aggregate demand. B) lowers the exchange rate, increases the supply of loanable funds, and increases aggregate demand. C) lowers other sort-term interest rate, raises the real interest rate, and increases aggregate demand. D) decreases the supply of loanable funds, raises the real interest rate, and decreases aggregate demand. E) decreases the demand for loanable funds, lowers the real interest rate, and decreases aggregate demand. Answer: B Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 38) A fall in the federal funds rate leads to A) a decrease in the quantity of money. B) a rise in the real interest rate. C) a decrease in investment. D) a rise in the price level. E) a decrease in real GDP. Answer: D Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 39) If the Fed lowers the federal funds rate, which of the following will NOT happen? A) The real interest rate falls. B) Other short-term interest rates fall. C) Aggregate demand increases. D) Real GDP increases. E) The price level falls. Answer: E Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

40) When the Federal Reserve raises the federal funds rate, the quantity of reserves ________, the quantity of money ________, and the quantity of loans ________. A) decreases; decreases; decreases B) decreases; decreases; does not change C) decreases; does not change; does not change D) increases; increases; decreases E) increases; increases; increases Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 41) If the Fed is concerned about a possible recession, it ________ the federal funds rate, which ________ the quantity of reserves and ________ the amount of bank loans. A) raises; decreases; decreases B) lowers; decreases; decreases C) lowers; increases; decreases D) raises; increases; increases E) lowers; increases; increases Answer: E Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 42) The Fed is concerned about inflation. Its policy will ________ U.S. short-term interest rates and, in the foreign exchange market, lead to the value of the U.S. dollar ________. A) lower; rising B) raise; rising C) raise; not changing D) lower; falling E) lower; not changing Answer: B Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

43) If the Fed is concerned about inflation, its actions ________ long-term interest rates so that investment ________ and net exports ________. A) lower; increases; increase B) lower; increases; decrease C) raise; decreases; decrease D) lower; decreases; decrease E) raise; increases; increase Answer: C Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 44) When the Federal Reserve increases the federal funds rate, bank loans ________, the supply of loanable funds ________, and the real interest rate ________. A) decrease; decreases; rises B) do not change; decreases; rises C) increase; increases; falls D) increase; increases; rises E) decrease; does not change; rises Answer: A Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 45) A change in monetary policy affects A) consumption expenditure, government expenditures on goods and services, and net exports. B) consumption expenditure, investment, and net exports. C) investment, government expenditures on goods and services, and net exports. D) consumption expenditure, productivity, and net exports. E) government expenditures on goods and services because it affects the government's budget balance. Answer: B Topic: Ripple effects of the Fed's action Skill: Level 1: Definition Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

46) When the Fed ________, the U.S. foreign exchange rate falls. A) sells government securities B) buys government securities C) raises the interest rate D) raises taxes on interest income E) increases the size of the multiplier Answer: B Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 47) Suppose monetary policy results in the exchange rate falling. As a result A) net exports decrease. B) net exports increase. C) exports decrease and imports decrease. D) exports increase and imports increase. E) exports do not change because they are autonomous and imports decrease. Answer: B Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 48) If the Fed increases interest rates, other things remaining the same, foreigners demand ________ dollars, thereby ________ the exchange rate. A) more; increasing B) more; decreasing C) fewer; increasing D) fewer; decreasing E) the same number of; not affecting Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

49) When the exchange rate falls, imports ________ and exports ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) decrease; do not change Answer: C Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 50) If the Fed buys government securities, other things the same, the exchange rate ________ and U.S. exports ________. A) rises; increase B) rises; decrease C) falls; increase D) falls; decrease E) falls; do not change because they are autonomous expenditure Answer: C Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 51) If the Fed lowers the interest rate, then A) only consumption expenditure decreases. B) only investment decreases. C) both consumption expenditure and investment decrease. D) net exports will increase. E) consumption expenditure decreases and investment increases. Answer: D Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

52) If the Fed raises the federal funds rate A) investment increases. B) real GDP increases. C) exports increase and imports decrease. D) exports decrease and imports increase. E) in the short run the interest rate falls. Answer: D Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 53) Because investment, consumption expenditure, and net exports are interest-sensitive components of expenditure, a ________ in the federal funds rate brings ________ in ________. A) fall; a decrease; aggregate demand B) fall; an increase; aggregate demand C) rise; an increase; aggregate supply D) rise; an increase; aggregate demand E) fall; a decrease; aggregate supply Answer: B Topic: Ripple effects of the Fed's action Skill: Level 1: Definition Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 54) If the Fed's policies aim to increase aggregate demand, the Fed must fear A) inflation. B) recession. C) stagflation. D) a supply shock that decreases potential GDP. E) a supply shock that increases aggregate supply. Answer: B Topic: Monetary policy, recession Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

55) If the Fed fears a recession, it A) sells government securities. B) decreases the quantity of money. C) buys government securities. D) decreases aggregate demand. E) decreases aggregate supply. Answer: C Topic: Monetary policy, recession Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 56) To fight a recession, the Fed can A) lower the federal funds rate by buying securities. B) lower the federal funds rate by selling securities. C) raise the federal funds rate by buying securities. D) raise the federal funds rate by selling securities. E) lower income taxes on interest income. Answer: A Topic: Monetary policy, recession Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 57) If the Fed is concerned about a possible recession, it ________ the federal funds rate and, in response, long-term interest rates ________ by a ________ amount than the change in short-term rates. A) raises; increase; larger B) lowers; increase; smaller C) raises; decrease; larger D) lowers; decrease; smaller E) raises; increase; smaller Answer: D Topic: Monetary policy, recession Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

58) The Federal Reserve fears that the United States economy is growing too slowly and is stuck in a recession. To move the economy back to its potential GDP, the most likely policy action for the Fed is to ________ the federal funds and thus ________. A) raise; increase aggregate demand B) raise; decrease aggregate demand C) lower; increase aggregate supply D) lower; decrease aggregate supply E) lower; increase aggregate demand Answer: E Topic: Monetary policy, recession Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 59) As the Fed lowers the federal funds rate A) aggregate demand increases. B) real GDP decreases. C) the price level falls. D) aggregate income decreases. E) aggregate supply increases. Answer: A Topic: Monetary policy, recession Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 60) If the Federal Reserve uses open market operations to offset a recession, the Fed ________ government securities in order to ________ the federal funds rate. A) sells; raise B) sells; lower C) buys; raise D) buys; lower E) buys; not change Answer: D Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

61) If the Fed lowers the federal funds rate, eventually the A) AD curve shifts leftward, decreasing real GDP and raising the price level. B) AS curve shifts leftward, decreasing real GDP and raising the price level. C) AD curve shifts rightward, increasing real GDP and raising the price level. D) AD curve shifts leftward, decreasing real GDP and lowering the price level. E) AS curve shifts rightward, decreasing real GDP and raising the price level. Answer: C Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 62) When the economy is in a recession, the Fed can ________ the federal funds rate, which ________ aggregate demand and ________ real GDP. A) lower; increases; decreases B) raise; decreases; increases C) lower; increases; increases D) raise; increases; decreases E) lower; decreases; decreases Answer: C Topic: Monetary policy, recession Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 63) If the Fed increases the quantity of money and lowers the federal funds rate, real GDP ________ and the price level ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: A Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills

64) In the short run, lowering the federal funds rate shifts the aggregate demand curve ________ so that real GDP ________ and the price level ________. A) rightward; increases; rises B) leftward; decreases; rises C) rightward; increases; falls D) leftward; decreases; falls E) rightward; decreases; rises Answer: A Topic: Monetary policy, recession Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 65) In a recession, the Fed's monetary policy aims to ________ the real interest rate, ________ aggregate demand, and ________ aggregate supply. A) increase; decrease; not change. B) decrease; increase; not change C) increase; not change; increase D) decrease; increase; increase E) increase; increase; increase Answer: B Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Application of knowledge 66) To fight a recession, an appropriate monetary policy would be that the Fed conducts an open market operation that ________ government securities, ________ the federal funds rate, and ________ aggregate demand. A) sells; raises; increases B) sells; raises; decreases C) buys; lowers; increases D) buys; lowers; decreases E) sells; lowers; increases Answer: C Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Application of knowledge

67) To fight a recession, the Fed could A) buy government securities thereby increasing bank reserves and raising interest rates which increases investment. B) sell government securities thereby decreasing bank reserves and raising interest rates which increases investment. C) sell government securities thereby increasing bank reserves and raising interest rates which increases investment. D) buy government securities thereby increasing bank reserves and lowering interest rates which increases investment. E) buy government securities thereby decreasing bank reserves and lowering interest rates which increases investment. Answer: D Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Application of knowledge

68) Using the data in the above table, if potential GDP for this economy is $25 billion, then at the present moment real GDP is A) less than potential GDP. B) equal to potential GDP. C) greater than potential GDP. D) at the full-employment level of output. E) not comparable to potential GDP. Answer: A Topic: Recessionary gap Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Revised AACSB: Analytic skills

69) Using the data in the above table, if potential GDP for this economy is $25 billion, then in order to restore full employment, the federal funds rate can be A) lowered so that government expenditure on goods and services increases. B) raised so that consumption expenditure, investment, and net exports increase. C) lowered so that consumption expenditure, investment, and net exports increase. D) raised so that net exports increase. E) lowered so that consumption expenditure and investment increase, though net exports decrease. Answer: C Topic: Monetary policy, recession Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Revised AACSB: Analytic skills

70) The economy is at the equilibrium shown as point a in the above figure. To restore the economy to potential GDP, the Fed should A) buy government securities and thereby increase aggregate demand. B) sell government securities and thereby increase aggregate demand. C) sell government securities and thereby decrease aggregate demand. D) buy government securities and thereby decrease aggregate demand. E) buy government securities and thereby increase aggregate supply. Answer: A Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Revised AACSB: Analytic skills

71) The economy is at the equilibrium shown at point a in the above figure. If the Fed A) buys government securities, the economy moves to an equilibrium at point c. B) buys government securities, the economy moves to an equilibrium at point b. C) sells government securities, the economy moves to an equilibrium at point c. D) sells government securities, the economy moves to an equilibrium at point b. E) None of the above is correct because the economy will remain at point a if the Fed buys or if the Fed sells government securities. Answer: B Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Revised AACSB: Analytic skills 72) The Fed raises the interest rate when it A) fears recession. B) wants to increase the quantity of money. C) fears inflation. D) wants to encourage bank lending. E) cannot change the quantity of money. Answer: C Topic: Monetary policy, inflation Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 73) When the Federal Reserve wants to slow inflation, it A) lowers the federal funds rate. B) raises the federal funds rate target. C) cuts the federal funds rate target aggressively to almost zero. D) increases aggregate income, output, and employment. E) increases taxes on interest income. Answer: B Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

74) If the Fed fears inflation, it ________ by ________ government securities. A) increases aggregate demand; selling B) increases aggregate supply; buying C) decreases aggregate demand; selling D) decreases aggregate supply; buying E) decreases aggregate supply; selling Answer: C Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 75) If the Fed fears inflation, then the Fed A) directs banks to lower the nominal interest rate. B) directs banks to raise the nominal interest rate. C) will sell government securities in the open market. D) will buy government securities in the open market. E) will increase the income tax rate on interest income. Answer: C Topic: Monetary policy, inflation Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 76) The Fed is concerned that inflation might occur. To help eliminate this possibility, the Fed could ________ government securities to ________ the federal funds rate in the short run. A) buy; lower B) buy; raise C) sell; lower D) sell; raise E) sell; not change Answer: D Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

77) When the Fed worries about inflation, it ________ the federal funds rate and, in the short run, ________ the real interest rate. A) lowers; lowers B) lowers; raises C) raises; lowers D) raises; raises E) does not change; the Fed raises Answer: D Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 78) When the Fed fears inflation, the Fed ________ government securities, so that the federal funds rate ________ and the quantity of money ________. A) sells; falls; decreases B) sells; rises; decreases C) sells; falls; increases D) buys; falls; increases E) buys; rises; decreases Answer: B Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 79) When the Fed raises the federal funds rate, eventually there is A) an upward movement along the investment demand curve and along the aggregate demand curve. B) an upward movement along the investment demand curve and the aggregate demand curve shifts leftward. C) an upward movement along the investment demand curve and the aggregate demand curve shifts rightward. D) a leftward shift of the investment demand curve and the aggregate demand curve shifts leftward. E) a leftward shift of both the aggregate demand curve and the aggregate supply curve. Answer: B Topic: Monetary policy, inflation Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills

80) If the AS and the AD curve intersect at a level of real GDP that exceeds potential GDP, then the appropriate monetary policy is one that ________ the federal funds rate and ________ aggregate demand. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases E) raises; has no effect on Answer: B Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 81) If real GDP exceeds potential GDP, to move the economy to potential GDP the Fed A) raises the federal funds rate to increase potential GDP but not real GDP. B) lowers the federal funds rate to decrease real GDP but not potential GDP. C) raises the federal funds rate to decrease real GDP but not potential GDP. D) lowers the federal funds rate to increase potential GDP but not real GDP. E) raises the federal funds rate to decrease both real GDP and potential GDP. Answer: C Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 82) If the Fed raises the federal funds rate, eventually the A) AD curve shifts rightward and real GDP increases. B) AD curve shifts leftward and real GDP decreases. C) AS curve shifts rightward and real GDP increases. D) AS curve shifts leftward and real GDP decreases. E) AD curve shifts rightward and real GDP decreases. Answer: B Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills

83) If the Fed raises the federal funds rate, eventually the A) AD curve shifts leftward, decreasing real GDP and increasing the price level. B) AS curve shifts leftward, decreasing real GDP and increasing the price level. C) AD curve shifts rightward, increasing real GDP and the price level. D) AD curve shifts leftward, decreasing real GDP and the price level. E) AS curve shifts rightward, decreasing real GDP and increasing the price level. Answer: D Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 84) When there is a threat of inflation in the economy, the Fed can ________ the federal funds rate to ________ aggregate demand and ________ the price level. A) lower; increase; decrease B) raise; decrease; increase C) lower; increase; increase D) raise; decrease; decrease E) raise; increase; decrease Answer: D Topic: Monetary policy, inflation Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 85) Raising the federal funds rate shifts the aggregate demand curve ________ so that real GDP ________ and the price level ________. A) rightward; increases; rises B) leftward; decreases; rises C) rightward; increases; falls D) leftward; decreases; falls E) leftward; increases; rises Answer: D Topic: Monetary policy, inflation Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills

86) If the economy was experiencing inflation gap, the Fed could A) sell government securities thereby reducing bank reserves and lowering interest rates which would decrease investment expenditures as well as aggregate demand. B) buy government securities thereby reducing bank reserves and raising interest rates which would decrease investment expenditures as well as aggregate supply. C) buy government securities thereby reducing bank reserves and lowering interest rates which would decrease investment expenditures as well as aggregate demand. D) sell government securities thereby reducing bank reserves and raising interest rates which would decrease investment expenditures as well as aggregate supply. E) sell government securities thereby reducing bank reserves and raising interest rates which would decrease investment expenditures as well as aggregate demand. Answer: E Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Application of knowledge 87) Which of the following is a problem in pursuing monetary policy? A) The lag between a change in the quantity of money and its effect on economic activity may be long. B) Monetary policy must be approved by the Congress. C) The Fed must reveal to the public anytime the Fed changes its policy. D) The Fed cannot control the federal funds rate. E) None of the above answers is correct. Answer: A Topic: Monetary policy problems Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 88) One problem with the ripple effect from the Fed's monetary policy is A) the fact that the monetary policy transmission process is long and drawn out. B) that changing the Federal funds target rate seldom has an effect on the markets for reserves and loanable funds. C) that the Fed's policy sometimes has a large impact on potential GDP as well as its usual impact on aggregate demand. D) the tight relationship between that the Federal funds rate has to aggregate spending. E) the frequent misalignment of the spread between the Federal funds rate and the Federal funds rate target. Answer: A Topic: Monetary policy problems Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 44 Copyright © 2023 Pearson Education Ltd.

89) When the Fed lowers the federal funds rate, which of the following economic variables responds most rapidly? A) consumption expenditure B) the supply of loanable funds C) the long-term real interest rate D) other short-term interest rates E) the inflation rate Answer: D Topic: Monetary policy transmission Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 90) When the Fed lowers the federal funds rate, which of the following economic variables responds most slowly? A) consumption expenditure B) the supply of loanable funds C) the long-term real interest rate D) other short-term interest rates E) the inflation rate Answer: E Topic: Monetary policy transmission Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 91) When the Fed lowers the federal funds rate, the quantity of money ________ and the supply of loanable funds ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases E) increases; does not change Answer: A Topic: Monetary policy transmission Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills

92) When the Fed raises the federal funds rate, the consumption expenditure ________ and investment ________. A) does not change; does not change B) does not change; decreases C) increases; decreases D) increases; increases E) decreases; decreases Answer: E Topic: Monetary policy transmission Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 93) When the Fed raises the federal funds rate, the exchange rate ________ and net exports ________. A) does not change; does not change B) does not change; decreases C) increases; decreases D) increases; increases E) decreases; decreases Answer: C Topic: Monetary policy transmission Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 94) A change in the federal funds rate ________ the supply of loanable funds, ________ the long-term real interest rate, and ________ investment. A) affects; affects; affects B) affects; affects; does not affect C) does not affect; affects; does not affect D) affects; does not affect; affects E) does not affect; does not affect; does not affect Answer: A Topic: Monetary policy transmission Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

95) If the Fed wants to fight recession, it will ________ the federal funds rate in order to ________. A) raise; increase aggregate demand B) raise; decrease aggregate supply C) raise; increase aggregate supply D) lower; increase aggregate supply E) lower; increase aggregate demand Answer: E Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 96) If the Fed wants to fight inflation, it will ________ the federal funds rate in order to ________. A) raise; decrease aggregate demand B) raise; decrease aggregate supply C) raise; increase aggregate supply D) lower; increase aggregate supply E) lower; decrease aggregate demand Answer: A Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 33.3 Alternative Monetary Policy Strategies 1) Discretionary monetary policy is defined as policy A) for which the markets make all decisions. B) that is based on the judgments of policymakers. C) that is pursued regardless of the current state of the economy. D) that responds to a changing economy with predetermined rules. E) for which the policymaker always publicizes the policy as extensively as possible because its effectiveness depends on the public's knowledge of the policy. Answer: B Topic: Types of policy, discretionary policy Skill: Level 1: Definition Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking

2) Discretionary monetary policy is monetary policy that is based on A) the judgment of Congress about the current needs of the economy. B) a rule that allows no discretion in how policymakers respond to the state of the economy. C) the ups and downs of the stock market. D) the judgment of the monetary policymakers about the current needs of the economy. E) rules that depend upon the state of the economy. Answer: D Topic: Types of policy, discretionary policy Skill: Level 1: Definition Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking 3) If the Fed bases its monetary policy on judgments of its policymakers about the current needs of the economy, it is following A) a monetary base instrument rule. B) discretionary policy. C) an inflation targeting rule. D) wait-and-see policy. E) a money targeting rule. Answer: B Topic: Types of policy, discretionary policy Skill: Level 2: Using definitions Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking 4) Which of the following is NOT an alternative rule for monetary policy? A) a monetary base instrument rule B) a money targeting rule C) a natural unemployment rate targeting rule D) a nominal GDP targeting rule E) an inflation rate targeting rule Answer: C Topic: Types of rules Skill: Level 1: Definition Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking

5) Of the following, which is NOT a monetary policy rule the Fed could follow? A) a nominal GDP targeting rule B) an unemployment rate targeting rule C) an inflation targeting rule D) a k-percent rule E) a money targeting rule Answer: B Topic: Types of policy Skill: Level 1: Definition Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking 6) The Taylor rule is an example of A) an instrument rule focused on the federal funds rate. B) a targeting rule focused on the monetary base. C) an instrument rule based on M1. D) a targeting rule focused on the federal funds rate. E) an instrument rule focused on the monetary base. Answer: A Topic: Eye on the U.S. economy, Taylor rule Skill: Level 1: Definition Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking 7) If the Fed follows the Taylor rule and the economy goes into a recession, the Fed would A) lower the federal funds rate. B) reduce tax rates. C) raise the federal funds rate D) increase government expenditures. E) None of the above answers is correct. Answer: A Topic: Eye on the U.S. economy, Taylor rule Skill: Level 2: Using definitions Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking

8) Maintaining the growth of the money supply at a constant rate is an example of A) discretionary policy. B) a money targeting rule. C) a money demand rule. D) an inflation targeting rule. E) a nominal GDP targeting rule. Answer: B Topic: Types of rules, money targeting Skill: Level 1: Definition Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking 9) The proposal to keep the quantity of money growing at a slow constant rate is an example of A) discretionary policy. B) an inflation rate targeting rule. C) a constant federal funds rate rule. D) a money targeting rule. E) a nominal GDP targeting rule. Answer: D Topic: Types of policy, money targeting rule Skill: Level 2: Using definitions Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking 10) Milton Friedman's k-percent rule says to set the rate of growth of the quantity of money equal to A) the unemployment rate. B) the rate of growth of potential GDP. C) last year's growth rate of real GDP. D) the real interest rate. E) a constant rate. Answer: E Topic: Types of rules, money targeting Skill: Level 2: Using definitions Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking

11) An example of Friedman's k-percent rule is A) "every time GDP decreases, decrease the growth rate of the quantity of money." B) "set the growth rate of the quantity money equal to the unemployment rate." C) "every time GDP decreases, increase the growth rate of the quantity of money." D) "do not change the growth rate of the quantity of money." E) "use all information available to determine the growth rate of the quantity of money each time GDP changes." Answer: D Topic: Types of rules, money targeting Skill: Level 2: Using definitions Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking 12) Under a k-percent rule, if the economy goes into expansion, the Fed would A) raise the federal funds rate. B) lower tax rates to keep revenue constant. C) lower the federal funds rate. D) increase the quantity of money. E) None of the above answers is correct. Answer: E Topic: Types of rules, money targeting Skill: Level 3: Using models Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking 13) As firms expect future profits to increase, they increase their investment. As a result, real GDP rises above potential GDP. If the Fed followed Friedman's k-percent rule, the Fed would A) increase the quantity of money more than usual. B) decrease the quantity of money. C) continue allowing the quantity of money to grow at "k" percent. D) raise the federal funds rate. E) lower the federal funds rate. Answer: C Topic: Types of policy, money targeting rule Skill: Level 3: Using models Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking

14) Consumer confidence in the economy falls, and as a result, aggregate demand decreases. As real GDP falls below potential GDP, if the Fed followed Friedman's k-percent rule, the Fed would A) increase the quantity of money more than usual. B) increase government expenditures. C) continue allowing the quantity of money to grow at "k" percent. D) lower the federal funds rate. E) raise the federal funds rate. Answer: C Topic: Types of policy, money targeting rule Skill: Level 3: Using models Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking 15) Which of the following are TRUE regarding Milton Friedman's k-percent money targeting rule? i. Currently this policy is used by many policy makers. ii. This rule sets the growth rate of the quantity of money independently of the economy's behavior. iii. For this policy to work well, the velocity of circulation must be stable. A) i only B) ii only C) ii and iii D) i and ii E) iii only Answer: C Topic: Types of policy, money targeting rule Skill: Level 1: Definition Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking 16) Discretionary monetary policy has the drawback that it A) must lead to very high inflation. B) is currently illegal in the United States. C) cannot be implemented using changes in the federal funds rate. D) makes inflation expectations harder to manage. E) None of the above answers is correct. Answer: D Topic: Types of policy, discretionary policy Skill: Level 1: Definition Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking

17) Which monetary policy rule needs a stable demand for money to work well? A) discretionary monetary policy B) monetary base instrument rule C) k-percent rule D) nominal GDP targeting rule E) inflation targeting rule Answer: C Topic: Types of rules, money targeting Skill: Level 1: Definition Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking 18) Inflation targeting requires that the central bank A) use a short-term interest rate as its policy instrument. B) adopt a k-percent rule for the inflation rate. C) avoid changing the amount of the monetary base. D) publicize its targeted inflation rate. E) set a fixed price real assets. Answer: D Topic: Types of rules, inflation target Skill: Level 1: Definition Section: Checkpoint 33.3 Status: Old AACSB: Reflective thinking

33.4 Chapter Figures

The figure above shows the market for reserves. 1) If the Fed wants to increase the federal funds rate, it will conduct an open market operation in which it ________ government securities and thereby shifts the ________ curve ________. A) sells; RS; rightward B) sells; RD; leftward C) buys; RD; rightward D) buys; RS; leftward E) sells; RS; leftward Answer: E Topic: The market for bank reserves Skill: Level 3: Using models Section: Checkpoint 33.1 Status: Old AACSB: Analytic skills

The figure above shows the market for reserves. 2) To shift the RS curve rightward as illustrated, the Fed has ________ government securities in the open market. The Fed will undertake this type of policy if it is concerned about ________. A) sold; inflation B) bought; inflation C) sold; recession D) bought; recession E) None of the above answers is correct. Answer: D Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills

3) The rightward shift of the RS curve will lead to a ________ in the real interest rate, ________ in investment, and ________ in aggregate demand. A) rise; an increase; an increase B) rise; an increase; a decrease C) rise; a decrease; a decrease D) fall; an increase; an increase E) fall; an increase; a decrease Answer: D Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 4) The rightward shift of the RS curve will lead to a ________ in the U.S. exchange rate, ________ in real GDP, and a ________ in the price level. A) rise; an increase; rise B) rise; an increase; fall C) rise; a decrease; fall D) fall; an increase; rise E) fall; an increase; fall Answer: D Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills

The figure above shows the market for loanable funds. The supply of loanable funds curve shifts rightward. 5) The change illustrated in the figure above can be the result of the Fed ________ government securities in the open market and will ultimately lead to ________ in aggregate demand. A) selling; an increase B) buying; an increase C) selling; a decrease D) buying; no change E) selling; no change Answer: B Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills

6) The change illustrated in the figure above is part of the transmission process of the Fed's monetary policy. As a result of the increase in the supply of loanable funds, aggregate demand ________, real GDP ________, and the price level ________. A) increases; decreases; falls B) increases; increases; rises C) decreases; decreases; falls D) increases; does not change; does not change E) None of the above answers is correct. Answer: B Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 7) The change illustrated in the figure above is part of the transmission process of the Fed's monetary policy. As a result of the increase in the supply of loanable funds, in the short run aggregate demand ________, aggregate supply ________, and potential GDP ________. A) increases; decreases; decreases B) increases; increases; increases C) decreases; decreases; decreases D) increases; does not change; does not change E) decreases; increases; increases Answer: D Topic: Ripple effects of the Fed's action Skill: Level 4: Applying models Section: Checkpoint 33.2 Status: Old AACSB: Analytic skills 33.5 Integrative Questions 1) When a central bank targets inflation, its inflation targets are usually specified as A) a range for the inflation rate. B) a specific inflation rate target, for example, 1 percent. C) deviations from the inflation rate. D) a point on the short-run Phillips curve. E) the short-term interest rate minus 2 percent. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

2) While the Fed has a "dual mandate" of goals to achieve, most economists believe that in the long run the single key role is attaining A) price stability. B) high levels of income and output. C) high inflation rates. D) low economic growth rates. E) stable velocity of money. Answer: A Topic: Monetary policy, dual mandate Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 3) In late 2007, the Fed began a series of cuts in the federal funds rate. Because the core inflation rate was about two percent, the most likely reason for these interest rate cuts was A) to raise the price of the dollar in the foreign exchange market. B) to avoid a recession. C) to encourage households to save more money. D) to reduce the natural unemployment rate. E) to increase the real interest rate. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 4) The Fed decreases the quantity of money to counteract A) a recessionary gap. B) a federal budget deficit. C) positive net exports. D) an inflationary gap. E) a rise in the unemployment rate. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) The Fed increases the quantity of money to counteract A) a recessionary gap. B) a federal budget surplus. C) negative net exports. D) an inflationary gap. E) inflation. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 6) During the Great Depression, real GDP decreased, unemployment soared, and the inflation rate was negative. Which would have been the appropriate federal government policy combination to improve economic performance? A) increase government expenditure, decrease taxes, increase the quantity of money B) increase government expenditure, decrease taxes, decrease the quantity of money C) decrease government expenditure, increase taxes, decrease the quantity of money D) do not change government expenditures or taxes, increase the quantity of money E) decrease government expenditures, increase taxes, do not change the quantity of money Answer: A Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 7) During the late 1960s, real GDP increased, unemployment fell, and the inflation rate started to rise. Which would have been the appropriate federal government policy combination to improve economic performance by lowering the inflation rate? A) increase government expenditures, decrease taxes, increase the quantity of money B) increase government expenditures, decrease taxes, decrease the quantity of money C) decrease government expenditures, increase taxes, decrease the quantity of money D) do not change government expenditures or taxes, increase the quantity of money E) increase government expenditures, decrease taxes, do not change the quantity of money Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills

8) A(n) ________ in the supply of loanable funds ________ the real interest rate and ________ investment. A) increase; raises; decreases B) increase; raises; increases C) decrease; raises; decreases D) decrease; lowers; decreases E) decrease; raises; increases Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 9) When the Fed ________ the federal funds rate, other short-term interest rates and the exchange rate also ________. The quantity of money and the supply of loanable funds ________. A) raises; rise; increase B) raises; fall; increase C) lowers; fall; increase D) lowers; rise; increase E) lowers; fall; decrease Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 10) An increase in the supply of bank loans ________ the supply of loanable funds so the real interest rate ________ and investment ________. A) increases; falls; decreases B) decreases; rises; increases C) decreases; falls; increases D) increases; falls; increases E) increases; rises; increases Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

11) A decrease in monetary base ________ the quantity of money, the interest rate ________, and the quantity of money demanded ________. A) decreases; rises; decreases B) decreases; falls; decreases C) decreases; rises; increases D) decreases; falls; increases E) increases; falls; decreases Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 12) When the Fed ________ the federal funds rate, other short-term interest rates ________ and the exchange rate ________. A) lowers; rise; falls B) raises; rise; rises C) raises; fall; rises D) raises; rise; falls E) lowers; rise; rises Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 13) If the economy slips into recession, the Fed ________ the federal funds rate, which ________ the short-term interest rate, and ________ the quantity of money. A) lowers; raises; increases B) raises; lowers; increases C) raises; lowers; decreases D) lowers; lowers; increases E) lowers; lowers; decreases Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills

14) Money targeting works when the demand for money curve is ________ and predictable. Technological change in the banking system has led to ________ and ________ shifts in the demand for money curve. A) stable; small; unpredictable B) stable; large; predictable C) stable; small; predictable D) unstable; large; unpredictable E) stable; large; unpredictable Answer: E Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 33.6 Essay: How the Fed Conducts Monetary Policy 1) Explain monetary policy goals and discuss any goal conflicts in the long run and the short run. Answer: Monetary policy has three goals: price level stability, maximum employment, and moderate long-term interest rates. In the long run, these goals all coincide and are best met by keeping the inflation rate low. In the short run, however, there is a tradeoff: Higher inflation can lead to lower unemployment and hence higher employment. So in the short run, higher employment can be attained but at the cost of higher inflation. Topic: Monetary policy goals Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Written and oral communication 2) Describe the main difference between the core inflation rate and the PCE inflation rate. Answer: The core inflation rate excludes the prices of food and fuel. Topic: Core inflation Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Reflective thinking

3) Explain the role the Fed, Congress, and the President play in making monetary policy. Answer: Ultimately the Federal Reserve maintains responsibility for setting monetary policy in the United States. The Federal Reserve Act gives the Board of Governors and Federal Open Market Committee responsibility to conduct monetary policy. The FOMC meets eight times a year to make monetary policy decisions. The Congress does not play a role in setting monetary policy. However, the Board of Governors is required to report on monetary policy and actions to Congress as laid out in the Federal Reserve Act. The President of the United States has a limited role in monetary policy. The President appoints members to the Board of Governors of the federal Reserve and also appoints the Chair of the Board of Governors. Topic: Monetary policy Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Written and oral communication 4) Distinguish between monetary policy instruments and goals. Answer: Monetary policy instruments are the variables the Fed can use to conduct monetary policy and reach its goals. These include the monetary base or the federal funds rate. Monetary policy goals are the ultimate objectives for the Fed. These include price stability and full employment. Topic: Monetary policy instruments Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Written and oral communication 5) What is the main difference between an instrument rule and a targeting rule? Be sure to define each. Answer: An instrument rule sets the policy instrument using a formula based on the current state of the economy. A targeting rule sets the policy instrument at a level that makes the central bank's forecast of the ultimate policy goals equal to their targets. The main difference between the two is that the targeting rule is based on a forecast of the economy while the instrument rule is based on the state of the economy. Topic: Monetary policy instruments Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Written and oral communication

6) What is the Taylor rule and how does it work? Answer: The Taylor rule is an instrument rule. The Taylor rule is a proposed formula for setting the federal funds rate. Taylor proposes that if his formula is followed inflation will stay close to 2 percent a year and real GDP will remain closer to potential GDP, thereby improving macroeconomic performance. The formula is based on the core inflation rate and the output gap. According to the Taylor rule if an economy goes into recession the federal funds rate should be lowered. The Fed does not strictly follow the Taylor rule. Topic: Types of rules Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Written and oral communication 7) Explain the differences between using the monetary base versus federal funds rate as the monetary policy instrument. Which does the Fed use as its instrument? Answer: Monetary policy can use either the monetary base or the federal funds rate as its instrument. The monetary base is the sum of Federal Reserve notes, coins, and banks' deposits at the Fed. The federal funds rate is the interest rate banks charge each other to borrow reserves. If the Fed targets the monetary base, the federal funds rate fluctuates to reach equilibrium. If the Fed targets the federal funds rate, the monetary base fluctuates in response to changes in the demand for it. The Fed cannot target both the monetary base and the federal funds rate simultaneously. The Fed uses the federal funds rate as its monetary policy instrument. Topic: Monetary policy instruments Skill: Level 2: Using definitions Section: Checkpoint 33.1 Status: Old AACSB: Written and oral communication 33.7 Essay: Monetary Policy Transmission 1) "The Federal Open Market Committee (FOMC) is the group within the Federal Reserve that makes monetary policy decisions. The FOMC meets twice a year and each meeting lasts eight days." Are these two statements correct or incorrect? Why? Answer: The first statement is correct. The second statement is incorrect. It is indeed the case that the FOMC is the group within the Fed that makes monetary policy decisions. However the FOMC meets eight times a year, not twice. Of these eight meetings, six are for one day and two of the meetings last for two days. Topic: Monetary policy process Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking

2) When the Fed lowers the federal funds rate and the real interest rate falls, what happens to the opportunity cost of investment? What happens to investment? Answer: The opportunity cost of investment is the real interest rate. When the Fed lowers the federal rate so that the real interest rate falls, the opportunity cost of investment decreases. In response, investment increases. Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Reflective thinking 3) Discuss how the Fed selling securities in the open market ripples through the different sectors of the economy. Answer: When the Fed sells securities in the open market it raises the federal funds rate. Banks' reserves decrease, in turn decreasing the quantity of money. The supply of loanable funds decreases so the real interest rate rises. The higher real interest rate decreases investment and consumption expenditure, especially consumption expenditure on durable goods. In the foreign exchange market, the higher interest rates increase the attractiveness of U.S. securities. Foreigners increase their demand for U.S. dollars in order to purchase these securities and so the price of the dollar rises on the foreign exchange market. The rise in the price of the dollar makes exports more expensive to foreigners and imports less expensive to U.S. residents. As a result, exports decrease and imports increase so that net exports decrease. All of the changes decrease aggregate demand. Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Written and oral communication 4) After the Fed raises the federal funds rate, the effects on the economy can take up to two years before they occur. Is this statement accurate? Lay out the time path of how an increase in the federal funds rate affects the economy. Answer: The statement is accurate. While there are immediate, short-term effects from the Fed raising the federal funds rate, there are also long-term effects. Immediately, short-term interest rates and the exchange rate rise. Within a few weeks to months the quantity of money and supply of loanable funds decreases and the long-term interest rate rises. Up to a year later consumption expenditure, investment, net exports, aggregate demand, and the real GDP growth rate all decrease. Finally, around two years later the inflation rate decreases. Topic: Ripple effects of the Fed's action Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Written and oral communication

5) List and briefly explain the steps in how monetary policy affects real GDP in the AS/AD model using as your example the case when the Fed eases monetary policy to fight a recession. Answer: There are several steps. Step one is a change in the federal funds rate. To fight a recession, the Fed lowers the federal funds rate. It does so by using open market operations to increase banks' reserves. With the increase in reserves, the quantity of money and bank loans increase. The increase in loans increases the supply of loanable funds, which then lowers the real interest rate. Next the fall in the real interest rate increases investment, net exports (though a fall in the exchange rate), and other interest sensitive parts of aggregate demand and thereby increases aggregate demand. Aggregate demand increases with a multiplied effect. The increase in aggregate demand raises the price level and increases real GDP. Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Written and oral communication 6) If the Fed wants to close a recessionary gap, should it buy or sell government securities? Why? Answer: The Fed should lower the federal funds rate by purchasing government securities. When the Fed buys government securities, the quantity of money increases and quantity of loans increases. The increase in loans increases the supply of loanable funds so the real interest rate falls. As a result, consumption expenditure, investment, and net exports increase, which increases aggregate demand. The increase in aggregate demand increases real GDP, which is the policy required when real GDP is less than potential GDP, that is, when the economy has a recessionary gap. Topic: Monetary policy, recession Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Written and oral communication 7) When the economy is in recession, does the Fed want to raise the federal funds rate so as to increase aggregate demand and increase real GDP? Explain your answer. Answer: When the economy is in a recession, the Fed surely wants to increase aggregate demand and hence GDP, but raising the federal funds rate is the wrong policy. A boost in the federal funds rate decreases consumption expenditure, investment, and net exports and therefore decreases aggregate demand. The proper policy for the Fed to pursue is a cut in the federal funds rate. Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Written and oral communication

8) When would the Fed want to carry out a monetary policy that decreases aggregate demand? Answer: The Fed wants to decrease aggregate demand when it is worried about inflation, that is, when there is an inflationary gap. In this case, real GDP exceeds potential GDP and during the adjustment back to potential GDP, the price level will rise (so that inflation occurs) as aggregate supply decreases. Hence in this case, the Fed might well want to decrease aggregate demand in order to restore the economy to potential GDP and avoid the rising price level. Topic: Monetary policy, inflation Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Written and oral communication 9) "When the Fed is concerned with an inflationary gap it buys government securities." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. An inflationary gap occurs when real GDP exceeds potential GDP. In this case, the Fed wants to decrease aggregate demand and thereby decrease real GDP. In order to decrease aggregate demand, the Fed needs to raise the federal funds rate. But when the Fed buys government securities, it LOWERS the federal funds rate. Therefore the proper Fed policy when it is concerned about an inflationary gap is to sell government securities and thereby raise the federal funds rate. Topic: Monetary policy, inflation Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Written and oral communication 10) If there is an inflationary gap, what is the proper monetary policy to restore price stability? What actions can the Fed undertake to restore price stability? Answer: An inflationary gap occurs when real GDP exceeds potential GDP. With no action by the Fed, the inflationary gap will be closed by inflation occurring as the money wage rate rises and aggregate supply decreases. In order to avoid the inflation, the Fed needs to decrease aggregate demand and thereby decrease real GDP back to potential GDP. To decrease aggregate demand, the Fed must raise the federal funds rate. To do so, the Fed can sell government securities in an open market operation. Topic: Monetary policy, inflation Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Old AACSB: Written and oral communication

11) How does a rise in the federal funds rate affect aggregate demand, real GDP, and the price level? Answer: A rise in the federal funds leads to investment, consumption expenditure, and net exports all decreasing, which, in turn, decreases aggregate demand. The decrease in aggregate demand then decreases real GDP and lowers the price level. Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Written and oral communication 12) Explain how the Fed's response to inflation works its way through the economy to ultimately affecting real GDP and the price level. Answer: When the Fed is concerned with inflation, the Fed raises the federal funds rate target. To then boost the federal funds rate up to the new target, the Fed conducts open market operations that sell government securities. This sale requires that banks and other purchasers pay for their purchases by using banks' reserves, which decreases the amount of reserves available for banks. The decrease in reserves raises the federal funds rate. It also decreases the quantity of money. The decrease in the quantity of money and bank loans decreases the supply of loanable funds so the real interest rate rises. The higher real interest rate leads to a decrease in the demand for investment and other interest-sensitive sectors of the economy. These decreases mean that aggregate demand decreases so that the AD curve shifts leftward. Following the original decrease in aggregate demand, a multiplier process begins which decreases aggregate demand even further, so that there is a further leftward shift of the AD curve. As a result of the decrease in aggregate demand, the price level falls and real GDP decreases. Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 33.2 Status: Old AACSB: Written and oral communication

13) In the above figure, is the Fed likely to be afraid that inflation will occur or that a recession will occur? Discuss the appropriate monetary policy that should be made to restore the economy to potential GDP. Answer: The Fed will fear inflation. The economy is in a short-run equilibrium with real GDP of $20.5 trillion, which exceeds potential GDP of $20.0 trillion. If the Fed does nothing, the aggregate supply curve will begin to shift leftward, raising the price level and creating inflation as it moves the economy back to potential GDP. In order to limit the inflation, the Fed needs to raise the federal funds rate, thereby decreasing aggregate demand. Topic: Fed and inflation Skill: Level 2: Using definitions Section: Checkpoint 33.2 Status: Revised AACSB: Analytic skills 33.8 Essay: Alternative Monetary Policy Strategies 1) Describe why monetary policy rules are superior to discretionary monetary policy. Answer: Rules are superior to discretion because rules allow people in the economy greater insight into how the Fed will respond to events and allow people to be aware of how the Fed's policy is likely to change the inflation rate. The economy functions better if the expected inflation rate equals, or is close to, the actual inflation rate and rules make this outcome more likely than would pure discretionary policy. Topic: Monetary policy rules versus discretion Skill: Level 2: Using definitions Section: Checkpoint 33.3 Status: Old AACSB: Written and oral communication

2) Describe inflation targeting rule as a monetary policy. What are its benefits? Answer: Inflation targeting requires that the nation's central bank set and then make public an explicit target for the inflation rate. Then the central bank must explain how its policy actions are designed to achieve its inflation goal. Inflation targeting has the major advantage of firmly setting the public's expected inflation rate. It also serves to keep the actual inflation rate because central banks are loathe to set a target level for inflation. Topic: Inflation targeting Skill: Level 2: Using definitions Section: Checkpoint 33.3 Status: Old AACSB: Written and oral communication

Foundations of Economics, 9e (Bade), GE Chapter 19 International Finance 34.1 Financing International Trade 1) The record of international receipts and payments is called the A) balance of payments. B) current account. C) official settlements account. D) capital and financial account. E) U.S. official reserves. Answer: A Topic: Balance of payments Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 2) The trade between countries is recorded in accounts called the balance of A) international trade accounts. B) export and import accounts. C) payments accounts. D) currency accounts. E) U.S. official trade account. Answer: C Topic: Balance of payments Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 3) The balance of payments accounts record all of the following EXCEPT the country's A) domestic investment. B) international borrowing. C) international trading. D) international lending. E) change in official reserves. Answer: A Topic: Balance of payments Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

4) Which of the following is a balance of payments account? i. current account ii. past account iii. capital and financial account A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Balance of payments Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 5) The current account is the record of A) a nation's international trading, borrowing, and lending. B) payments for imports, receipts for exports, net interest, and net transfers. C) foreign investment in the nation minus the nation's investment abroad. D) changes in the government's holdings of foreign currency. E) the nation's exports but not its imports. Answer: B Topic: Current account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 6) The U.S. current account records A) all the international transactions during the current year. B) the current value of the balance of payments in U.S. dollars. C) transactions involving trade, interest payments, and net transfers. D) transactions involving foreign investment in the United States and U.S. investment abroad. E) U.S. exports but not U.S. imports, which are recorded in the capital account. Answer: C Topic: Current account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

7) The value of imports and exports is recorded in A) international trade account. B) official settlements account. C) capital and financial account. D) current account. E) official reserves account. Answer: D Topic: Current account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 8) When a U.S. company purchases $1 million worth of French cheese, the value of that transaction is recorded in the A) capital and financial account. B) investment account. C) current account. D) transfer account. E) goods account. Answer: C Topic: Current account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 9) When a U.S. company makes a $200,000 donation to the International Red Cross to help the victims of an earthquake in India, the transaction is recorded in the A) official settlements account. B) current account. C) international help account. D) capital and financial account. E) one-way donations account. Answer: B Topic: Current account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

10) In the current account, the largest category of international transactions is A) net interest. B) international investment. C) net transfers. D) imports. E) statistical discrepancy. Answer: D Topic: Current account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 11) In 2018, the United States had A) a current account surplus because imports were greater than exports. B) a capital and financial account deficit because exports were greater than imports. C) a current account deficit because imports were greater than exports. D) no change in U.S. official reserves. E) a current account deficit and a capital and financial account deficit. Answer: C Topic: Current account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Revised AACSB: Reflective thinking 12) Interest received from U.S. holdings of foreign assets and interest paid to foreigners for U.S. investment assets is recorded in the A) capital and financial account. B) official settlements account. C) official reserves account. D) current account. E) official dollar account. Answer: D Topic: Current account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

13) Suppose you own some German government bonds that pay you interest every year. This interest is entered into which of the balance of payments accounts? A) current account B) capital and financial account C) official settlements account D) trade account E) interest account Answer: A Topic: Current account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 14) If the current account balance is negative, net interest is $100 billion and net transfer is -$100 billion, then A) imports exceed exports. B) exports exceed imports. C) real GDP exceeds potential GDP. D) the official settlements account must be positive. E) the official settlements account must be negative. Answer: A Topic: Current account balance Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 15) In 2008, the U.S. current account balance was -$706 billion, net interest was +$119 billion, net transfers were -$128 billion, and exports were +$1,827 billion. Therefore, imports were A) -$2,524 billion. B) +$2,524 billion. C) +$1,112 billion. D) -$1,112 billion. E) +$2,780 billion. Answer: A Topic: Current account balance Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

16) If the current account balance is -$100 billion, net interest = $0, net transfers = $0, then A) exports are greater than imports. B) imports are greater than exports. C) the capital and financial account balance must be +$100 billion. D) there was an increase in net foreign assets. E) the country is loaning abroad. Answer: B Topic: Current account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 17) If the United States imports goods and services for a total of $45 billion, exports goods and services for a total of $40 billion, records $4 billion as net interest and zero as net transfers, then the U.S. current account balance is A) $89 billion. B) $1 billion. C) zero. D) -$1 billion. E) $81 billion. Answer: D Topic: Current account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 18) The capital and financial account is the record of A) a nation's international trading, borrowing, and lending. B) payments for imports, receipts for exports, net interest, and net transfers. C) foreign investment in the nation minus the nation's investment abroad. D) changes in the government's holdings of foreign currency. E) the nation's imports and exports of capital goods. Answer: C Topic: Capital and financial account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

19) The capital and financial account records A) all the purchases and sales of capital goods in the United States. B) the current value of the balance of payments in U.S. dollars. C) transactions involving trade, interest payments, and net transfers. D) transactions involving foreign investment in the United States and U.S. investment abroad. E) imports and exports of capital goods. Answer: D Topic: Capital and financial account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 20) Foreign investment in the United States and U.S. investment abroad is recorded in the A) investment account. B) official settlements account. C) capital and financial account. D) current account. E) creditor/debtor account. Answer: C Topic: Capital and financial account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 21) In the capital and financial account, the largest category of international transactions is A) net interest. B) foreign investment in the United States. C) net transfers. D) exports and imports. E) statistical discrepancy. Answer: B Topic: Capital and financial account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

22) When a German company purchases a U.S. company for $20 million, in the balance of payments the value of that transaction is recorded in the A) purchase account. B) current account. C) investment account. D) capital and financial account. E) official purchases account. Answer: D Topic: Capital and financial account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 23) Toyota purchases a truck factory in San Antonio, Texas. This purchase is entered into which of the balance of payment accounts? A) current account B) official settlements account C) trade account D) capital and financial account E) foreign account Answer: D Topic: Capital and financial account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 24) Suppose IBM purchases a factory in Japan. This purchase is entered into which of the balance of payments accounts? A) current account B) capital and financial account C) official settlements account D) trade account E) purchases account Answer: B Topic: Capital and financial account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

25) Suppose Honda purchases a car factory in the United States. This purchase is entered into which of the balance of payments accounts? A) current account B) capital and financial account C) official settlements account D) trade account E) business purchases account Answer: B Topic: Capital and financial account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 26) Microsoft's purchase of a factory in Mexico is entered into the U.S. balance of payments accounts as a A) negative entry in the capital and financial account. B) positive entry in the capital and financial account. C) negative entry in the current account. D) positive entry in the current account. E) negative entry in the settlements account. Answer: A Topic: Capital and financial account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 27) The capital and financial account balance is equal to A) foreign investment in the United States minus U.S. investment abroad. B) exports minus imports. C) foreign assets owned by the United States minus U.S. assets owned by foreigners. D) U.S. investment abroad minus foreign investment in the United States. E) the value of exports of U.S. capital goods minus the value of imports of capital goods into the United States. Answer: A Topic: Capital and financial account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

28) In a year, if foreigners invest ________ in the United States than the United States invests abroad, the capital and financial account balance is ________. A) more; positive B) less; positive C) more than; negative D) less; zero E) more; zero Answer: A Topic: Capital and financial account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 29) When the U.S. capital and financial account shows a positive balance, that is an indication of A) the value of all U.S. exports exceeding the value of all U.S. imports. B) the United States acquiring more foreign reserves. C) U.S. industries becoming more competitive. D) foreigners investing more in the United States than the United States is investing abroad. E) the value of U.S. exports of capital goods exceeding the value of U.S. imports of capital goods. Answer: D Topic: Capital and financial account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 30) U.S. official reserves are A) equal to the value of the government's oil reserves. B) the government's holding of foreign currency. C) equal to the government's holding of gold. D) equal to the value of U.S. government debt in the hands of foreigners. E) equal to the balance on the capital and financial account. Answer: B Topic: Official settlements account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

31) The official settlements account records the A) change in official U.S. reserves. B) revenue collected from taxing imports. C) income used to settle international lawsuits. D) change in the official U.S. exchange rate. E) revenue collected from taxing exports. Answer: A Topic: Official settlements account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 32) The official settlements account is the record of A) a nation's international trading, borrowing and lending. B) payments for imports, receipts for exports, net interest, and net transfers. C) foreign investment in the nation minus the nation's investment abroad. D) changes in the government's holdings for foreign currency. E) exports of capital goods minus imports of capital goods. Answer: D Topic: Official settlements account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 33) When the government increases the level of official reserves by $50 million, the change is recorded in the A) official settlements account. B) capital and financial account. C) foreign currency account. D) official reserves account. E) current account. Answer: A Topic: Official settlements account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

34) The official settlements account contains data on A) officials' expenses. B) official reserves. C) trade complaints that are officially settled. D) official governmental complaints between countries. E) capital imports and exports. Answer: B Topic: Official settlements account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 35) The government's holdings of foreign currency is recorded in the A) money account. B) official settlements account. C) capital and financial account. D) current account. E) currency account. Answer: B Topic: Official settlements account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 36) Suppose that the U.S. government acquires more foreign currency. This change is entered into which of the balance of payments accounts? A) current account B) capital and financial account C) official settlements account D) trade account E) reserves account Answer: C Topic: Official settlements account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

37) When U.S. official reserves ________, the official settlements account balance becomes negative and when U.S. official reserves ________, the official settlements account balance becomes positive. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) More information is needed about the balances on the current account and the capital account in order to answer this question. Answer: C Topic: Official settlements account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 38) Suppose that the U.S. government acquires more foreign currency. How does this change affect the balance of payments accounts? A) The official settlements account balance is positive. B) The official settlements account balance is negative. C) The capital and financial account is positive. D) The capital and financial account is negative. E) The balance of payments account sum to a positive number equal to the value of the additional foreign currency the government has obtained. Answer: B Topic: Official settlements account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 39) If U.S. official reserves increase, the A) current account increases. B) balance of payments increases. C) official settlements account balance is negative. D) current account is positive. E) official settlements account balance is positive. Answer: C Topic: Official settlements account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

40) If official reserves increase, then we know that the A) official settlements account balance is negative. B) capital and financial account is negative. C) official settlements account balance is positive. D) capital and financial account and the current account must sum to zero. E) capital and financial account is positive. Answer: A Topic: Official settlements account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 41) In 2008, the current account balance was -$706 billion and the capital and financial account balance was +$711 billion. Therefore, the official settlements account balance was ________ and the balance of all payments accounts summed was ________. A) -$5 billion; zero B) +$5 billion; zero C) not enough information to determine; negative D) negative; negative E) positive; positive Answer: A Topic: Official settlements account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 42) Recently the current account balance was -706 billion and the capital and financial account balance was +711 billion. Therefore, the official settlements account balance was ________ and the balance of all payments accounts was ________. A) -5; zero B) +5; zero C) not enough information to determine; most likely negative D) negative; negative E) positive; positive Answer: A Topic: Current account balance Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

43) The table above gives data for the nation of Syldavia. The current account has a A) $40 billion deficit. B) $30 billion deficit. C) $40 billion surplus. D) $50 billion deficit. E) balance of $320 billion. Answer: A Topic: Current account Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 44) The table above gives data for the nation of Syldavia. The capital and financial account has a A) $40 billion deficit. B) $30 billion deficit. C) $40 billion surplus. D) $50 billion deficit. E) balance of $380 billion. Answer: C Topic: Capital and financial account Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 45) The table above gives data for the nation of Syldavia. The official settlements account has a A) $40 billion deficit. B) $30 billion deficit. C) $40 billion surplus. D) zero balance. E) balance of $380 billion. Answer: D Topic: Official settlements account Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 15 Copyright © 2023 Pearson Education Ltd.

46) The table above gives data for the nation of Syldavia. The sum of the current account balance, capital and financial account balance, and the official settlements account balances of Syldavia is equal to A) $30 billion. B) -$10 billion. C) $10 billion. D) zero. E) $40 billion. Answer: D Topic: Balance of payments Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

The table has some of the U.S. balance of payments account. 47) Refer to the table above. The current account balance is equal to A) +$200 billion. B) -$200 billion. C) +$220 billion. D) -$220 billion. E) +$20 billion. Answer: A Topic: Balance of payments accounts Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

48) Refer to the table above. If there is no statistical discrepancy, the capital and financial account balance equals A) -$220 billion. B) +$220 billion. C) +$200 billion. D) -$200 billion. E) +$20 billion. Answer: A Topic: Balance of payments accounts Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 49) Refer to the table above. If there is no statistical discrepancy, the official settlement account balance equals A) +$20 billion. B) -$20 billion. C) +$200 billion. D) +$220 billion. E) zero. Answer: A Topic: Balance of payments accounts Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 50) Refer to the table above. If there is no statistical discrepancy, the sum of all three balance of payments accounts equals A) zero. B) -$20 billion. C) +$200 billion. D) +$220 billion. E) +$20 billion. Answer: A Topic: Balance of payments accounts Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

51) The sum of the balances of the three accounts of the balance of payments (the current account, the capital and financial account, and the official settlements account) is A) negative if there is a balance of trade deficit. B) equal to zero. C) positive if there is a balance of trade surplus. D) negative if there is a balance of trade surplus or positive if there is a balance of trade deficit. E) positive if there is a balance of trade surplus or negative if there is a balance of trade deficit. Answer: B Topic: Balance of payments accounts Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 52) There are three balance of payments accounts. The sum of the balances on these three accounts will equal A) the total amount of the nation's foreign borrowing. B) the total amount of the nation's foreign lending. C) zero. D) the total amount of the nation's exports. E) the total amount of the nation's imports. Answer: C Topic: Balance of payments accounts Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 53) In 2018, in the United States the sum of the balance of all three of the balance of payments accounts was A) zero. B) slightly negative. C) greatly negative. D) slightly positive. E) greatly positive. Answer: A Topic: Balance of payments accounts Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Revised AACSB: Reflective thinking

54) The ________ always equals zero. A) sum of current account plus capital and financial account B) sum of current account plus official settlements account C) sum of capital and financial account plus official settlements account D) sum of current account plus capital and financial account plus official settlements account E) official settlements account Answer: D Topic: Balance of payments accounts Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 55) When the U.S. current account has a deficit, international payments from the United States ________ U.S. international receipts. To cover the current account deficit, there must be a ________ in the combined capital and financial account and official settlements account. A) are less than; surplus B) exceed; surplus C) are less than; deficit D) equal; surplus E) exceed; deficit Answer: B Topic: Balance of payments accounts Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 56) We know that among the current account, the capital and financial account, and the official settlements account that the A) current account is always larger than the capital and financial and official settlements accounts combined. B) current and capital and financial accounts sum to zero while the official settlements account must be greater than zero. C) current account plus the capital and financial account plus the official settlements account must sum to zero. D) current account plus the capital and financial account plus the official settlements account must sum to 100. E) current account plus the capital and financial account equals zero. Answer: C Topic: Balance of payments accounts Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

57) The sum of the current account plus the capital and financial account plus the official settlements account equals A) 100 percent. B) U.S. official reserves. C) zero. D) government expenditures. E) U.S. exports. Answer: C Topic: Balance of payments accounts Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 58) If the current account balance has a $70 million deficit and there was no change in official reserves during that year, then we know that A) the balance of payments must register a $70 million surplus. B) the capital and financial account balance must have a $70 million surplus. C) the official settlements account balance must have a $70 million surplus. D) net transfers were -$70 million. E) the capital account balance must have a $70 million deficit. Answer: B Topic: Balance of payments accounts Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 59) If the U.S. capital and financial account balance has a $30 million surplus and there was no change in official reserves during that year, we know that A) U.S. net foreign lending must equal $30 million. B) the United States has a $30 million current account deficit. C) the United States is a net lender. D) U.S. official reserves have increased by $30 million. E) the United States has a $30 million current account surplus. Answer: B Topic: Balance of payments accounts Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

60) If the current account balance is -$100 billion, the capital and financial account balance is $80 billion, then the official settlements account balance is A) 0. B) $180 billion. C) $20 billion. D) -$20 billion. E) -$180 billion. Answer: C Topic: Balance of payments accounts Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 61) If the current account balance is -$450 billion, the capital and financial account balance is $440 billion, then the official settlements balance is A) $10 billion. B) -$10 billion. C) $890 billion. D) -$890 billion. E) $0 because it is ALWAYS zero. Answer: A Topic: Balance of payments accounts Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 62) Between 1981 and 2018, the United States A) had a current account deficit almost every year. B) had a current account surplus almost every year. C) some years had a deficit and some years had a surplus that netted out to $0. D) some years had a deficit and some years had a surplus that totaled a surplus of $2.5 trillion. E) had a current account surplus or deficit that almost equal to $0 every year. Answer: A Topic: Eye on the past, the U.S. balance of payments Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Revised AACSB: Reflective thinking

63) For most of the years since 1981, the United States has had A) a current account deficit. B) a capital and financial account deficit. C) balanced trade. D) a large official settlements balance. E) an official settlements account deficit. Answer: A Topic: Eye on the past, the U.S. balance of payments Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 64) From the early 1990s through 2018, the U.S. A) balance of payments exceeded the capital account. B) current account was negative. C) capital and financial account was negative. D) actual balance of payments deficit exceeded what the United States measured as the balance of payments deficit. E) current account and U.S. capital and financial account were both positive. Answer: B Topic: Eye on the past, the U.S. balance of payments Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Revised AACSB: Reflective thinking 65) Which of the following has NOT changed much as a percent of GDP over the last twenty years for the United States? i. the official settlements account ii. the capital and financial account iii. the current account A) i only B) ii only C) iii only D) ii and iii E) None of the above answers is correct because all three have had large swings over the last 20 years. Answer: A Topic: Eye on the past, the U.S. balance of payments Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

66) Looking at the U.S. balance of payments from 1980 to the present, we see that the A) current account was positive until 1992 then turned negative. B) current account has been negative for most years and was small in the late 1980s and early 1990s. C) capital and financial account has been negative for most years and was small in the late 1980s and early 1990s. D) official settlements account was large in the 1980s relative to the current account. E) current account was negative until 1992 then turned positive. Answer: B Topic: Eye on the past, the U.S. balance of payments Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Revised AACSB: Reflective thinking 67) From the 1990s to the present, the U.S. current account balance has had a ________, and the U.S. capital and financial account balance has had ________. A) deficit; a deficit B) deficit; a surplus C) surplus; a deficit D) surplus; a surplus E) deficit; neither a deficit nor a surplus Answer: B Topic: Eye on the past, the U.S. balance of payments Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 68) Which of the following is TRUE? A) Most countries are net lenders. B) Most countries are net borrowers. C) A net borrower must be a debtor country. D) A net lender must be a debtor nation. E) A net lender must be a creditor nation. Answer: B Topic: Net borrower, net lender Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

69) The United States switched from being a ________ to being a ________ in the early 1980s, when it started to run large current account ________. A) net lender; net borrower; surpluses B) net borrower; net lender; surpluses C) net lender; net borrower; deficits D) net borrower; net lender; deficits E) debtor nation; creditor nation; deficits Answer: C Topic: Net borrower, net lender Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 70) During the last year, foreign investment in a country was $500 billion and the country's investment abroad was $600 billion. Which of the following statements is TRUE? A) The country has net borrowing of $100 billion. B) The country has a current account deficit of $100 billion. C) The country has a current account deficit of $1,100 billion. D) The country has net lending of $100 billion. E) The country has a capital and financial account deficit of $1,100 billion. Answer: D Topic: Net borrower, net lender Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 71) The United States currently is A) a net borrower and has been since the end of World War II in 1945. B) a net lender and has been since the 1980s. C) a net borrower and has been since the 1980s. D) a net lender and has been since the end of World War II in 1945. E) neither a net lender nor a net borrower. Answer: C Topic: Net borrower, net lender Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

72) A country with an official settlements balance of zero and a negative current account balance is a A) net borrower. B) net lender. C) net saver. D) net creditor. E) None of the above answers is correct because it is not possible to have an official settlements balance of zero and a negative current account balance. Answer: A Topic: Net borrower, net lender Skill: Level 4: Applying models Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 73) A country reports exports minus imports of $300 billion, net interest income of $30 billion, net transfers of $50 billion, and no change in official reserves. The country is a A) net borrower. B) net lender. C) debtor nation. D) net liability. E) net asset. Answer: B Topic: Net borrower, net lender Skill: Level 4: Applying models Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 74) If U.S. exports exceed U.S. imports and official reserves do not change, the United States A) borrows from the rest of the world. B) makes loans to the rest of the world. C) borrows from the U.S. government. D) makes loans to the U.S. government. E) cannot sell any capital to foreigners. Answer: B Topic: Net borrower, net lender Skill: Level 4: Applying models Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

75) A nation that currently has a surplus in its current account is called a A) debtor nation. B) creditor nation. C) net borrower. D) net lender. E) capital account surplus nation. Answer: D Topic: Net borrower, net lender Skill: Level 4: Applying models Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 76) A nation that currently has a surplus in its capital account is called a A) debtor nation. B) creditor nation. C) net borrower. D) net lender. E) current account surplus nation. Answer: C Topic: Net borrower, net lender Skill: Level 4: Applying models Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 77) A nation that is a net borrower each year over time will become a ________ nation. A nation that is a net lender each year over time will become a ________ nation. Since the early 1980s, the United States has been a ________ due to the current account ________. A) debtor; creditor; net lender; surpluses B) creditor; debtor; net lender; surpluses C) creditor; debtor; net borrower; deficits D) debtor; creditor; net borrower; deficits E) creditor; debtor; net lender; deficits Answer: D Topic: Net borrower, net lender Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

78) A nation that has invested more in the rest of the world than other countries have invested in it is called a A) debtor nation. B) creditor nation. C) net borrower. D) net lender. E) saver nation. Answer: B Topic: Debtor nation, creditor nation Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 79) The United States currently is A) a creditor nation and has been since the end of World War II in 1945. B) a debtor nation and has been since 1989. C) a creditor nation and has been one since 1989. D) a debtor nation and has been since the end of World War II in 1945. E) neither a debtor nation nor a creditor nation. Answer: B Topic: Debtor nation, creditor nation Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 80) Because of the large current account deficits accumulated by the United States since 1981, the United States has become a A) creditor nation. B) broke nation. C) balanced nation. D) debtor nation. E) nation with no official reserves. Answer: D Topic: Debtor nation, creditor nation Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

The table above gives data on the U.S. balance of payments in 2019. 81) Refer to the table above. The current account balance is A) -$100 billion. B) $100 billion. C) -$200 billion. D) $200 billion. E) $1,900 billion. Answer: C Topic: Current account Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 82) Refer to the table above. The capital and financial account balance is A) -$200 billion. B) $200 billion. C) -$190 billion. D) $190 billion. E) $1,900 billion. Answer: D Topic: Capital and financial account Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

83) Refer to the table above. The official settlements account balance is A) -$1,100 billion. B) $1,100 billion. C) $10 billion. D) -$10 billion. E) $0. Answer: C Topic: Official settlements account Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 84) Refer to the table above. Is the United States a debtor or a creditor nation in 2019? A) a debtor nation B) a creditor nation C) neither a creditor nor debtor nation D) both a creditor nation and a debtor nation E) More information is needed to determine if the United States is a debtor or creditor nation. Answer: A Topic: Debtor nation, creditor nation Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 85) The current account balance is equal to net exports ________ net interest ________ net transfers. A) plus; plus B) plus; minus C) minus; plus D) minus; minus E) multiplied by; multiplied by Answer: A Topic: Current account balance Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

86) The current account balance equals A) net exports + net transfers + net interest. B) net exports - net transfers + net interest. C) net exports + net transfers - net interest. D) net exports - net transfers - net interest. E) net exports + net transfers. Answer: A Topic: Current account balance Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 87) Fluctuations in the current account balance are mainly the result of fluctuations in A) net exports. B) net interest. C) net transfers. D) foreign reserves. E) imports of capital. Answer: A Topic: Current account balance Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 88) In the United States, the main source of fluctuations in the current account balance is A) net transfers. B) international debt. C) net exports. D) net interest. E) exports of capital. Answer: C Topic: Current account balance Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

89) The private sector balance equals A) saving plus investment. B) saving minus investment. C) net taxes minus government expenditures. D) net taxes plus government expenditures. E) investment minus saving. Answer: B Topic: Private sector balance Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 90) If private savings equals $1.2 billion and private investment equals $1.5 billion, then there is a A) private sector surplus. B) private sector deficit. C) government sector surplus. D) government sector deficit. E) current account balance. Answer: B Topic: Private sector balance Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 91) The government sector balance equals A) saving plus investment. B) saving minus investment. C) net taxes minus government expenditures. D) net taxes plus government expenditures. E) government expenditures plus investment. Answer: C Topic: Government sector balance Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

92) Which of the following is correct? i. The private sector balance equals saving minus investment. ii. Net exports is exports of goods and services plus imports of goods and services. iii. Net exports equals the sum of the private sector balance plus the government sector balance. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Net exports Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 93) Define X = exports, M = imports, S = saving, I = investment, T = net taxes, G = government expenditure. Which of the following formulas is correct? A) X - M = S + I + T - G B) X - M = S - I + T - G C) X - M = S - I - T - G D) X - M = S + I +T + G E) X - M = S + I -T + G Answer: B Topic: Net exports Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 94) Net exports are the sum of A) exports and imports. B) the private sector balance and the government sector balance. C) the current account balance and capital account balance. D) the balance of payments accounts. E) the current account balance and the official settlements account balance. Answer: B Topic: Net exports Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

95) The private sector balance is equal to savings ________ investment, and the government sector balance is equal to government expenditure ________ taxes. If there is a deficit in the private sector balance and a deficit in the government sector balance, then there must be a ________ in net exports. A) minus; minus; surplus B) plus; minus; surplus C) minus; minus; deficit D) plus; plus; deficit E) plus; plus; surplus Answer: C Topic: Sector balances Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 96) A country has imports of goods and services at $2,000 billion. The interest paid to the rest of the world is $500 billion. The interest received from the rest of the world is $400 billion. The decrease in official reserves is $10 billion. The government sector balance is $200 billion, savings is $1,800 billion, investment is $2,000 billion, and net transfers is zero. What are net exports? A) $100 billion B) -$100 billion C) -$200 billion D) $0 E) $200 billion Answer: D Topic: Sector balances Skill: Level 4: Applying models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

97) A country has imports of goods and services at $2,000 billion. The interest paid to the rest of the world is $500 billion. The interest received from the rest of the world is $400 billion. The decrease in official reserves is $10 billion. The government sector balance is $200 billion, savings is $1,800 billion, investment is $2,000 billion, and net transfers is zero. What is the current account balance? A) $100 billion B) -$100 billion C) -$200 billion D) -$10 billion E) $200 billion Answer: B Topic: Sector balances Skill: Level 4: Applying models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 98) A country has imports of goods and services at $2,000 billion. The interest paid to the rest of the world is $500 billion. The interest received from the rest of the world is $400 billion. The decrease in official reserves is $10 billion. The government sector balance is $200 billion, savings is $1,800 billion, investment is $2,000 billion, and net transfers is zero. Using the information above, what is the capital account balance? A) $90 billion B) -$90 billion C) -$10 billion D) $10 billion E) -$200 billion Answer: A Topic: Sector balances Skill: Level 4: Applying models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

The table above has information about the U.S. economy. 99) Refer to the table above. Net exports equal A) -$200 billion. B) $200 billion. C) -$2,800 billion. D) $2,800 billion. E) $400 billion. Answer: B Topic: Net exports Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 100) Refer to the table above. The private sector balance is a A) $700 billion deficit. B) $700 billion surplus. C) $2,900 billion deficit. D) $2,900 billion surplus. E) $400 billion deficit. Answer: A Topic: Private sector balance Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 101) Refer to the table above. The government sector balance is a A) $900 billion deficit. B) $900 billion surplus. C) $2,900 billion balanced budget. D) $2,900 billion trade deficit. E) $500 billion deficit. Answer: B Topic: Government sector balance Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 35 Copyright © 2023 Pearson Education Ltd.

102) A country's balance of payments accounts records its A) tax receipts and expenditures. B) tariffs and nontariff revenue and government purchases. C) international trading, borrowing, and lending. D) international exports and imports and nothing else. E) tariff receipts and what it pays in tariffs to other nations. Answer: C Topic: Balance of payments Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 103) Which of the following are balance of payments accounts? i. capital and financial account ii. tariff account iii. current account A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: D Topic: Balance of payments Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 104) Which balance of payments account records payments for imports and exports? A) current account B) capital and financial account C) official settlements account D) reserves account E) trade account Answer: A Topic: Current account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Written and oral communication

105) The current account balance is equal to A) imports - exports + net interest + net transfers. B) imports - exports + net interest - net transfers. C) exports - imports - net interest + net transfers. D) exports - imports + net interest + net transfers. E) exports - imports - net interest - net transfers. Answer: D Topic: Current account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 106) If an investment of $100 million from the United Kingdom is made in the United States, the $100 million is listed as a ________ entry in the ________ account. A) positive; current B) negative; capital and financial C) positive; capital and financial D) negative; current E) positive; official settlements Answer: C Topic: Capital and financial account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 107) If the United States receives $200 billion of foreign investment and at the same time invests a total of $160 billion abroad, then the U.S. A) capital and financial account balance increases by $40 billion. B) current account must be in surplus. C) balance of payments must be negative. D) capital and financial account balance decreases by $40 billion. E) official settlements account balance increases by $40 billion. Answer: A Topic: Capital and financial account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

108) In the balance of payments accounts, changes in U.S. official reserves are recorded in the A) current account. B) capital and financial account. C) official settlements account. D) international currency account. E) international reserves account. Answer: C Topic: Official settlements account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 109) If a country has a current account balance of $100 billion and the official settlements account balance is zero, then the country's capital and financial account balance must be A) equal to $100 billion. B) positive but not necessarily equal to $100 billion. C) equal to -$100 billion. D) negative but not necessarily equal to -$100 billion. E) zero. Answer: C Topic: Balance of payments accounts Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 110) A country that is borrowing more from the rest of the world than it is lending is called a A) net lender. B) net borrower. C) net debtor. D) net creditor. E) net loaner country. Answer: B Topic: Net borrower, net lender Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

111) A debtor nation is a country that A) borrows more from the rest of the world than it lends to it. B) lends more to the rest of the world than it borrows from it. C) during its entire history has invested more in the rest of the world than other countries have invested in it. D) during its entire history has borrowed more from the rest of the world than it has lent to it. E) during its entire history has consistently run a capital account deficit. Answer: D Topic: Debtor nation, creditor nation Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 112) Comparing the U.S. balance of payments in 2018 to the rest of the world, we see that the A) United States has the largest current account surplus. B) U.S. current account is similar in size to most developed nations and has a surplus. C) United States has the largest capital and financial account deficit. D) United States has the largest current account deficit. E) U.S. current account is similar in size to most developed nations and has a deficit. Answer: D Topic: Eye on the global economy, current account balances around the world Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Revised AACSB: Reflective thinking 113) According to the U.S. balance of payments accounts in 2018, U.S. international borrowing is used for A) private and public investment. B) private consumption. C) government expenditure. D) private and public saving. E) private saving and public consumption. Answer: A Topic: U.S. borrowing Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Revised AACSB: Reflective thinking

34.2 The Exchange Rate 1) When a Mexican company purchases a U.S.-made computer, the Mexican company pays for it with A) U.S. dollars. B) Mexican pesos. C) gold. D) Mexican goods and services. E) euros or yen. Answer: A Topic: Foreign exchange market Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 2) The price at which one currency exchanges for another currency is called the A) currency exchange rate. B) net export exchange rate. C) money exchange rate. D) foreign exchange rate. E) value of the dollar. Answer: D Topic: Foreign exchange market Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 3) The foreign exchange rate is defined as the A) rate or the speed with which the currencies of the worlds are traded. B) volume of the world currencies traded. C) price at which one currency exchanges for another. D) equal to the amount of the current account deficit. E) equal to the amount of the capital account deficit. Answer: C Topic: Foreign exchange market Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

4) The exchange rate between the United States and Japan A) consistently increases over time. B) consistently decreases over time. C) is fixed so it does not change. D) fluctuates, sometimes rising and sometimes falling. E) does not exist. Answer: D Topic: Foreign exchange market Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 5) The demand for the U.S. dollar in the foreign exchange market is a derived demand. A derived demand means that the demand is derived from A) the supply of U.S. dollars. B) government policy. C) the demand for U.S. goods, services, and assets. D) the domestic demand for U.S. goods and services. E) the demand by U.S. residents for foreign goods, services, and assets. Answer: C Topic: Foreign exchange market Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 6) When a currency decreases in value relative to another currency, the currency has A) accelerated. B) decelerated. C) depreciated. D) appreciated. E) declined. Answer: C Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

7) Today, one U.S. dollar exchanges for 1.10 euros. The next morning the same dollar exchanges for 1.07 euros. We can conclude that the dollar has ________ and the euro has ________. A) appreciated; appreciated B) depreciated; appreciated C) depreciated; neither appreciated nor depreciated D) appreciated; depreciated E) depreciated; depreciated Answer: B Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 8) In 2015, a dollar could be traded for 100 yen and in 2016 a dollar could be traded for 90 yen. Between these two years, the dollar has become ________ valuable and so the dollar has ________. A) less; appreciated against the yen B) less; depreciated against the yen C) more; appreciated against the yen D) more; depreciated against the yen E) more; appreciated against the dollar Answer: B Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 9) If the exchange rate changes from 1.5 euros per dollar to 1.0 euro per dollar, the euro has A) depreciated against the dollar. B) appreciated against the dollar. C) fallen inversely in value. D) depreciated against the euro. E) appreciated against the euro. Answer: B Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

10) If the exchange rate changes from 1.00 euro per dollar to 1.10 euro per dollar, the dollar has A) depreciated against the euro. B) appreciated against the euro. C) fallen inversely in value. D) appreciated against the dollar. E) depreciated against the dollar. Answer: B Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 11) If the exchange rate changes from 1.00 euro per dollar to 1.10 euros per dollar, the euro has A) depreciated against the euro. B) appreciated against the euro. C) fallen inversely in value. D) appreciated against the dollar. E) depreciated against the dollar. Answer: E Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 12) If the exchange rate changes from 1.10 euros per dollar to 1.00 euro per dollar, the dollar has A) depreciated against the euro. B) appreciated against the euro. C) fallen inversely in value. D) appreciated against the dollar. E) depreciated against the dollar. Answer: A Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

13) When the U.S. dollar rises in value relative to the Mexican peso, the dollar has ________, and when the dollar falls in value, it has ________. A) appreciated; depreciated B) grown; shrunken C) depreciated; appreciated D) been bullish; been bearish E) grown; shrunk Answer: A Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 14) If the dollar falls from 1.25 euros to 1.00 euro, then the dollar has ________ and the euro has ________. A) appreciated; appreciated B) appreciated; depreciated C) depreciated; appreciated D) depreciated; depreciated E) shrunk; grown Answer: C Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 15) When the exchange rate between the U.S. dollar and the euro changes from 1.07 euros per dollar to 0.93 euros per dollar, then the A) euro has depreciated against the dollar. B) U.S. dollar has depreciated against the euro. C) U.S. dollar has appreciated against the euro. D) euro has depreciated against the euro. E) U.S. dollar has depreciated against the dollar. Answer: B Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

16) When the exchange rate between the U.S. dollar and the euro changes from 1.00 euro per dollar to 1.30 euros per dollar, then the A) euro has appreciated against the dollar. B) U.S. dollar has depreciated against the euro. C) U.S. dollar has appreciated against the euro. D) euro has depreciated against the euro. E) U.S. dollar has depreciated against the dollar. Answer: C Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 17) When a currency depreciates, its value has A) remained constant against that of another currency. B) fallen against another currency. C) risen against another currency. D) fluctuated around a particular value. E) been fixed against the value of another country. Answer: B Topic: Depreciation, appreciation Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 18) Which of the following is a factor in determining the demand for the dollar on the foreign exchange market? i. the exchange rate ii. interest rates in the United States and other countries iii. the expected future exchange rate A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

19) When the United States exports goods and services to France, there is an increase in the A) supply of dollars. B) supply of French francs. C) demand for dollars. D) U.S. capital account balance. E) U.S. official settlements account balance. Answer: C Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 20) If the exchange rate rises, the quantity of dollars demanded A) increases and there is movement down along the demand curve for dollars. B) does not change. C) decreases and there is movement up along the demand curve for dollars. D) decreases and there is movement down along the demand curve for dollars. E) increases and there is movement up along the demand curve for dollars. Answer: C Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 21) On the foreign exchange market, an increase in a country's exchange rate A) decreases the quantity demanded of its currency and leads to a movement up along the demand curve. B) increases the quantity demanded of its currency and leads to a movement up along the demand curve. C) increases the quantity demanded of its currency and leads to a movement down along the demand curve. D) decreases the demand for its currency and shifts the demand curve rightward. E) decreases the demand for its currency and shifts the demand curve leftward. Answer: A Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

22) If the exchange rate rises, then the quantity of dollars demanded ________ because with the higher U.S. exchange rate, U.S. exports ________. A) increases; increase B) increases; decrease C) decreases; increase D) decreases; decrease E) does not change; do not change Answer: D Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 23) If the current exchange rate is 1.00 euro per dollar and the expected exchange rate at the end of the month rises to 1.20 euros per dollar, then the demand for dollars ________ because people expect holding of dollars to become ________ profitable. A) increases; more B) increases; less C) decreases; more D) decreases; less E) does not change; neither more nor less Answer: A Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 24) When the exchange rate between the U.S. dollar and the euro changes from 1.30 euros per dollar to 1.00 euro per dollar the dollar has ________ and U.S. goods have become ________ to people in Europe so that quantity of U.S. dollars demanded ________. A) depreciated; cheaper; increases B) depreciated; more expensive; decreases C) depreciated; cheaper; decreases D) appreciated; more expensive; decreases E) appreciated; cheaper; increases Answer: A Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

25) Which of the following statements about the foreign exchange market is correct? A) The higher the expected future exchange rate, the smaller is the expected profit from holding dollars and so the greater is the demand for dollars. B) The lower the expected future exchange rate, the smaller is the expected profit from holding dollars and so the greater is the demand for dollars. C) The higher the expected future exchange rate, the smaller is the expected profit from holding dollars and so the smaller is the demand for dollars. D) The higher the expected future exchange rate, the greater is the expected profit from holding dollars and so the greater is the demand for dollars. E) The lower the expected future exchange rate, the greater is the expected profit from holding dollars and so the greater is the demand for dollars. Answer: D Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 26) Which of the following are reasons why U.S. residents supply dollars to the foreign exchange market? i. to buy U.S. exports ii. to buy foreign real estate iii. to buy foreign bonds A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: E Topic: Law of supply Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 27) If the exchange rate rises, the quantity of dollars supplied A) increases, and there is movement up along the supply curve of dollars. B) increases, and there is movement down along the supply curve. C) decreases, and there is movement down along the supply curve. D) does not change. E) increases with movement down along the supply curve. Answer: A Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 48 Copyright © 2023 Pearson Education Ltd.

28) If the exchange rate falls, the quantity of dollars supplied A) increases, and there is movement up along the supply curve of dollars. B) decreases, and there is movement down along the supply curve of dollars. C) does not change. D) increases, and there is movement down along the supply curve of dollars. E) decreases, and there is movement up along the supply curve of dollars. Answer: B Topic: Law of supply Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 29) In the foreign exchange market, the A) quantity of dollars supplied increases as the exchange rate increases and the supply of dollars does not change. B) quantity of dollars supplied increases as the exchange rate decreases and the supply of dollars does not change. C) supply of dollars increases as the exchange rate increases and the quantity of dollars supplied does not change. D) supply of dollars decreases as the exchange rate increases and the quantity of dollars supplied does not change. E) both the quantity of dollars supplied and the supply of dollars increases as the exchange rate increases. Answer: A Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 30) As the exchange rate ________, the quantity supplied of U.S. dollars ________. A) rises; increases B) falls; increases C) falls; remains the same because it is the supply of U.S. dollars decreases so that the supply curve shifts leftward D) rises; decreases E) rises; remains the same because it is the supply of U.S. dollars increases so that the supply curve shifts rightward Answer: A Topic: Law of supply Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 49 Copyright © 2023 Pearson Education Ltd.

31) The quantity of U.S. dollars supplied in the foreign exchange market is A) fixed at any given exchange rate. B) positively related to the exchange rate. C) negatively related to the exchange rate. D) unrelated to the exchange rate. E) the same as the quantity of for U.S. dollars demanded. Answer: B Topic: Law of supply Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 32) In the foreign exchange market, an increase in the exchange rate leads to A) an increase the quantity of dollars supplied and a rightward shift of the supply curve of dollars. B) an increase in the quantity of dollars demanded and a movement along the demand curve for dollars. C) an increase the quantity of dollars supplied and a movement along the supply curve of dollars. D) an increase in the quantity of dollars demanded and no movement along the demand curve for dollars. E) a decrease the quantity of dollars supplied and a movement along the supply curve of dollars. Answer: C Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 33) When the exchange rate between the U.S. dollar and the euro changes from 1.30 euros per dollar to 1.00 euro per dollar the dollar has ________ and European goods have become ________ to people in the United States so that quantity of U.S. dollars supplied ________. A) depreciated; cheaper; increases B) depreciated; more expensive; decreases C) depreciated; cheaper; decreases D) appreciated; more expensive; decreases E) appreciated; cheaper; increases Answer: B Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

34) As the U.S. exchange rate ________, the price of U.S. imports increases and the quantity supplied of dollars ________. A) falls; increases B) rises; increases C) falls; decreases D) rises; decreases E) falls; does not change Answer: C Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 35) Other things remaining the same, as U.S. imports increase, the quantity of A) U.S. dollars demanded increases. B) foreign currency demanded decreases. C) U.S. dollars supplied decreases. D) foreign currency demanded increases. E) foreign currency supplied increases. Answer: D Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 36) In the foreign exchange market, the demand for dollars decreases and the demand curve shifts leftward if the A) U.S. interest rate differential increases. B) expected future exchange rate rises. C) U.S. interest rate differential decreases. D) U.S. exchange rate rises. E) U.S. exchange rate falls. Answer: C Topic: Change in the expected future exchange rate Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

37) The U.S. interest rate has ________ on the supply of dollars and has ________ on the demand for dollars. A) no effect; no effect B) no effect; an effect C) an effect; no effect D) an effect; an effect E) an effect sometimes; an effect sometimes Answer: D Topic: Change in the U.S. interest rate differential Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 38) In the foreign exchange market, the demand for dollars increases and the demand curve shifts if the A) U.S. interest rate differential increases. B) expected future exchange rate falls. C) U.S. interest rate differential decreases. D) U.S. exchange rate rises. E) U.S. exchange rate falls. Answer: A Topic: Change in the U.S. interest rate differential Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 39) Everything else the same, in the foreign exchange market which of the following increases the demand for U.S. dollars and shifts the demand curve rightward? A) The Japanese interest rate rises. B) The expected future exchange rate falls. C) The U.S. interest rate rises. D) The U.S. exchange rate rises. E) The U.S. exchange rate falls. Answer: C Topic: Change in the U.S. interest rate differential Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

40) If the U.S. interest rate differential rises, then the effect in the foreign exchange market on the demand for dollars is that the A) quantity of dollars demanded decreases. B) quantity of dollars demanded increases. C) demand for dollars increases. D) demand for dollars decreases. E) demand for dollars does not change and the quantity of dollars demanded also does not change. Answer: C Topic: Change in the U.S. interest rate differential Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 41) When the U.S. interest rate differential ________, the demand for dollars ________ and the demand curve for dollars shifts rightward. A) rises; decreases B) rises; increases C) falls; increases D) falls; decreases E) rises; does not change Answer: B Topic: Change in the U.S. interest rate differential Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 42) If the U.S. interest rate rises relative to the interest rate in other countries, then the supply of dollars ________ and the demand for dollars ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: C Topic: Change in the U.S. interest rate differential Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

43) In the foreign exchange market, an increase in the supply of dollars could be the result of A) an increase in the U.S. interest rate differential. B) an increase in the expected future exchange rate. C) a decrease in the U.S. interest rate differential. D) an increase in the exchange rate. E) a decrease in the exchange rate. Answer: C Topic: Change in the U.S. interest rate differential Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 44) If the interest rate rises in the United States relative to other nations, then in the foreign exchange market the demand for dollars ________ and the supply of dollars ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: B Topic: Change in the U.S. interest rate differential Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 45) Suppose interest rates in foreign countries increase relative to the U.S. interest rate. As a result, there is ________ the demand curve for dollars. A) an upward movement along B) a downward movement along C) a leftward shift of D) a rightward shift of E) neither a movement along nor a shift of Answer: C Topic: Change in the U.S. interest rate differential Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

46) When the U.S. interest rate ________ relative to foreign interest rates, the supply of dollars ________ and the supply curve of dollars shifts rightward. A) rises; decreases B) rises; increases C) falls; increases D) falls; decreases E) rises; does not change Answer: C Topic: Change in the U.S. interest rate differential Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 47) If the U.S. interest rate differential decreases, then in the foreign exchange market the A) quantity supplied of dollars decreases. B) quantity supplied of dollars increases. C) supply of dollars decreases. D) supply of dollars increases. E) demand for dollars increases. Answer: D Topic: Change in the U.S. interest rate differential Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 48) ________ increases the supply of dollars in the foreign exchange market. A) An increase in the exchange rate B) A decrease in the exchange rate C) A fall in the interest rate in the U.S. relative to the interest rate in other countries D) A rise in the expected future exchange rate E) A rise in the interest rate in the U.S. relative to the interest rate in other countries Answer: C Topic: Change in the U.S. interest rate differential Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

49) If the U.S. interest rate differential decreases, then in the foreign exchange market the A) quantity demanded of dollars decreases. B) quantity demanded of dollars increases. C) demand for dollars decreases. D) demand for dollars increases. E) supply of dollars decreases. Answer: C Topic: Change in the U.S. interest rate differential Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 50) In the foreign exchange market, if the U.S. interest rate rises relative to interest rates in other nations, then the demand curve for U.S. dollars ________ and the supply curve of U.S. dollars ________. A) shifts to the right; shifts to the right B) shifts to the left; shifts to the right C) shifts to the right; shifts to the left D) shifts to the left; shifts to the left E) does not shift; does not shifts Answer: C Topic: Change in the U.S. interest rate differential Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 51) The ________ the expected future exchange rate, the greater is the expected profit from holding dollars and so the ________. A) lower; supply curve of dollars shifts rightward B) higher; demand curve for dollars shifts leftward C) higher; demand curve for dollars shifts rightward D) lower; demand curve for dollars shifts leftward E) higher; supply curve of dollars shifts rightward Answer: C Topic: Change in the expected future exchange rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

52) If people expect the future exchange rate for dollars will be lower, then in the foreign exchange market the current A) quantity demanded of dollars decreases. B) quantity demanded of dollars increases. C) demand for dollars decreases. D) demand for dollars increases. E) supply of dollars decreases. Answer: C Topic: Change in the expected future exchange rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 53) The ________ the expected future exchange rate, the greater is the expected profit from holding dollars and so the ________. A) lower; supply curve of dollars shifts rightward B) higher; demand curve for dollars shifts leftward C) higher; supply curve of dollars shifts leftward D) lower; demand curve for dollars shifts leftward E) higher; supply curve of dollars shifts rightward Answer: C Topic: Change in the expected future exchange rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 54) In the foreign exchange market, which of the following shifts the demand curve for dollars rightward? A) The expected future exchange rate rises. B) The expected future exchange rate falls. C) The current exchange rate falls. D) The current exchange rate rises. E) None of the above answers is correct. Answer: A Topic: Changes in the expected future exchange rate Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

55) In the foreign exchange market, which of the following shifts the supply curve of dollars leftward? A) The expected future exchange rate rises. B) The expected future exchange rate falls. C) The current exchange rate rises. D) The current exchange rate falls. E) None of the above answers is correct. Answer: A Topic: Changes in the expected future exchange rate Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 56) If the expected future U.S. exchange rate falls, then in the foreign exchange market the current A) quantity supplied of dollars decreases. B) quantity supplied of dollars increases. C) supply of dollars decreases. D) supply of dollars increases. E) demand for dollars increases. Answer: D Topic: Change in the expected future exchange rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 57) The expected future exchange rate has ________ on the supply of dollars and has ________ on the demand for dollars. A) no effect; no effect B) no effect; an effect C) an effect; no effect D) an effect; an effect E) an effect sometimes; an effect sometimes Answer: D Topic: Change in the expected future exchange rate Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

58) If the expected future exchange rate decreases, then the supply of dollars ________ and the demand for dollars ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: B Topic: Change in the expected future exchange rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 59) If the equilibrium exchange rate of the dollar is 1.10 euros per dollar and currently the exchange rate is 0.90 euros per dollar, then there is a ________ of dollars that leads to ________. A) surplus; a rise in the exchange rate B) shortage; the demand curve for dollars shifting rightward C) surplus; the supply curve of dollars shifting leftward D) shortage; a rise in the exchange rate E) shortage; the supply curve of dollars shifting rightward Answer: D Topic: Market equilibrium Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 60) The equilibrium exchange rate is 0.70 euros per dollar. At this exchange rate, the quantity demanded equals the quantity supplied and is $1.3 trillion a day. If the exchange rate is now 0.80 euros per dollar, then A) there is a shortage of dollars and the exchange rate falls. B) there is a surplus of dollars and the exchange rate rises. C) there is no change. D) there is a surplus of dollars and the exchange rate falls. E) there is a shortage of dollars and the exchange rate rises. Answer: D Topic: Market equilibrium Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

61) The equilibrium exchange rate is 0.70 euros per dollar. At this exchange rate, the quantity demanded equals the quantity supplied and is $1.3 trillion a day. If the exchange rate is now 0.60 euros per dollar, then A) there is a shortage of dollars and the exchange rate rises. B) there is a surplus of dollars and the exchange rate rises. C) there is a shortage of dollars and the exchange rate falls. D) there is a surplus of dollars and the exchange rate falls. E) there is no change. Answer: A Topic: Market equilibrium Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 62) Exchange rate changes are A) not very volatile because of offsetting changes in demand and supply. B) very volatile because of government intervention in the market. C) not very volatile because of government intervention. D) very volatile because supply and demand changes reinforce each other. E) infrequent because the exchange rate rarely changes. Answer: D Topic: Exchange rate changes Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 63) In the foreign exchange market, the exchange rate is volatile because the A) demand for dollars changes more frequently than the supply of dollars. B) supply of dollars changes more frequently than the demand for dollars. C) factors that influence the supply of dollars also influence the demand for dollars. D) both the demand curve for dollars and the supply curve of dollars are very flat. E) None of the above is related to the volatility of the exchange rate. Answer: C Topic: Exchange rate changes Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

64) The exchange rate is volatile because A) when a relevant factor changes, demand and supply tend to change in opposite directions. B) when a relevant factor changes, demand and supply tend to change in the same direction. C) the demand curve is vertical. D) the supply curve is vertical. E) the demand curve and the supply curve are horizontal. Answer: A Topic: Exchange rate changes Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 65) The exchange rate can be very volatile, yet the quantity of dollars traded might not change much because A) there is only limited quantity of dollars in the foreign exchange market. B) the Fed is constantly intervening by buying and selling dollars. C) supply of dollars and the demand for dollars often change in opposite directions. D) supply of dollars and the demand for dollars often change in the same directions. E) both the demand curve for dollars and the supply curve of dollars are horizontal. Answer: C Topic: Exchange rate changes Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 66) In the foreign exchange market, an increase in the U.S. interest rate leads to ________ in the exchange rate because the supply of dollars ________. A) a rise; increases B) a rise; decreases C) a fall; increases D) a fall; decreases E) no change; does not change Answer: B Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

67) When the U.S. interest rate rises, the demand for U.S. dollars ________ and the exchange rate ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) does not change; rises Answer: A Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 68) If the U.S. interest rate differential falls, then the exchange rate A) definitely rises. B) definitely falls. C) does not change. D) falls only if it was the U.S. interest rate that changed. E) rises only if it was the foreign interest rate that changed. Answer: B Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 69) An increase in the U.S. interest rate relative to other countries will lead to ________ in the supply of dollars and a ________ in the exchange rate. A) an increase; rise B) an increase; fall C) a decrease; rise D) a decrease; fall E) no change; rise Answer: C Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

70) Yesterday, the dollar was trading in the foreign exchange market at 1.10 euros per dollar. Today, the dollar is trading at 1.05 euros per dollar. The dollar has ________ and a possible reason for the change is ________ in the U.S. interest rate. A) appreciated; an increase B) appreciated; a decrease C) depreciated; an increase D) depreciated; a decrease E) depreciated; because there has been no change Answer: D Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 71) An increase the U.S. interest rate differential ________ the demand for U.S. dollars and ________ the exchange rate. A) decreases; depreciates B) decreases; appreciates C) increases; depreciates D) increases; appreciates E) does not change; does not change Answer: D Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 72) An increase the U.K. interest rate ________ the demand for U.S. dollars and ________ the exchange rate. A) decreases; depreciates B) decreases; appreciates C) increases; depreciates D) increases; appreciates E) does not change; does not change Answer: A Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

73) If the expected future exchange rate rises, the demand for U.S. dollars ________ and the exchange rate ________. A) decreases; depreciates B) decreases; appreciates C) increases; depreciates D) increases; appreciates E) does not change; does not change Answer: D Topic: Equilibrium exchange rate, change in the expected future exchange rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 74) If the expected future exchange rate falls, the supply of U.S. dollars ________ and the exchange rate ________. A) decreases; depreciates B) decreases; appreciates C) increases; depreciates D) increases; appreciates E) does not change; does not change Answer: C Topic: Equilibrium exchange rate, change in the expected future exchange rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 75) Yesterday, the dollar was trading in the foreign exchange market at 1.10 euros per dollar. Today, the dollar is trading at 1.20 euros per dollar. The dollar has ________ and a possible reason for the change is ________ in the expected future exchange rate. A) appreciated; an increase B) appreciated; a decrease C) depreciated; an increase D) depreciated; a decrease E) appreciated; because there has been no change Answer: A Topic: Equilibrium exchange rate, change in the expected future exchange rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

76) When people expect that the future exchange rate will be lower, they ________ the supply of dollars and the current exchange rate ________. A) increase; rises B) increase; falls C) decrease; rises D) decrease; falls E) do not change; rises Answer: B Topic: Equilibrium exchange rate, change in the expected future exchange rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 77) Purchasing power parity is defined as A) a constant value for a currency. B) an equal value of money across currencies. C) a currency whose value falls. D) a currency whose value rises. E) an equal value of interest rates across currencies. Answer: B Topic: Purchasing power parity Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 78) Purchasing power parity determines the exchange rate in A) the long run. B) the short run. C) the long run and the short run. D) theory only, but not in reality. E) nations that do not allow their exchange rate to fluctuate. Answer: A Topic: Purchasing power parity Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

79) In the long run, the exchange rate between two currencies is A) constant. B) fixed. C) influenced by purchasing power parity. D) undefined. E) determined so that the current account balance equals zero. Answer: C Topic: Purchasing power parity Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 80) Suppose that a currency's value is found to be overvalued by using purchasing power parity. Then A) we know when and how much the currency will appreciate. B) the currency will depreciate in the future but we don't know when. C) the currency will appreciate in the future but we don't know when. D) we know when and how much the currency will depreciate. E) the interest rate in the country will change in order to restore purchasing power parity. Answer: B Topic: Purchasing power parity Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 81) Purchasing power parity can be used as A) a short-term gauge, but in the long run large deviations in currency values can exist. B) a short-term and long-term gauge of relative currency values. C) a long-run gauge, but in the short run large deviations in currency values can exist. D) an indicator of how interest rates will change in the short run. E) an indicator of how interest rates will change in the long run. Answer: C Topic: Purchasing power parity Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

82) If purchasing power parity exists and the exchange rate is 1.50 U.S. dollars per British pound, than a latte that has a price of $4.00 in San Jose, California, has a price of ________ in London, England. A) 8.00 pounds B) 4.00 pounds C) 6.00 pounds D) 2.67 pounds E) 0.37 pounds Answer: D Topic: Purchasing power parity Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 83) Assume the exchange rate is 1 U.S. dollar equals 1.10 Canadian dollars. If purchasing power parity is correct, a DVD that has a price of $10 in Rochester, New York, in Canada has a price of ________ Canadian dollars. A) 11.00 B) 9.09 C) 10.00 D) 11.11 E) 10.10 Answer: A Topic: Purchasing power parity Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 84) If the interest rate on a bank deposit in the United States is 3 percent while a similar deposit earns 6 percent in Britain, then we could expect that deposits would flow to A) Britain regardless of exchange rate expectations. B) the United States regardless of exchange rate expectations. C) Britain if the pound is expected to depreciate less than 3 percent. D) Britain if the pound is expected to depreciate more than 3 percent. E) the United States if the dollar is expected to appreciate less than 3 percent. Answer: C Topic: Interest rate parity Skill: Level 4: Applying models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

85) If the Fed wants to maintain a dollar exchange rate of 1.20 euros per dollar but the exchange rate rises, then in the short run the Fed can A) sell dollars and buy euros. B) buy dollars and sell euros. C) buy dollars and buy euros. D) sell dollars and sell euros. E) do nothing. Answer: A Topic: Fed Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 86) The Fed wants to keep the dollar at 0.80 euros per dollar. If the demand for dollars increases A) the Fed buys dollars to decrease the supply of dollars and maintain the exchange rate. B) the Fed sells dollars to decrease the supply of dollars and maintain the exchange rate. C) the Fed buys dollars to increase the supply of dollars and maintain the exchange rate. D) the Fed sells dollars to increase the supply of dollars and maintain the exchange rate. E) the Fed conducts persistent intervention on one side of the market. Answer: D Topic: Fed Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 87) To appreciate the U.S. dollar against the Mexican peso, in the foreign exchange market the Fed could ________ dollars and ________ pesos. A) buy; buy B) buy; sell C) sell; buy D) sell; sell E) None of the above answers is correct because the Fed cannot affect the U.S. exchange rate. Answer: B Topic: Fed Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

88) If one day the dollar is trading at 1.00 euro per dollar and the next day the exchange rate is 0.88 euros per dollar, one possible factor that might have led to this change is A) an increase in the U.S. interest rate. B) an increase in the expected future exchange rate. C) the Fed selling dollars. D) the Fed buying dollars. E) a decrease in the European interest rate. Answer: C Topic: Fed Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 89) The foreign exchange market is the market in which A) all international transactions occur. B) currencies are exchanged solely by governments. C) goods and services are exchanged between governments. D) the currency of one country is exchanged for the currency of another. E) the world's governments collect their tariff revenue. Answer: D Topic: Foreign exchange market Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 90) When Del Monte, an American company, purchases Mexican tomatoes, Del Monte pays for the tomatoes with A) Canadian dollars. B) Mexican pesos. C) gold. D) Mexican goods and services. E) euros. Answer: B Topic: Foreign exchange market Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

91) If today the exchange rate is 1.00 euro per dollar and tomorrow the exchange rate is 0.98 euros per dollar, then the dollar ________ and the euro ________. A) appreciated; appreciated B) appreciated; depreciated C) depreciated; appreciated D) depreciated; depreciated E) depreciated; did not change Answer: C Topic: Depreciation, appreciation Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 92) In the foreign exchange market, as the U.S. exchange rate rises, other things remaining the same, the A) quantity of dollars demanded increases. B) demand curve for dollars shifts rightward. C) demand curve for dollars shifts leftward. D) quantity of dollars demanded decreases. E) supply curve of dollars shifts rightward. Answer: D Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 93) In the foreign exchange market, the demand for dollars increases and the demand curve for dollars shifts rightward if the A) U.S. interest rate differential increases. B) expected future exchange rate falls. C) foreign interest rate rises. D) U.S. interest rate falls. E) exchange rate falls. Answer: A Topic: Change in the U.S. interest rate differential Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

94) As the exchange rate ________, the quantity supplied of U.S. dollars ________. A) rises; increases B) falls; increases C) falls; remains the same D) rises; decreases E) rises; remains the same Answer: A Topic: Law of supply Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 95) In the foreign exchange market, the supply curve of dollars is A) upward sloping. B) downward sloping. C) vertical. D) horizontal. E) identical to the demand curve for dollars. Answer: A Topic: Law of supply Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 96) Everything else remaining the same, in the foreign exchange market, which of the following increases the supply of U.S. dollars? A) The European interest rate rises. B) The expected future exchange rate rises. C) The U.S. interest rate rises. D) The U.S. interest rate differential increases. E) The exchange rate falls. Answer: A Topic: Change in the U.S. interest rate differential Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

97) When there is a shortage of dollars in the foreign exchange market, the A) demand curve for dollars shifts leftward to restore the equilibrium. B) U.S. exchange rate will appreciate. C) U.S. exchange rate will depreciate. D) supply curve of dollars shifts leftward to restore the equilibrium. E) supply curve of dollars shifts rightward to restore the equilibrium. Answer: B Topic: Market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 98) In the foreign exchange market, when the U.S. interest rate rises, the supply of dollars ________ and the foreign exchange rate ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) increases; does not change Answer: C Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 99) A situation in which money buys the same amount of goods and services in different currencies is called A) exchange rate equilibrium. B) purchasing power parity. C) exchange rate surplus. D) exchange rate balance. E) a fixed exchange rate. Answer: B Topic: Purchasing power parity Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

100) Interest rate parity occurs when A) the interest rate in one currency equals the interest rate in another currency when exchange rate changes are taken into account. B) interest rate differentials are always maintained across nations. C) interest rates are equal across nations. D) prices are equal across nations when exchange rates are taken into account. E) interest rates no longer affect the exchange rate. Answer: A Topic: Interest rate parity Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking

34.3 Chapter Figures

The figure above shows the demand curve for dollars in the foreign exchange market. 1) If the exchange rate rises as shown by the arrow, the price of American exports to foreigners will be ________, and foreign nations will demand ________ dollars in order to buy ________ American exports. A) cheaper; more; more B) higher; more; more C) cheaper; fewer; fewer D) cheaper; fewer; more E) higher; fewer; fewer Answer: E Topic: Law of demand Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

2) Which of the following factors could lead to an upward movement along the demand curve as indicated by the arrow? i. an increase in the U.S. interest rate ii. a decrease in the U.S. interest rate iii. an increase in the expected future U.S. exchange rate. A) i only B) ii only C) i and iii D) ii and iii E) None of the factors could lead to the upward movement illustrated by the arrow. Answer: E Topic: Law of demand Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

The figure above shows demand curves for dollars in the foreign exchange market. 3) The demand curve shifts rightward from D0 to D1 when the U.S. interest rate ________ and foreign interest rates are unchanged. The demand curve shifts rightward from D0 to D1 when the expected future exchange rate ________. A) rises; falls B) falls; rises C) rises; rises D) falls; falls E) None of the above answers is correct because the factors mentioned lead to movements along the demand curve and not to shifts of the demand curve. Answer: C Topic: Changes in the demand for dollars Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

4) Based on the figure above, which of the following factors could lead the demand curve to shift rightward from D0 to D1? A) a rise in the U.S. exchange rate B) a fall in the U.S. exchange rate C) a rise in the U.S. interest rate D) a fall in expected future U.S. exchange rate E) a rise in foreign interest rates Answer: C Topic: Changes in the demand for dollars Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 5) Based on the figure above, which of the following factors could lead the demand curve to shift leftward from D0 to D2? A) a rise in the U.S. exchange rate B) a fall in the U.S. exchange rate C) a rise in the U.S. interest rate D) a rise in expected future U.S. exchange rate E) a fall in foreign interest rates Answer: D Topic: Changes in the demand for dollars Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 6) Based on the figure above, which of the following factors could lead the demand curve to shift leftward from D0 to D2? A) a rise in the U.S. exchange rate B) a fall in the U.S. exchange rate C) a rise in the U.S. interest rate D) a fall in expected future U.S. exchange rate E) a rise in foreign interest rates Answer: E Topic: Changes in the demand for dollars Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

The figure above shows the supply curve of dollars in the foreign exchange market. 7) If the exchange rate rises as shown by the arrow in the figure above, the price of imports coming into the United States will be ________, Americans will supply ________ dollars in order to get the foreign exchange to purchase ________ imported goods. A) lower; fewer; more B) higher; more; more C) lower; fewer; fewer D) lower; more; more E) higher; fewer; more Answer: D Topic: Law of supply Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

The figure above shows supply curves of dollars in the foreign exchange market. 8) The supply curve shifts rightward from S0 to S2 when the U.S. interest rate ________ and foreign interest rates are unchanged. The supply curve shifts rightward from S0 to S2 when the expected future exchange rate ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls E) None of the above answers is correct because the factors mentioned lead to movements along the demand curve and not to shifts of the demand curve. Answer: D Topic: Changes in the supply of dollars Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

9) Based on the figure above, which of the following factors could lead the supply curve to shift rightward from S0 to S2? A) a rise in the U.S. exchange rate B) a fall in the U.S. exchange rate C) a fall in the U.S. interest rate D) a rise in expected future U.S. exchange rate E) a fall in foreign interest rates Answer: C Topic: Changes in the supply of dollars Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 10) Based on the figure above, which of the following factors could lead the supply curve to shift leftward from S0 to S1? A) a rise in the U.S. exchange rate B) a fall in the U.S. exchange rate C) a fall in the U.S. interest rate D) a rise in expected future U.S. exchange rate E) a rise in foreign interest rates Answer: D Topic: Changes in the supply of dollars Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 11) Based on the figure above, which of the following factors could lead the supply curve to shift leftward from S0 to S1? A) a rise in the U.S. exchange rate B) a fall in the U.S. exchange rate C) a fall in the U.S. interest rate D) a rise in expected future U.S. exchange rate E) a fall in foreign interest rates Answer: E Topic: Changes in the supply of dollars Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

The figure above shows the market for foreign exchange in 2001 and 2009. 12) Which of the following could have led to the shifts illustrated in the figure above? i. The U.S. exchange rate was expected to depreciate between 2001 and 2009. ii. The U.S. exchange rate was expected to appreciate between 2001 and 2009. iii. The U.S. interest rate rose relative to interest rates in other countries between 2001 and 2009. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: A Topic: Exchange rate changes Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

13) Which of the following could have led to the shifts illustrated in the figure above? i. The U.S. exchange rate was expected to depreciate between 2001 and 2009. ii. The U.S. exchange rate was expected to appreciate between 2001 and 2009. iii. The U.S. interest rate fell relative to interest rates in other countries between 2001 and 2009. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: D Topic: Exchange rate changes Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 14) What would the Fed have done if it had tried to keep the exchange rate at its 2001 level? A) buy dollars and sell euros B) buy dollars and buy euros C) sell dollars and buy euros D) sell dollars and sell euros E) None of the above is correct because the Fed cannot affect the exchange rate. Answer: A Topic: The Fed in the market for foreign exchange Skill: Level 4: Applying models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills 15) Suppose the Fed had tried to keep the exchange rate at its 2001 level. In that case the Fed would have ________ dollars and its foreign reserves would have ________. A) bought; decreased B) sold; decreased C) bought; increased D) sold; increased E) None of the above is correct because the Fed cannot affect the exchange rate. Answer: A Topic: The Fed in the market for foreign exchange Skill: Level 4: Applying models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

34.4 Integrative Questions 1) Which of the following generally becomes positive when the value of U.S. exports exceeds the value of U.S. imports? A) the exchange rate B) the balance of payments account C) capital and financial account D) current account E) the official settlements account Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 2) For many years, U.S. investment has exceeded savings and government expenditure has exceeded taxes. These imbalances (deficits) have been financed through international ________ by the United States as shown by the surplus on the balance of payments ________ account. A) borrowing; capital and financial B) lending; current C) borrowing; current D) lending; official settlements E) borrowing; official settlements Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 3) If the exchange rate appreciates, then the A) quantity of dollars demanded decreases. B) quantity of dollars demanded increases. C) demand for dollars decreases. D) demand for dollars increases. E) supply of dollars decreases. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

4) If the exchange rate depreciates, then the A) quantity of dollars demanded decreases. B) quantity of dollars demanded increases. C) demand for dollars decreases. D) demand for dollars increases. E) supply of dollars decreases. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 5) If the exchange rate is constant and U.S. exports increase, then in the foreign exchange market the A) quantity of U.S. dollars demanded decreases. B) quantity of U.S. dollars demanded increases. C) demand for U.S. dollars decreases. D) demand for U.S. dollars increases. E) supply of U.S. dollars increases. Answer: D Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking 6) If the exchange rate is constant and U.S. imports increase, then in the foreign exchange market the A) quantity of U.S. dollars supplied decreases. B) quantity of U.S. dollars supplied increases. C) supply of U.S. dollars decreases. D) supply of U.S. dollars increases. E) demand for U.S. dollars increases. Answer: D Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking

7) If the prices for the same goods and services are different in two nations, the exchange rate adjusts over the long run to achieve A) zero net exports for each nation. B) purchasing power parity between the two currencies. C) balance of payments account between the two nations equal to zero. D) interest rate parity. E) a zero current account balance between the two nations. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 8) Changes in a currency's exchange rate adjust immediately to insure that A) purchasing power parity always prevails. B) interest rate parity always prevails. C) official settlements account parity always prevails. D) net exports always equal zero. E) current account balance equals zero. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 9) If the U.S. dollar depreciates against the euro, what can the Fed do to keep the dollar's exchange rate stable? A) nothing B) decrease U.S. imports by increasing tariffs C) sell dollars in the foreign exchange market D) buy dollars in the foreign exchange market E) buy euros in the foreign exchange market Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

10) If the price in Japan of a U.S. dollar becomes a larger number of yen, the U.S. dollar has ________. The yen has ________ because it buys ________ dollars. A) appreciated; depreciated; fewer B) appreciated; depreciated; more C) appreciated; appreciated; fewer D) depreciated; appreciated; more E) appreciated; appreciated; more Answer: A Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Application of knowledge 11) If the Fed tries to prevent the U.S. dollar exchange rate from rising, the Fed ________ U.S. dollars, ________ foreign currency, and U.S. official reserves ________. A) buys; sells; increase B) sells; buys; decrease C) sells, buys; increase D) sells; sells; increase E) buys; buys; increase Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 12) If the dollar rises against the euro, the dollar buys ________ euros, the euro ________ and the dollar ________. A) more; appreciates; depreciates B) less, depreciates; appreciates C) less; appreciates; depreciates D) more; depreciates; appreciates E) more; depreciates; depreciates Answer: D Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills

13) The United States is a ________ nation because it pays ________ in interest to the rest of the world than it receives in ________ from the rest of the world. A) debtor; more; interest B) debtor; less; interest C) debtor; more; cash D) debtor; less; cash E) creditor; more; interest Answer: A Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 14) The private sector balance is saving ________ investment. If saving exceeds investment, a private sector ________ is lent to other sections. If investment exceeds saving, borrowing from other sectors finances a private sector ________. A) minus; surplus; surplus B) minus; deficit; surplus C) plus; surplus; deficit D) plus; deficit; deficit E) minus; surplus; deficit Answer: E Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills 15) The government sector balance is equal to net taxes ________ government expenditure on goods and services. If that number is ________, a government sector surplus is lent to other sectors; if that number is ________, borrowing from other sectors must finance a government deficit. A) minus; positive; negative B) minus; negative; negative C) minus; positive; positive D) minus; negative; positive E) plus; positive; negative Answer: A Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytic skills

16) If the exchange rate ________, the quantity of dollars demanded ________ and there is a movement up along the ________ curve for dollars. A) rises; increases; demand B) falls; decreases; demand C) rises; decreases; demand D) rises; decreases; supply E) falls; increases; supply Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytic skills 34.5 Essay: Financing International Trade 1) Explain the three components of the balance of payments accounts. What must these three balances sum to? Answer: The balance of payments has three sections: the current account, the capital and financial account, and the official settlements account. The current account keeps track of transactions in goods and services as well as net interest and net transfers. It equals exports minus imports plus net interest plus net transfers. The capital and financial account keeps a record of investment. It equals foreign investment in the United States minus U.S. investment abroad. The official settlements account keeps track of changes in U.S. official reserves. The sum of the three balances must equal zero. Topic: Balance of payments Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Written and oral communication 2) Name and briefly describe the three balance of payments accounts. Answer: The current account is a record of international receipts and payments for imports, exports, net interest and net transfers. The capital and financial account is a record of net foreign investment, that is, investment in the United States minus U.S. investment abroad. The official settlements account is a record of the change in U.S. official reserves. Topic: Balance of payments Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

3) "The current account records foreign investment in a nation minus investment abroad." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The current account equals exports minus imports plus net interest plus net transfers. The capital and financial account records foreign investment in a nation minus investment abroad. Topic: Current account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 4) What balance of payment account records foreign investment between countries? Answer: The capital and financial account records foreign investment between countries. The U.S. capital and financial account equals foreign investment in the United States minus U.S. investment abroad. Topic: Capital and financial account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 5) Define official settlements account and U.S. official reserves. Discuss the differences between the two terms. Answer: The official settlements account is the record of the change in a country's official reserves. U.S. official reserves are the U.S. government's holdings of foreign currency. If the U.S. official reserves increases, the official settlements account balance is negative. The reason the official settlements account decreases is that holding foreign money is similar to investing abroad insofar as both buying foreign money and buying foreign assets (that is, investing abroad) use (rather than acquire) U.S. dollars. Topic: Official settlements account Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Written and oral communication 6) If U.S. official reserves increase, is the official settlements account balance positive, negative, or unaffected? Answer: If U.S. official reserves increase, the official settlements account balance is negative. Topic: Official settlements account Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking

7) "If the official settlements balance is zero, a current account surplus implies an equal capital and financial account deficit." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is correct. The sum of the current account balance plus the capital and financial account balance plus the official settlements account must equal zero. If the official settlements account balance is zero, then the sum of the current account balance plus the capital and financial account balance must equal zero. Therefore a current account surplus must be "balanced" by an equally-sized capital and financial account deficit. Topic: Balance of payments accounts Skill: Level 1: Definition Section: Checkpoint 34.1 Status: Old AACSB: Written and oral communication 8) Looking at the U.S. balance of payments for the last three decades, how have the current account and the capital and financial account changed? Answer: Since the early 1980s, the U.S. current account has been negative and sometimes quite large. The U.S. capital and financial account has more or less mirrored the current account, only it has been positive rather than negative. Thus when the current account deficit is small, the capital and financial account surplus is small and when the current account deficit is large, the capital and financial account surplus is large. Topic: Eye on the past, the U.S. balance of payments Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Written and oral communication 9) Define net borrower, net lender, creditor nation, and debtor nation. Discuss the difference between a net borrower and a debtor nation. Answer: A country that is borrowing more from the rest of the world than it is lending to the rest of the world is a net borrower. A country that is lending more to the rest of the world than it borrows from the rest of the world is a net lender. A country that during its entire history has borrowed more from the rest of the world than it has lent to the rest of the world is a debtor nation. A country that has invested more in the rest of the world than other countries have invested in it is a creditor nation. A net borrower is a country that is currently borrowing whereas a debtor nation has a stock of outstanding debt. Borrowing is a flow variable and the outstanding debt is a stock. Thus a net borrower could be a creditor nation that is currently borrowing or it could be a debtor nation that is currently borrowing and thereby increasing its debt. Topic: Net lender, net borrower Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Written and oral communication

10) When a nation has no funds to finance economic development, how can it acquire the needed funds? Is the country a net lender or a net borrower? Answer: Funds for development can be borrowed from other nations. In this case, the borrowing nation is a net borrower in its capital account. Topic: Borrowers and lenders, debtors and creditors Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Reflective thinking 11) "Although the United States is running a large current account deficit, it is still ranked as a major international net lender." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. Aside from changes in the official settlements account, any nation that is running a current account deficit must be paying for the excess of imports over exports by borrowing from abroad. The United States is no exception and with its large current account deficits, the United States is a large net borrower from abroad. Topic: Net lender, net borrower Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Written and oral communication 12) What is a "debtor nation?" Is the United States a debtor nation? Answer: A debtor nation is a country that during its entire history has borrowed more from the rest of the world than it has lent to it. Although the United States was a creditor nation until the 1980s, its borrowing that started during the 1980s means that today the United States is a debtor nation. Topic: Debtor nation, creditor nation Skill: Level 2: Using definitions Section: Checkpoint 34.1 Status: Old AACSB: Written and oral communication 13) If imports are $1,200 billion and exports are $1,300 billion, while net interest income and net transfers are zero, what is the current account balance? Answer: The current account balance equals exports minus imports, or $1,300 billion minus $1,200 billion, which is $100 billion. Topic: Current account Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

14) During this year, a country reports imports of $1,000 billion, exports of $1,100 billion, foreign investment in the country of $900 billion, investment abroad of $1,200 billion, net interest and net transfers of zero. What is the country's current account balance? Answer: The current account balance is $100 billion. Topic: Current account Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 15) If the current account balance is $235 billion and U.S. official reserves increased by $35 billion, what is the official settlements account balance and the capital and financial account balance? Answer: The official settlements account equals the negative of the change in official reserves, so the official settlements account balance is -$35 billion. Then, the sum of the current account balance plus the capital and financial account balance plus the official settlements account balance equals zero, which means that the capital and financial account balance must equal $200 billion. Topic: Balance of payments accounts Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

The table has some of the U.S. balance of payments account. 16) The table above gives some of the balance of payments accounts of the United States in 2017. a. What is the current account balance? b. What is the capital and financial account balance? c. What is the official settlements account balance? Answer: a. The current account balance is $200 billion. b. The capital and financial account balance is -$220 billion. c. The official settlements account balance is $20 billion. Topic: Balance of payments accounts Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills

17) The table above gives some of the balance of payments accounts of the United States in 2025. a. What is the current account balance? b. What is the capital and financial account balance? c. What is the official settlements account balance? d. What is the balance of all account payments? Answer: a. The current account balance is $345 billion. b. The capital and financial account balance is -$350 billion. c. The official settlements account balance is $5 billion. d. The balance of all account payments is zero. Topic: Balance of payments accounts Skill: Level 3: Using models Section: Checkpoint 34.1 Status: Old AACSB: Analytic skills 34.6 Essay: The Exchange Rate 1) In the foreign exchange market, how will each of the following influences affect the demand for dollars and the demand curve for dollars? a. an increase in the exchange rate b. an increase in the U.S. interest rate c. a fall in the expected future exchange rate Answer: a. The increase in the exchange rate decreases the quantity of dollars demanded and creates an upward movement along the demand curve for dollars. b. An increase in the U.S. interest rate increases the demand for dollars and shifts the demand curve for dollars rightward. c. A fall in the expected future exchange rate decreases the demand for dollars and shifts the demand curve for dollars leftward. Topic: Demand for dollars Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

2) Name three factors in the foreign exchange market that affect either the quantity of dollars demanded or the demand for dollars. Discuss whether the factor increases or decreases the number of dollars people want to hold. Answer: Three factors are the exchange rate, the U.S. interest rate differential, and the expected future exchange rate. If the exchange rate rises, the quantity of dollars demanded decreases. If the U.S. interest rate differential is larger (either because the U.S. interest rate rose or because foreign interest rates fell) then the demand for dollars increases. And, if the expected future value of the exchange rate is higher, then the current demand for dollars increases. Topic: Demand for dollars Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication 3) Why do people and firms in the United States supply dollars to the foreign exchange market? Answer: People and firms supply dollars in order to obtain foreign currency with which to purchase foreign goods and services and/or foreign assets. Topic: Supply of dollars Skill: Level 1: Definition Section: Checkpoint 34.2 Status: Old AACSB: Reflective thinking 4) Explain the effect on the demand for dollars in the foreign exchange market of an increase in the U.S. interest rate differential. Answer: As the U.S. interest rate differential increases, international investors can obtain a greater return by holding U.S. assets. Therefore these investors want to buy more U.S. assets, such as bonds. But in order to buy more U.S. assets, they need more dollars. Hence the increase in the U.S. interest rate differential leads to an increase in the demand for dollars in the foreign exchange market and so the demand curve for U.S. dollars shifts rightward. Topic: Change in the U.S. interest rate differential Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication 5) In the foreign exchange market, how does a fall in the U.S. interest rate affect the supply of dollars? Answer: The fall in the U.S. interest rate increases the supply of dollars as U.S. residents supply more dollars in order to obtain foreign currency with which to buy foreign assets that now have relatively higher interest rates. Topic: Change in the U.S. interest rate differential Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication 95 Copyright © 2023 Pearson Education Ltd.

6) In the foreign exchange market, how does a change in expected future U.S. exchange rate affect the supply of dollars? Answer: Changes in the expected future exchange rate change the supply of dollars. If the expected future exchange rate falls, the supply of dollars increases and the supply curve shifts rightward because the expected profit from holding dollars decreases. If the expected future exchange rate rises, the supply of dollars decreases and the supply curve shifts leftward because the expected profit from holding dollars increases. Topic: Change in the expected future exchange rate Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication 7) In the foreign exchange market, how does a change in expected future U.S. exchange rate affect the demand for dollars? Answer: Changes in the expected future exchange rate change the demand for dollars. If the expected future exchange rate falls, the demand for dollars decreases and the demand curve shifts leftward because the expected profit from holding dollars decreases. If the expected future exchange rate rises, the demand for dollars increases and the demand curve shifts rightward because the expected profit from holding dollars increases. Topic: Change in the expected future exchange rate Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication 8) What happens in the foreign exchange market if the U.S. interest rate increases? What is the effect on the exchange rate? Answer: In the foreign exchange market, the increase in the U.S. interest rate increases the demand for dollars and the demand curve for dollars shifts rightward. The increase in the interest rate also decreases the supply of dollars and the supply curve of dollars shifts leftward. As a result, the exchange rate rises so that the dollar appreciates. Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication

9) "In the foreign exchange market, if the demand for the U.S. dollar increases, the U.S. dollar appreciates in value." Briefly explain whether the previous statement is correct or incorrect. Answer: The statement is correct. The increase in the demand for dollars shifts the demand curve for dollars rightward and creates a shortage of dollars at the initial exchange rate. This shortage puts upward pressure on the exchange rate and so the exchange rate rises to its new equilibrium value. Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication 10) Why can exchange rates be very volatile? Answer: Exchange rates can be volatile because in the foreign exchange market the factors that affect the supply also affect the demand and they reinforce each other. For instance, an increase in demand (which raises the exchange rate) often is accompanied by a decrease in the supply (which also raises the exchange rate). As a result, the exchange rate soars higher. Topic: Exchange rate changes Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication 11) What are the "deep" factors that change exchange rate expectations? Answer: The "deep" factors that change exchange rate expectations are purchasing power parity and interest rate parity. Purchasing power parity is the proposition that money buys the same amount of goods and services in different currencies differences. If purchasing power parity does not prevail, in the long run the exchange rate changes so that it holds. People realize this change will occur and so it factors into their expectations of the exchange rate. Interest rate parity is the proposition that the interest rate in one currency equals the interest rate in another currency when exchange rate changes are taken into account. If interest rate parity does not prevail, the exchange rate changes immediately so that it holds. People realize that interest rate parity always prevails so it factors into their expectations of the exchange rate. Topic: Purchasing power parity, interest rate parity Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication

12) "Fluctuations in exchange rates, other things remaining the same, create a situation in which money buys the same amount of goods and services in different currencies." What does the previous statement describe? Will these fluctuations occur in the short run or the long run? Answer: The statement describes purchasing power parity, the proposition that money will buy the same amount of goods and services in different currencies. The effects of purchasing power parity will change the exchange rate in the long run. In the short run, deviations from purchasing power parity can occur. Topic: Purchasing power parity Skill: Level 2: Using definitions Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication 13) Explain how the Fed intervenes in the foreign exchange market and what the effects are of the Fed's actions. Answer: The Fed changes the value of the exchange rate by buying or selling dollars in the foreign exchange market. If the Fed deems it necessary to appreciate the exchange rate (raise the exchange rate) it will buy dollars. By so doing it increases the demand for dollars and thereby raises the exchange rate. If the Fed wants to depreciate the exchange rate (lower the exchange rate) the Fed will sell dollars. By selling dollars the Fed will increase the supply of dollars and lower the exchange rate. Topic: Fed Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication 14) If the Fed wants to lower the U.S. exchange rate, what action should it take in the foreign exchange market? Why does the action lower the exchange rate? Answer: To lower the exchange rate, the Fed should sell dollars and buy foreign currency. By selling dollars, the Fed increases the supply of dollars, which lowers the U.S. exchange rate. Topic: Fed Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Written and oral communication

15) In the figure above, illustrate the effect of an increase in the U.S. interest rate. What is the effect on the foreign exchange rate? Answer:

The figure above shows the effect of the increase in the U.S. interest rate. The demand for dollars increases and the demand curve shifts rightward. The supply of dollars decreases and the supply curve shifts leftward. The equilibrium exchange rate rises, to 100 yen per dollar in the figure. Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills

16) The figure above illustrates the U.S. foreign exchange market. Illustrate how the exchange rate changes if the expected future exchange rate falls. Does the dollar appreciate or depreciate? Answer:

The fall in the expected future exchange rate decreases the demand for dollars and increases the supply. The demand curve shifts leftward and the supply curve shifts rightward. As shown in the figure, the exchange rate falls so the dollar depreciates. Topic: Equilibrium exchange rate, change in the U.S. interest rate Skill: Level 3: Using models Section: Checkpoint 34.2 Status: Old AACSB: Analytic skills