TEST BANK FOR Macroeconomics 11th Edition By Michael Parkin by StudyGuide

Macroeconomics, 11e (Parkin) Chapter 1 What Is Economics? 1 Definition of Economics 1) All economic questions are about A) how to make money. B) what to produce. C) how to cope with scarcity. D) how to satisfy all our wants. Answer: C Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 2) All economic questions arise because we A) want more than we can get. B) want more than we need. C) have an abundance of resources. D) have limited wants that need to be satisfied. Answer: A Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 3) Economics is best defined as the study of how people, businesses, governments, and societies A) choose abundance over scarcity. B) make choices to cope with scarcity. C) use their infinite resources. D) attain wealth. Answer: B Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4) Scarcity is a situation in which A) people cannot satisfy all their wants. B) most people can get only bare necessities. C) people can satisfy all their wants. D) some people can get all they want and some cannot. Answer: A Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 5) Economists point out that scarcity confronts A) neither the poor nor the rich. B) the poor but not the rich. C) the rich but not the poor. D) both the poor and the rich. Answer: D Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning 6) Scarcity is A) our inability to satisfy all our wants. B) a situation that exists during economic recessions but not during economic booms. C) eliminated by choices. D) an economic problem only for poor people. Answer: A Topic: Scarcity Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 7) When an economist talks of scarcity, the economist is referring to the A) ability of society to employ all of its resources. B) ability of society to consume all that it produces. C) inability of society to satisfy all human wants because of limited resources. D) ability of society to continually make technological breakthroughs and increase production. Answer: C Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

8) Fundamental economic problems basically 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) our wants exceeding our scarce resources. Answer: D Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 9) Scarcity exists because A) society and people are greedy and wasteful. B) our wants exceed the resources available to satisfy them. C) of the inefficient choices we make. D) poor people need more food and other goods. Answer: B Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 10) Scarcity can be eliminated through A) the use of market mechanisms. B) exploration that helps us find new resources. C) wise use of our resources. D) None of the above because scarcity cannot be eliminated. Answer: D Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 11) As an economic concept, scarcity applies to A) both money and time. B) money but not time. C) time but not money. D) neither time nor money. Answer: A Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

12) In every economic system, choices must be made because resources are ________ and our wants are ________. A) unlimited; limited B) limited; unlimited C) unlimited; unlimited D) limited; limited Answer: B Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 13) The problem of "scarcity" applies A) only in industrially developed countries because resources are scarce in these countries. B) only in underdeveloped countries because there are few productive resources in these countries. C) only in economic systems that are just beginning to develop because specialized resources are scarce. D) to all economic systems, regardless of their level of development. Answer: D Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 14) Scarcity requires that people must A) cooperate. B) compete. C) trade. D) make choices. Answer: D Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 15) People must make choices because A) most people enjoy shopping. B) of scarcity. C) there are many goods available. D) None of the above answers is correct. Answer: B Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 4 Copyright © 2014 Pearson Education, Inc.

16) An incentive A) could be a reward but could not be a penalty. B) could be a penalty but could not be a reward. C) could be either a reward or a penalty. D) is the opposite of a tradeoff. Answer: C Topic: Incentive Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 17) An inducement to take a particular action is called A) the marginal benefit. B) the marginal cost. C) opportunity cost. D) an incentive. Answer: D Topic: Incentive Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 18) Economics is best defined as A) how people make money and profits in the stock market. B) making choices from an unlimited supply of goods and services. C) making choices with unlimited wants but facing a scarcity of resources. D) controlling a budget for a household. Answer: C Topic: Definition of Economics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 19) The study of economics A) focuses mainly on individual consumers. B) arises from the fact that our wants exceed available resources. C) recognizes that scarcity does not affect rich nations. D) deals mainly with microeconomics. Answer: B Topic: Definition of Economics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

20) Economics is best defined as the science of choice and how people cope with A) differences in wants. B) differences in needs. C) scarcity. D) different economic systems. Answer: C Topic: Definition of Economics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 21) Economics is the study of A) the distribution of surplus goods to those in need. B) affluence in a morally bankrupt world. C) the choices we make because of scarcity. D) ways to reduce wants to eliminate the problem of scarcity. Answer: C Topic: Definition of Economics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 22) The study of the choices made by individuals is part of the definition of A) microeconomics. B) positive economics. C) macroeconomics. D) normative economics. Answer: A Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 23) In part, microeconomics is concerned with A) how a business firm decides upon the amount it produces and the price it sets. B) changes in the economy's total output of goods and services over long periods of time. C) factors that explain changes in the unemployment rate over time. D) the Federal Reserve's policy decisions. Answer: A Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

24) The study of the decisions of individual units in the economy is known as A) macroeconomics. B) microeconomics. C) the study of incentives. D) ceteris paribus study. Answer: B Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 25) Studying the determination of prices in individual markets is primarily a concern of A) positive economics. B) negative economics. C) macroeconomics. D) microeconomics. Answer: D Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 26) The analysis of the behavior of individual decision-making units is the definition of A) microeconomics. B) positive economics. C) macroeconomics. D) normative economics. Answer: A Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 27) Which of the following is a microeconomic topic? A) How a trade agreement between the United States and Mexico affects both nations' unemployment rates. B) Comparing inflation rates across countries. C) How rent ceilings impact the supply of apartments. D) How a tax rate increase will impact total production. Answer: C Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

28) Which of the following questions is NOT a microeconomic question? A) Can the Federal Reserve keep income growing by cutting interest rates? B) How would a tax on e-commerce affect eBay? C) What is Britney's opportunity cost of having another baby? D) Does the United States have a comparative advantage in information technology services? Answer: A Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 29) Which of the following is an example of a microeconomic decision? A) an individual deciding how to allocate the time he or she has for work and leisure B) a small shoe factory deciding how much leather to purchase for the next quarter's production need C) a multinational company deciding where to relocate its world headquarter D) All of the above answers are correct. Answer: D Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 30) Which of the following is a microeconomic topic? A) The reasons why Kathy buys less orange juice. B) The reasons for a decline in average prices. C) The reasons why total employment decreases. D) The effect of the government budget deficit on inflation. Answer: A Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 31) Which of the following questions is a topic that would be studied by microeconomics? A) Why did production and the number of jobs shrink in 2009? B) Will the current budget deficit affect the well-being of the next generation? C) How will a lower price of digital cameras affect the quantity of cameras sold? D) What is the current unemployment rate in the United States? Answer: C Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

32) An example of a question that might be explored in microeconomics is to determine A) the number of workers employed by Intel. B) savings by the household sector. C) why the U.S. economy has grown more rapidly than the Japanese economy. D) the total employment within the U.S. economy. Answer: A Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 33) In part, microeconomics is concerned with the study of A) unemployment and economic growth. B) the Federal Reserve's policies. C) the effect government regulation has on the price of a product. D) national output of goods and services. Answer: C Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 34) The branch of economics that deals with the analysis of the whole economy is called A) macroeconomics. B) marginal analysis. C) microeconomics. D) metroanalysis. Answer: A Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 35) Macroeconomics is concerned with A) individual consumers. B) government decision making concerning farm price supports. C) economy-wide variables. D) the effects on Ford Motor of a strike by the United Auto Workers. Answer: C Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

36) Macroeconomics differs from microeconomics in that A) macroeconomics studies the decisions of individuals. B) microeconomics looks at the economy as a whole. C) macroeconomics studies the behavior of government while microeconomics looks at private corporations. D) macroeconomics focuses on the national economy and the global economy. Answer: D Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 37) Which of the following is a macroeconomic decision or concept? A) the price of oil B) how many television sets to produce C) the unemployment rate for the entire economy D) the unemployment rate for each firm Answer: C Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 38) Which of the following questions is a macroeconomic issue? A) How many more pounds of cookies will a consumer purchase if the price of cookies decreases? B) What effect would a cure for Mad Cow Disease have on the market for beef? C) What is the future growth prospect for an economy? D) How many workers should the owner of a business hire? Answer: C Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 39) In broad terms the difference between microeconomics and macroeconomics is that A) they use different sets of tools and ideas. B) microeconomics studies decisions of individual people and firms and macroeconomics studies the entire national economy. C) macroeconomics studies the effects of government regulation and taxes on the price of individual goods and services whereas microeconomics does not. D) microeconomics studies the effects of government taxes on the national unemployment rate. Answer: B Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 10 Copyright © 2014 Pearson Education, Inc.

40) Which of the following is a macroeconomic issue? A) How a rise in the price of sugar affects the market for sodas. B) How federal government budget deficits affect interest rates. C) What determines the amount a firm will produce. D) The cause of a decline in the price of peanut butter. Answer: B Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 41) Which of the following is a macroeconomic issue? A) The purchasing decisions that an individual consumer makes. B) The effect of increasing the money supply on inflation. C) The hiring decisions that a business makes. D) The effect of an increase in the tax on cigarettes on cigarette sales. Answer: B Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 42) Macroeconomic topics include A) total, nationwide employment. B) studying what factors influence the price and quantity of automobiles. C) studying the determination of wages and production costs in the software industry. D) the impact of government regulation of markets. Answer: A Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 43) The fact that wants cannot be fully satisfied with available resources reflects the definition of A) the what tradeoff. B) scarcity. C) the big tradeoff. D) for whom to produce. Answer: B Topic: Study Guide Question, Definition of Economics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

44) Studying the effects choices have on the individual markets within the economy is part of A) scarcity. B) microeconomics. C) macroeconomics. D) incentives. Answer: B Topic: Study Guide Question, Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 45) Economics can be defined as the social science that explains the ________. A) choices made by politicians B) choices we make when we trade in markets C) choices that we make as we cope with scarcity D) choices made by households Answer: C Topic: MyEconLab Questions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 46) Scarcity is a situation in which ________. A) some people are poor and others are rich B) something is being wasted C) we are unable to satisfy all our wants D) long lines form at gas stations Answer: C Topic: MyEconLab Questions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 47) Microeconomics is the study of ________. A) the choices that individuals and businesses make B) all aspects of scarcity C) the global economy D) the national economy Answer: A Topic: MyEconLab Questions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

2 Two Big Economic Questions 1) When an economy produces more houses and fewer typewriters, it is answering the ________ part of one of the two big economic questions. A) "what" B) "how" C) "where" D) "for whom" Answer: A Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 2) When firms in an economy start producing more computers and fewer televisions, they are answering the ________ part of one of the two big economic questions. A) "when" B) "for whom" C) "what" D) "where" Answer: C Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 3) If Taco Bell decides to produce more tacos and fewer burritos, Taco Bell is answering the ________ part of one of the two big economic questions. A) "what" B) "why" C) "when" D) "scarcity" Answer: C Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

4) When a farmer decides to raise hogs instead of cattle, the farmer is answering the ________ part of one of the two big economic questions. A) "what" B) "for whom" C) "how" D) "why" Answer: A Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 5) When a country decides to produce fewer bombers and more public housing projects, it is answering the ________ part of one of the two big economic questions. A) "how" B) "what" C) "defense" D) "for whom" Answer: B Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 6) When a firm decides to produce more electric cars and fewer gas guzzlers, it is most directly answering the ________ part of one of the two big economic questions. A) "how" B) "scarcity" C) "what" D) "for whom" Answer: C Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 7) U.S. producers decide to produce more compact cars and fewer SUVs as the price of gasoline rises. Producers are answering the ________ part of one of the two big economic questions. A) "what" B) "how" C) "when" D) "how many" Answer: A Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 14 Copyright © 2014 Pearson Education, Inc.

8) Which of the following statements is correct? A) The United States produces more goods than services. B) The United States produces more services than goods. C) The percentage of people producing goods in the United States has steadily increased over the last 60 years. D) The United States produces an equal amount of goods and services. Answer: B Topic: Trends in Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 9) In the U.S. economy, which of the following statements is true? A) More goods are produced than services. B) More services are produced than goods. C) Production is divided evenly between goods and services. D) The economy is too complex to determine the proportion of production that is devoted to producing services. Answer: B Topic: Trends in Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 10) The largest part of what the United States produces today is ________ such as ________. A) goods; food and electronic equipment B) goods; education and entertainment C) services; trade and health care D) services; textbooks and computers Answer: C Topic: Trends in Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 11) When China builds a dam using few machines and a great deal of labor, it is answering the ________ part of one of the two big economic questions. A) "what" B) "how" C) "where" D) "for whom" Answer: B Topic: How Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 15 Copyright © 2014 Pearson Education, Inc.

12) When a textile company keeps track of its inventory using a computer and its competitor uses a pad of paper and a pencil, they are both answering the ________ part of one of the two big economic questions. A) "what" B) "how" C) "for whom" D) "where" Answer: B Topic: How Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 13) When a California farmer decides to harvest lettuce using machines instead of by migrant workers, the farmer is answering the ________ part of one of the two big economic questions. A) "how" B) "for whom" C) "scarcity" D) "what" Answer: A Topic: How Are Goods Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 14) An art museum decides to offer tours by having visitors listen to cassette tapes rather than have tour guides. The museum is answering the ________ part of one of the two big economic questions. A) "scarcity" B) "what" C) "why" D) "how" Answer: D Topic: How Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

15) The fact that people with higher incomes get to consume more goods and services addresses the ________ part of one of the two big economic questions. A) "for whom" B) "when" C) "where" D) "how" Answer: A Topic: For Whom Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Ethical Reasoning 16) Which of the following is NOT a factor of production? A) the water used to cool a nuclear power plant. B) the effort of farmers raising cattle. C) the wages paid to workers. D) the management skill of a small business owner. Answer: C Topic: Factors of Production Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 17) Which of the following are considered factors of production used to produce goods and services? I. Land II. Labor III. Capital IV. Entrepreneurship A) I and II only B) I and III only C) I, II and III only D) I, II, III and IV Answer: D Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

18) Which of the following is correct? Factors of production are A) land, labor, the price system, and capital. B) the inputs used to produce goods and services. C) the fundamental source of abundance. D) only land and labor. Answer: B Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 19) Factors of production include A) the economic system. B) land, labor, capital and entrepreneurship. C) labor and capital (not land, which is fixed). D) only capital, land, and labor. Answer: B Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 20) Factors of production include all of the following EXCEPT ________. A) machines made in past years. B) money C) entrepreneurship D) a wheat field that is not irrigated Answer: B Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 21) Factors of production are grouped into four categories: A) land, labor, capital, entrepreneurship B) land, labor, capital, money C) land, capital, money, entrepreneurship D) labor, capital, money, entrepreneurship Answer: A Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

22) Which of the following is NOT a factor of production? A) vans used by a bakery company for deliveries B) a person developing a production schedule for a new product C) 175 shares of Microsoft stock D) wilderness areas that have yet to be developed Answer: C Topic: Factors of Production Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 23) Keeping in mind economists' definition of factors of production, which of the following is NOT a factor of production? A) money B) low-skilled labor C) coal D) an engineer Answer: A Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 24) Which of the following is NOT a factor of production? A) mineral resources B) a university professor C) an apartment building D) 100 shares of Microsoft stock Answer: D Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 25) The income earned by the people who sell the services of the factor of production ________ is called ________. A) capital; rent B) entrepreneurship; wages C) land; profit D) entrepreneurship; profit Answer: D Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

26) Which factor of production earns profit? A) land B) human capital C) money D) entrepreneurship Answer: D Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 27) Which factor of production earns most income in the United States? A) capital B) labor C) money D) entrepreneurship Answer: B Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 28) Which of the following best defines capital as a factor of production? A) The gifts of nature that businesses use to produce goods and services. B) The knowledge and skills that people obtain from education and use in production of goods and services. C) Financial assets used by businesses. D) Instruments, machines, and buildings used in production. Answer: D Topic: Capital Stock Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 29) In economics, the term "land" means A) only land that is used in agricultural production. B) land, mineral resources, and nature's other bounties. C) land that is devoted to economic pursuits. D) land used for agricultural and urban purposes. Answer: B Topic: Land Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

30) A natural resource, such as fishing territories, is considered an example of A) both land and labor. B) land, labor, capital and entrepreneurship. C) land only. D) only capital. Answer: C Topic: Land Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 31) The "gifts of nature" are included as part of which factor of production? A) labor B) land C) capital D) entrepreneurship Answer: B Topic: Land Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 32) Copper falls into which factor of production category? A) land B) labor C) capital D) entrepreneurship Answer: A Topic: Land Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 33) Overtime worked by a JCPenney associate is considered ________ and earns ________. A) labor; wages. B) entrepreneurship; profit. C) human capital; interest. D) labor; profit. Answer: A Topic: Labor Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

34) The term human capital refers to A) labor resources used to make capital equipment. B) buildings and machinery. C) people's knowledge and skill. D) entrepreneurship and risk-taking. Answer: C Topic: Human Capital Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 35) Human capital is A) all capital owned by individuals, but not by corporations or governments. B) all capital owned by individuals or corporations, but not by governments. C) machinery that meets or exceeds federal safety standards for use by humans. D) the skill and knowledge of workers. Answer: D Topic: Human Capital Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 36) Joy is training to become a chef. The skills she is obtaining from her training and education will increase Joy's ________. A) human capital B) physical capital C) entrepreneurship D) None of the above answers are correct. Answer: A Topic: Human Capital Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 37) Which of the following is NOT an investment in human capital? A) a business student takes a seminar in using a laptop computer B) a student purchases a laptop computer C) a computer science student learns how to repair a laptop computer D) a computer science student takes a course on programming a laptop computer Answer: B Topic: Human Capital Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

38) Samantha goes to college to become an engineer. This is an example of an A) investment in physical capital. B) investment in human capital. C) increase in entrepreneurship. D) increase in labor. Answer: B Topic: Human Capital Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 39) In economics, the term "capital" refers to A) the money in one's pocket. B) buildings and equipment. C) mineral resources. D) consumer goods. Answer: B Topic: Capital Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 40) Human resources that perform the functions of organizing, managing, and assembling the other resources are called A) physical capital. B) venture capital. C) entrepreneurship. D) productive capital. Answer: C Topic: Entrepreneurship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 41) The economic resource that organizes the use of other economic resources is called A) labor. B) capital. C) entrepreneurship. D) land. Answer: C Topic: Entrepreneurship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

42) Entrepreneurs do all of the following EXCEPT A) organize labor, land, and capital. B) come up with new ideas about what and how to produce. C) bear risk from business decisions. D) own all the other resources used in the production process. Answer: D Topic: Entrepreneurship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 43) Entrepreneurs directly do all of the following EXCEPT A) create new ideas about what and how to produce. B) make business decisions. C) face risks that arise from making business decisions. D) decide for whom goods and services are produced. Answer: D Topic: Entrepreneurship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 44) Differences in income are most directly related to which of the following economic question? A) What goods and services are produced? B) In what quantities are various goods and services produced? C) How are goods and services produced? D) Who consumes the goods and services that are produced? Answer: D Topic: For Whom Are Goods and Services Produced? Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 45) The fact that some people can afford to live in beautiful homes while others are homeless, is most directly an example of an economy facing the ________ part of one of the two big economic questions. A) "for whom" B) "when" C) "how" D) "why" Answer: A Topic: For Whom Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Ethical Reasoning 24 Copyright © 2014 Pearson Education, Inc.

46) The fact that a rock star earns $5 million a year while a teacher earns $25,000 annually is most directly an example of an economy answering the ________ part of one of the two big economic questions. A) "when" B) "for whom" C) "how" D) "why" Answer: B Topic: For Whom Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Ethical Reasoning 47) One economist says that raising taxes on gas would be in the social interest. What does this economist mean? A) Higher taxes on gas would benefit society as a whole. B) Raising taxes on gas would benefit most of the people. C) Higher taxes on gas would benefit everyone. D) Both answers A and C are correct. Answer: A Topic: Social Interest Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 48) An outcome is considered efficient if A) it is not possible to make someone better off without making anyone else worse off. B) it is the best available choice for an individual. C) it results in fair shares for everyone involved. D) it is possible to make someone better off without making anyone else worse off. Answer: A Topic: Self-Interest and Social Interest Skill: Definition Status: New AACSB: Reflective Thinking 49) Suppose Company A's profits increase by $10 million and nobody is made worse off. The CEO of Company A keeps all $10 million for herself. This situation A) is definitely efficient. B) is definitely not in the self-interest of Company A. C) is definitely not in the social interest. D) is definitely fair. Answer: A Topic: Self-Interest and Social Interest Skill: Conceptual Status: New AACSB: Analytical Skills 25 Copyright © 2014 Pearson Education, Inc.

50) The Occupy Wall Street movement advocates A) a shift away from market capitalism. B) a shift towards more market capitalism. C) centrally planned socialism. D) following the teachings of Adam Smith. Answer: A Topic: At Issue: The Protest Against Market Capitalism Skill: Conceptual Status: New AACSB: Analytical Skills 51) An economic system in which the government decides what, how, and for whom to produce, directs workers to jobs, and owns all the land and capital is A) centrally planned socialism. B) market capitalism. C) mixed economy. D) supported by economists as the best system available. Answer: A Topic: At Issue: The Protest Against Market Capitalism Skill: Definition Status: New AACSB: Reflective Thinking 52) According to Adam Smith, A) government intervention in markets is not desirable because an invisible hand leads decisions made in pursuit of self-interest to unintentionally promote the social interest. B) politicians are well-equipped to regulate corporations and intervene in markets to improve market outcomes. C) when big corporations pursue their self-interest of maximum profit, they will inevitably conflict with social interest. D) in a market transaction buyers can either get what they want for less than they would be willing to pay or sellers can earn a profit, but both buyers and sellers can't gain simultaneously. Answer: A Topic: At Issue: The Protest Against Market Capitalism Skill: Conceptual Status: New AACSB: Reflective Thinking

53) The 2010 Patient Protection and Affordable Care Act (Obamacare) contains a provision that may require individuals to either purchase private health insurance or pay a tax. This is an example of A) a mixed economy. B) market capitalism. C) centrally planned socialism. D) the invisible hand. Answer: A Topic: At Issue: The Protest Against Market Capitalism Skill: Conceptual Status: New AACSB: Analytical Skills 54) According to economists, A) market capitalism is the best system available and some government intervention and regulation can either help or harm the social interest. B) market capitalism is the best system available and any government intervention and regulation will inevitably harm the social interest. C) centrally planned socialism is the best system available since governments generally make decisions that are in social interest. D) centrally planned socialism and pure market capitalism are equally capable of promoting social interest, but a mixed economy is an undesirable compromise between the two that will harm social interest. Answer: A Topic: At Issue: The Protest Against Market Capitalism Skill: Conceptual Status: New AACSB: Reflective Thinking 55) Which of the following is NOT part of the first big economic question? A) What goods and services are produced? B) How are goods and services produced? C) For whom are goods and services produced? D) Why do incentives affect only marginal costs? Answer: D Topic: Study Guide Question, Two Big Economic Questions Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

3 The Economic Way of Thinking 1) In economics we learn that A) tradeoffs allow us to have more of everything we value. B) tradeoffs allow us to avoid the problem of opportunity cost. C) opportunity costs are all of the possible alternatives given up when we make a choice. D) None of the above answers is correct. Answer: D Topic: Tradeoffs Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 2) Because we face scarcity, every choice involves A) money. B) the question "what." C) giving up something for nothing. D) an opportunity cost. Answer: D Topic: Tradeoff and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 3) The term used to emphasize that making choices in the face of scarcity involves a cost is A) substitution cost. B) opportunity cost. C) utility cost. D) accounting cost. Answer: B Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 4) The loss of the highest-valued alternative defines the concept of A) marginal benefit. B) scarcity. C) entrepreneurship. D) opportunity cost. Answer: D Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

5) Opportunity cost means the A) accounting cost minus the marginal cost. B) highest-valued alternative forgone. C) accounting cost minus the marginal benefit. D) monetary costs of an activity. Answer: B Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 6) The opportunity cost of any action is A) all the possible alternatives given up. B) the highest-valued alternative given up. C) the benefit from the action minus the cost of the action. D) the dollars the action cost. Answer: B Topic: Opportunity Cost Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 7) The opportunity cost of something you decide to get is A) all the possible alternatives that you give up to get it. B) the highest valued alternative you give up to get it. C) the value of the item minus the cost you paid for it. D) the amount of money you pay to get it. Answer: B Topic: Opportunity Cost Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 8) Opportunity cost is best defined as A) how much money is paid for something. B) how much money is paid for something, taking inflation into account. C) the highest-valued alternative that is given up to get something. D) all the alternatives that are given up to get something. Answer: C Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

9) Which of the following statements are correct? I. The "highest-valued alternative given up to get something" is the opportunity cost. II. Wealthy economies don't experience opportunity costs. III. Scarcity creates opportunity costs. A) I only B) I and II C) I and III D) I, II, and III Answer: C Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 10) Opportunity cost is defined as the A) total value of all the alternatives given up. B) highest-valued alternative given up. C) cost of not doing all of the things you would like to do. D) lowest-valued alternative given up. Answer: B Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 11) You have the choice of going on vacation to Florida for one week, staying at work for the week, or spending the week doing fix-up projects around your house. If you decide to go to Florida, the opportunity cost of the trip is A) working and doing fix-up projects. B) working or doing fix-up projects, depending on which you would have done otherwise. C) working, because you would be giving up dollars. D) nothing because you will enjoy the trip to Florida. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

12) The night before a midterm exam, you decide to go to the movies instead of studying for the exam. You score 60 percent on your exam. If you had studied the night before, you'd have scored 70 percent. What was the opportunity cost of your evening at the movies? A) 10 percent off your grade B) 60 percent C) 70 percent D) Zero Answer: A Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 13) On Saturday morning, you rank your choices for activities in the following order: go to the library, work out at the gym, have breakfast with friends, and sleep late. Suppose you decide to go to the library. Your opportunity cost is A) working out at the gym, having breakfast with friends, and sleeping late. B) working out at the gym. C) zero because you do not have to pay money to use the library. D) not clear because not enough information is given. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 14) Fred and Ann are both given free tickets to see a movie. Both decide to see the same movie. We know that A) both bear an opportunity cost of seeing the movie because they could have done other things instead of seeing the movie. B) both bear the same opportunity cost of seeing the movie because they are doing the same thing. C) it is not possible to calculate the opportunity cost of seeing the movie because the tickets were free. D) the opportunity cost of seeing the movie is zero because the tickets were free. Answer: A Topic: Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

15) You have the choice of going to Hawaii for a week, staying at work for the week, or spending the week skiing. If you decide to go to Hawaii, the opportunity cost is A) the value of working and skiing. B) the value of working or skiing, depending on which you would have done rather than go to Hawaii. C) working, because you would be giving up a week's pay. D) None of the above if you enjoy the time spent in Hawaii. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 16) Today, Julie attended her 12:30 Economics class. If she hadn't gone to class, Julie would have gone out to lunch with friends. She had other options; she could have worked or slept in. Julie's opportunity cost of going to class is the A) income she gave up. B) lunch she gave up. C) sleep she gave up. D) income, pleasure, and sleep she gave up. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 17) Joe likes to sleep late in the mornings and play tennis in the afternoons. The opportunity cost of Joe attending his morning class for one hour is A) an hour of tennis given up. B) an hour of sleep given up. C) both the tennis given up and the sleep given up. D) nothing because he is paying for his class. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

18) 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 Answer: A Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 19) You decide to take a vacation and the trip costs you $2,000. While you are on vacation, you do not go to work where you could have earned $750. In terms of dollars, the opportunity cost of the vacation is A) $2,000. B) $750. C) $2,750. D) $1,250 Answer: C Topic: Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 20) The opportunity cost of attending college includes the cost of A) the tuition but not the job at which you would otherwise have worked. B) the highest valued alternative to attending college. C) the highest valued alternative to attending college plus the cost of tuition. D) tuition, books, and the lost wages for the hours spent studying. Answer: C Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

21) Misty has the option of purchasing one of three products: Brand A, Brand B, or Brand C. Each costs ten dollars. If she decides that Brand A meets her needs best, then the opportunity cost of this decision is A) Brand B plus Brand C. B) twenty dollars. C) Brand A. D) Brand B or Brand C, depending on which is considered the highest-value alternative forgone. Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 22) Which of the following is NOT an example of an opportunity cost? A) By spending Thursday night studying for an economics exam, a student was unable to complete a homework assignment for calculus class. B) Because David used all of his vacation time to paint his house, he was unable to visit the Caribbean last year. C) Because Mary is now being paid a higher wage, she can afford to buy a new car even though she is moving into a bigger apartment. D) By choosing to attend college, Jean was not able to continue working as an electrician; as a result, she gave up more than $85,000 in earnings while she was in college. Answer: C Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 23) From 8 to 11 p.m., Sam can either attend a basketball game, a hockey match or the symphony. Suppose that Sam decides to attend the hockey match and thinks to herself that if she did not go to the match she would go to the symphony. Then the opportunity cost of attending the hockey match is A) going to the symphony and the basketball game. B) going to the symphony. C) going to the basketball game. D) three hours of time. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

24) After you graduate, you have decided to accept a position working at the Bureau of Labor Statistics for $45,000.00 a year. The two other offers you received were working for Wal-Mart for $38,000 and working for Ernst and Young consulting for $42,000. Of these two offers, you would have preferred the job at Ernst and Young. What is the opportunity cost of accepting the position at the Bureau of Labor Statistics? A) the $45,000 you are paid for working at the Bureau of Labor Statistics B) the $42,000 you would have been paid working for Ernst and Young C) the $38,000 you would have been paid working for Wal-Mart D) the $42,000 you would have been paid working for Ernst and Young and the $38,000 you would have been paid working for Wal-Mart Answer: B Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 25) Bill Bonecrusher graduates from college with a choice of playing professional football at $2 million a year or coaching for $50,000 a year. He decides to play football, but eight years later, though he could continue to play football at $2 million a year, he quits football to make movies for $3 million a year. His opportunity cost of playing football at graduation was ________ and eight years later the opportunity cost of making movies was ________. A) $50,000; $2 million B) $2 million; $2 million C) $2 million; $3 million D) $50,000; $50,000 Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 26) During the summer you have made the decision to attend summer school, which prevents you from working at your usual summer job in which you normally earn $6,000 for the summer. Your tuition cost is $3,000 and books and supplies cost $1,300. In terms of dollars, the opportunity cost of attending summer school is A) $10,300. B) $6,000. C) $4,300. D) $3,300. Answer: A Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

27) The term "opportunity cost" points out that A) there may be such a thing as a free lunch. B) not all individuals will make the most of life's opportunities because some will fail to achieve their goals. C) executives do not always recognize opportunities for profit as quickly as they should. D) any decision regarding the use of a resource involves a costly choice. Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 28) When the government chooses to use resources to build a dam, these sources are no longer available to build a highway. This choice illustrates the concept of A) a market mechanism. B) macroeconomics. C) opportunity cost. D) a fallacy of composition. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 29) Jill, an economics student, has already spent 5 hours cleaning her room. In deciding whether or not to continue cleaning for another hour, she applies the economic principle of A) scarcity. B) ceteris paribus. C) choosing at the margin. D) productivity. Answer: C Topic: Choices at the Margin Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 30) Marginal benefit is the benefit A) that your activity provides to someone else. B) of an activity that exceeds its cost. C) that arises from the secondary effects of an activity. D) that arises from an increase in an activity. Answer: D Topic: Marginal Benefit/Marginal Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 36 Copyright © 2014 Pearson Education, Inc.

31) A benefit from an increase in activity is called the A) marginal benefit. B) economic benefit. C) total benefit. D) opportunity benefit. Answer: A Topic: Marginal Benefit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 32) The marginal benefit is the A) additional gain from one more unit of an activity. B) additional cost from one more unit of an activity. C) loss of the highest-valued alternative. D) additional gain from one more unit of an activity minus the additional cost from one more unit of the activity. Answer: A Topic: Marginal Benefit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 33) In terms of dollars, the marginal benefit of working five days a week instead of four days a week is A) the wages received for the fifth day of work. B) the wages received for 5 days of work. C) the wages received for 4 days of work. D) None of the above answers is correct. Answer: A Topic: Marginal Benefit Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

34) Your employer has asked you to start working overtime and has offered to pay $18 per hour for every hour you work beyond forty hours a week. The wage rate for each of the first forty hours will continue to be the usual $15 per hour. In terms of dollars, what is the marginal benefit of working each hour of overtime? A) zero B) $3.00 C) $15.00 D) $18.00 Answer: D Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 35) A student is studying for an exam 2 hours a day and is debating whether to study an extra hour. The student's marginal benefit A) depends on the grade the student earns on the exam. B) is the benefit the student receives from studying all 3 hours. C) is the benefit the student receives from studying the extra hour. D) is greater than the student's marginal cost. Answer: C Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 36) A student athlete is deciding whether to work out for an extra hour. Her marginal benefit from another hour of exercise A) is the benefit she gets from all the hours she's worked out all week. B) is the benefit she receives from exercising the additional hour. C) is less than the marginal cost of the additional hour. D) depends on the cost of the workout. Answer: B Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

37) Suppose that you are spending two hours a day studying economics, and your grade is 85 percent. You want a higher grade and decide to study for an extra hour a day. As a result, your grade rises to 90 percent. Your marginal benefit is the A) 5 point increase in your grade minus the opportunity cost to you of spending the hour studying. B) extra hour per day you spend on studying. C) 5 point increase in your grade. D) three hours per day you spend on studying. Answer: C Topic: Marginal Benefit Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 38) Marginal cost is the cost A) that your activity imposes on someone else. B) that arises from an increase in an activity. C) of an activity that exceeds its benefit. D) that arises from the secondary effects of an activity. Answer: B Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 39) A cost due to an increase in activity is called A) an incentive loss. B) a marginal cost. C) a negative marginal benefit. D) the total cost. Answer: B Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 40) Marginal cost is the A) cost of an increase in an activity. B) total cost of an activity. C) cost of an activity minus the benefits of the activity. D) cost of all forgone alternatives. Answer: A Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 39 Copyright © 2014 Pearson Education, Inc.

41) Laura is a manager for HP. When Laura must decide whether to produce a few additional printers, she is choosing at the margin when she compares A) the total revenue from sales of printers to the total cost of producing all the printers. B) the extra revenue from selling a few additional printers to the extra costs of producing the printers. C) the extra revenue from selling a few additional printers to the average cost of producing the additional printers. D) HP's printers to printers from competing companies, such as Lexmark. Answer: B Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 42) A lawn service is deciding whether to add an additional employee to its summer crew. The marginal cost of hiring this worker depends on the A) total amount paid to only the new worker. B) total amount paid to all previously hired workers. C) the total amount paid to all the workers, both the new one and the previously hired workers. D) the additional revenue created by having an additional worker minus the cost of hiring the worker. Answer: A Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 43) If the marginal cost of an activity exceeds the marginal benefit, then A) the activity will occur because the high marginal cost means it must be highly valued. B) the forgone alternatives' costs must be increased. C) an alternative action will be selected. D) the person must concentrate on the activity's total benefits. Answer: C Topic: Marginal Benefit/Marginal Cost Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

44) A store remains open from 8 a.m. to 4 p.m. each weekday. The store owner is deciding whether to stay open an extra hour each evening. The owner's marginal benefit A) is the benefit the owner receives from staying open from 8 a.m. to 5 pm. B) depends on the revenues the owner makes during the day. C) must be greater than or equal to the owner's marginal cost if the owner decides to stay open. D) is the benefit the owner receives from staying open from 8 a.m. to 6 pm. Answer: C Topic: Marginal Benefit/Marginal Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 45) Which of the following creates an incentive to increase the amount of an activity? A) an increase in the marginal cost of the activity and a decrease in the marginal benefit of the activity B) a decrease in the marginal cost of the activity and an increase in the marginal benefit of the activity C) constant marginal cost and constant marginal benefit of the activity D) None of the above create an incentive to increase the amount of an activity. Answer: B Topic: Incentives, Marginal Cost and Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 46) Suppose that the government of New York state promises to decrease taxes to a firm if it decides to stay in New York instead of moving to another state. This policy on the part of the state constitutes ________, to make the ________ of the firm remaining in New York. A) an incentive; marginal benefit exceed the marginal cost B) an incentive; marginal cost exceed the marginal benefit C) a command; marginal benefit exceed the marginal cost D) a command; marginal cost exceed the marginal benefit Answer: A Topic: Incentives, Marginal Cost and Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

47) Jed had an exam score of 50 percentage points. There is an extra credit assignment that Jed can complete that will raise his exam score by 20 percentage points. Jed has determined that the extra credit assignment will take 10 hours of his time. Jed will complete the assignment he values the A) 20 percentage points more than the 10 hours of his time. B) 10 hours of his time more than the 20 percentage points. C) 70 percentage points more than the 10 hours of his time. D) wants a higher score. Answer: A Topic: Incentives, Marginal Cost and Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 48) From 8 P.M. to 10 P.M., Susan can attend a movie, study, or talk with friends. Suppose that Susan decides to go to the movie but thinks that, if she hadn't, she would otherwise have talked with friends. The opportunity cost of attending the movie is A) talking with friends and studying. B) studying. C) talking with friends. D) two hours of time. Answer: C Topic: Study Guide Question, Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 49) When the government hires people to serve in the army, these people are no longer available to do other work. This choice illustrates the concept of A) an incentive. B) a social interest/private interest conflict. C) opportunity cost. D) marginal benefit. Answer: C Topic: Study Guide Question, Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

50) When the government chooses to spend the tax dollars that it collects on homeland security, its choice ________. A) involves a tradeoff of other goods and services such as education for more homeland security B) illustrates that scarcity does not always exist C) involves no tradeoff because the defense is necessary D) primarily affects who gets the goods and services produced. Answer: A Topic: MyEconLab Questions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 51) Making a choice at the margin means ________. A) letting someone else choose for you B) waiting until the last minute to make a choice C) deciding to do a little bit more or a little bit less of an activity D) making a choice by comparing the total benefit and the total cost Answer: C Topic: MyEconLab Questions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 52) Suppose that for the past two months, you have studied economics one hour a day. You now decide to study economics two hours a day. For the past two months, ________. A) your marginal cost of studying economics for an hour must have exceeded its marginal benefit B) the marginal cost of studying economics must have fallen C) your marginal benefit from studying economics an hour must have been greater than its marginal cost D) the opportunity cost of studying economics must have risen. Answer: C Topic: MyEconLab Questions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4 Economics as Social Science and Policy Tool 1) In economics, positive statements are about A) the way things ought to be. B) the way things are. C) macroeconomics, not microeconomics. D) microeconomics, not macroeconomics. Answer: B Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 2) A positive statement is A) about what ought to be. B) about what is. C) the result of a model's normative assumptions. D) valid only in the context of a model with simple assumptions. Answer: B Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 3) A positive statement is A) about what ought to be. B) about what is. C) always true. D) one that does not use marginal concepts. Answer: B Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4) Which of the following are true regarding "positive" statements? I. They describe what "ought to be." II. They describe what is believed about how the world appears. III. They can be tested as to their truthfulness. A) I and II B) II and III C) I and III D) I, II and III Answer: B Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 5) Positive and normative statements differ in that A) positive statements can be tested, whereas normative statements cannot. B) normative statements can be tested, whereas positive statements cannot. C) normative statements depict "what is" and positive statements depict "what ought to be." D) normative statements never use the word "should." Answer: A Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 6) Positive economic statements A) prescribe what should be. B) are related only to microeconomics. C) can be tested against the facts. D) cannot be tested against the facts. Answer: C Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 7) Which of the following is a positive statement? A) An unemployment rate of 9 percent is a national disgrace. B) Unemployment is a more important problem than inflation. C) When the national unemployment rate is 9 percent, the unemployment rate for inner-city youth is often close to 40 percent. D) Unemployment and inflation are equally important problems. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 45 Copyright © 2014 Pearson Education, Inc.

8) Which of the following is a positive statement? A) The United States should fight inflation even if it raises unemployment. B) What to do with Social Security is the most important economic issue today. C) A 5 percent increase in income leads to a 3 percent increase in the consumption of orange juice. D) Because they decrease productivity, labor unions should be eliminated. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 9) Which of the following is a positive statement? A) People buy more of a good or service when its price falls. B) The distribution of income is fair. C) The government ought to provide health care to everyone. D) Corporations should be more socially responsible. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 10) Which of the following is an example of a positive statement? A) Government should not redistribute income. B) Business firms ought to contribute more to charities. C) Households are the primary source of saving. D) The foreign sector should be more tightly controlled. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 11) Which of the following is an example of a positive statement? A) We should cut back on our use of carbon-based fuels such as coal and oil. B) Increasing the minimum wage results in more unemployment. C) Every American should have equal access to health care. D) The Federal Reserve ought to cut the interest rate. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

12) Which of the following is a positive statement? A) Taxes should be lower because then people get to keep more of what they earn. 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. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 13) Which of the following is a positive statement? A) Our planet is warming because of an increased carbon dioxide buildup in the atmosphere. B) A minimum wage of $7.50 per hour is a shame for a rich country like the United States. C) Both these statements are positive. D) Neither of these statements is positive. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 14) Which of the following is a positive statement? A) The government must lower the price of a pizza so that more students can afford to buy it. B) The best level of taxation is zero percent because then people get to keep everything they earn. C) My economics class should last for two terms because it is my favorite class. D) An increase in tuition means fewer students will apply to college. Answer: D Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 15) Which of the following is a positive statement? A) Low rents decrease the amount of housing landlords make available for rent. B) Low rents are good because they make apartments more affordable. C) Housing costs too much. D) Owners of apartment buildings ought to be free to charge whatever rent they want. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

16) When Al makes the statement, "The cost of living has increased 10 percent over the past 10 years," he is A) making a normative statement. B) making a positive statement. C) testing an economic model. D) facing the standard of living tradeoff. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 17) Which of the following is a positive statement? A) State lotteries are good methods to use for raising revenues. B) Increased prison sentences are the best way to reduce the crime rate. C) An increase in gas prices leads people to car pool more. D) Inflation is a more serious problem than is deflation. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 18) The statement "Managers with a college education earn $18 an hour while ski instructors who did not complete college earn $10" is A) a political statement. B) a positive statement. C) a normative statement. D) an ethical statement. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 19) The statement "An increase in the price of gasoline will lead to a decrease in the amount purchased" is A) a political statement. B) a positive statement. C) a normative statement. D) a scientific statement. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 48 Copyright © 2014 Pearson Education, Inc.

20) The statement "The unemployment rate for teens is higher than that for adults" is A) a political statement. B) a positive statement. C) a normative statement. D) an ethical statement. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 21) Which of the following is NOT a normative statement? A) People buy more of a good or service when its price falls. B) The distribution of income is fair. C) The government ought to provide health care to everyone. D) Corporations should be more socially responsible. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 22) A normative statement concerns A) what is provable. B) what is correct. C) what is incorrect. D) a value judgment. Answer: D Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 23) Normative economic statements A) describe what ought to be. B) describe what is rather than what ought to be. C) describe the process of economic policy-making. D) deal with economic hypotheses that are not well-established laws. Answer: A Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

24) The statement that "peach ice cream is better than chocolate ice cream" A) can be tested using the scientific approach. B) is a normative statement. C) is a positive statement. D) provides a basis for predicting which type of ice cream will exhibit the most sales. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 25) The statement "Unemployment should be below 6 percent" is A) a positive statement. B) a normative statement. C) a prediction. D) an assumption. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 26) Statements about what ought to be are called A) positive statements. B) normative statements. C) assumptions. D) implications. Answer: B Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 27) Normative statements are statements about A) prices. B) quantities. C) what is. D) what ought to be. Answer: D Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

28) A normative statement is A) about what ought to be. B) about what is. C) always true. D) one that does not use marginal concepts. Answer: A Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 29) In economics, normative statements are about A) the way things ought to be. B) the way things are. C) marginal benefits, not marginal costs. D) marginal costs, not marginal benefits. Answer: A Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 30) Which of the following is a normative statement? A) The price of candy bars is $1.25 each. B) Candy bars are more expensive than newspapers. C) You should eat less candy. D) Popcorn and candy are sold in movie theaters. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 31) Which of the following is a normative statement? A) The unemployment rate is too high. B) Forty percent of the public believes that the unemployment rate is too high. C) The unemployment rate rose last month. D) None of the above are normative statements. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

32) Which of the following is a normative statement? A) The United States has a comparative advantage compared to the European Union in the production of wheat. B) The main reason why the United States has a trade deficit with China is because China's trade practices are unfair. C) Both these statements are normative. D) Neither of these statements is normative. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 33) "Government should act to reduce poverty levels." A) This statement is a normative statement. B) This statement is a positive statement. C) This statement is an example of the fallacy of composition. D) This statement is an example of the post hoc fallacy. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 34) When Susan makes the statement, "The government should spend less money to take care of national parks," she is A) making a normative statement. B) making a positive statement. C) testing an economic model. D) not dealing with scarcity. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 35) "The rich should pay higher income tax rates than the poor" is an example of a A) normative statement. B) positive statement. C) descriptive statement. D) theoretical statement. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 52 Copyright © 2014 Pearson Education, Inc.

36) Which of the following is a normative statement? A) Studying more hours leads to an increase in your GPA. B) An increase in tax rates means people work fewer hours. C) Taking extra vitamin C prevents catching a cold. D) States should require all motorcycle riders to wear helmets to reduce the number of riders killed. Answer: D Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 37) Which of the following is a normative statement? A) Low rents will restrict the supply of housing. B) Low rents are good because they make apartments more affordable. C) Housing costs are rising. D) Owners of apartment buildings are free to charge whatever rent they want. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 38) Which of the following is a normative statement? A) Next year's inflation rate will be under 4 percent. B) Consumers will buy more gasoline over the Christmas holiday even if the price of gas is 10 cents higher than it was during the Thanksgiving holiday. C) The government's cuts in welfare spending impose an unfair hardship on the poor. D) The current butter surplus is the result of federal policies. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 39) Economic models A) are essentially different from those used in other sciences. B) always use graphs. C) simplify reality. D) include all relevant facts. Answer: C Topic: Model Building Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

40) A good economic model A) describes every aspect of the economic world, with no exception. B) includes all those features of the world that can be described numerically. C) includes only those features of the world that are needed for the purpose at hand. D) should not include more than two variables. Answer: C Topic: Model Building Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 41) An economic model is A) a generalization that summarizes all the normative assumptions we make about a particular issue. B) a description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand. C) a statement that describes how the world should be. D) a collection of facts that describe the real world. Answer: B Topic: Models Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 42) A normative statement is A) about what ought to be. B) about what is. C) always true. D) one that is based on an economic experiment. Answer: A Topic: Study Guide Question, Positive and Normative Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 43) Which of the following is a positive statement? A) The government must provide health insurance so that the poor can obtain decent medical treatment. B) The government should spend more on education. C) My favorite dinner is pizza and soda. D) An increase in the price of pizza will lead fewer students to buy pizza. Answer: D Topic: Study Guide Question, Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 54 Copyright © 2014 Pearson Education, Inc.

44) An economic model includes A) only normative statements. B) no use of marginal concepts. C) all known details in order to increase its accuracy. D) only details considered essential. Answer: D Topic: Study Guide Question, Economic Model Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 45) The statement that ________ is a positive statement. A) more students should study economics B) the price of gasoline is too high C) too many people in the United States have no health care insurance D) the price of sugar in the United States is higher than the price in Australia Answer: D Topic: MyEconLab Questions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

5 News Based Questions 1) Ben Bernanke, Chairman of the Federal Reserve, must choose whether tomorrow he meets with the Secretary of the Treasury or with the Congress regarding the financial crisis. This choice reflects the A) fact that Bernanke faces scarcity. B) concept of entrepreneurship. C) fact that Bernanke responds to incentives D) use of capital. Answer: A Topic: Scarcity Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 2) When the president of the Bank of America addresses Congress regarding lending standards in that industry, he is discussing A) a macroeconomic topic. B) a microeconomic topic. C) incentives. D) the big tradeoff. Answer: B Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 3) When Ben Bernanke, Chairman of the Federal Reserve, addresses Congress regarding the United States role in the world economy, he is discussing A) a macroeconomic topic. B) a microeconomic topic. C) scarcity. D) incentives. Answer: A Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4) Dell Computers decides to produce PCs and sell them directly over the Internet and via Best Buy. This is an example of A) incentives. B) a microeconomic decision. C) a macroeconomic decision. D) scarcity. Answer: B Topic: Microeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 5) Consider the following events: I. Samsung hires associates to market their HDTV sets to Best Buy. II. The Dallas Cowboys build a new football stadium. III. Ebay fires 10 percent of its workforce. IV. Ten million stocks were traded on the New York Stock Exchange in one day. V. Pennsylvania builds a new state park. Which of the events describe use of factors of production? A) I, II, III, and V B) II, IV, and V C) I and III only D) IV only Answer: A Topic: Factors of Production Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 6) Panasonic sends its HDTV salespeople to training sessions. This is an example of A) a macroeconomic decision. B) scarcity. C) a firm investing in workers' human capital D) entrepreneurship. Answer: C Topic: Human Capital Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

7) "When OPEC increases the supply of oil to the market, the price of gasoline falls." This is an example of A) a normative statement. B) the failure of opportunity cost to determine prices. C) a positive statement. D) a macroeconomic statement. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 8) "As part of the financial crisis bailout plan in 2009, the Federal Reserve bought stakes in banks. This policy will result in an increase in the inflation rate." This is an example of A) a positive statement. B) a normative statement. C) a microeconomic statement. D) an economic model. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 9) "As part of the financial crisis bailout plan in 2008, the Federal Reserve should not bail out banks that made risky loans." This is an example of A) a positive statement. B) the Federal Reserve taking actions that are not at the margin. C) opportunity costs. D) a normative statement. Answer: D Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 10) "OPEC should supply more oil so that the world's economies can grow more rapidly." This is an example of A) a normative statement. B) a positive statement. C) a decision at the margin. D) OPEC overcoming scarcity Answer: A Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 58 Copyright © 2014 Pearson Education, Inc.

6 Essay Questions 1) 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: Recognition Status: Previous edition, Chapter 1 AACSB: Communication 2) What is the relationship between wants, factors of production, 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 factors of production 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: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication 3) 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: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning

4) Explain why both rich and poor people experience scarcity. Answer: Scarcity exists when people's wants exceed their ability to satisfy the wants. People's wants are literally infinite, so just as a poor person can want more, so too can a richer person. Therefore both rich and poor experience scarcity. Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning 5) What is the difference between scarcity and poverty? Answer: Scarcity exists when availability is less than people want. Poverty exists when availability is less than people need. Everyone suffers scarcity; only an unfortunate minority suffers poverty. Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning 6) 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: Recognition Status: Previous edition, Chapter 1 AACSB: Communication 7) 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: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

8) What is the difference between microeconomics and macroeconomics? Give an example of an issue each studies. Answer: Essentially microeconomics studies individual units within the economy, such as the choices made by individual consumers or individual firms. Macroeconomics studies the overall or aggregate economy. Microeconomics examines the factors that affect employment at an individual firm. Macroeconomics examines the factors that affect economy-wide unemployment. Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication 9) Below is a student's answer to the question "What is microeconomics?" If you were the instructor, how would you correct the student's answer? "Microeconomics is the study of how government influences the choices made by individuals and businesses and of the performance of the whole national economy." Answer: The answer is partially correct. Microeconomics is the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of the government. But the performance of the national economy is the subject of macroeconomics, not microeconomics. Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication 10) China's population is over 1.5 billion, while the population of the United States is about 300 million. This fact means that China has much more human capital than the U.S. does. True or false? Explain your answer. Answer: False. Population can measure the quantity of a nation's labor resource, but the population numbers don't tell us anything about skills that this labor force obtained from education, on-the-job training, and work experience, which are called human capital. Thus, the population numbers in the statement only tell us that China is likely to have more labor than the United States, but it does not necessarily mean that it also has more human capital. Topic: Human Capital Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication 11) Explain what entrepreneurship is and why it is considered a factor of production. Answer: Entrepreneurship is the resource (the people) that runs businesses. Entrepreneurs organize the other resources, land, labor, and capital. It is a factor of production because people with the desire and talent to successfully organize a business are needed to run businesses. Topic: Entrepreneurship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

12) An analyst on a local news channel argues that the recent corporate scandals "demonstrated very clearly that self interest always contradicts social interest." Do you agree or disagree? Substantiate your answer. Answer: You should disagree. The recent corporate scandals only show that self interest might contradict social interest. But they don't prove that this is necessarily the case as we can find many real-world examples of how people guided by self-interest promote society's well-being. In fact, under the market system the whole economy operates through the decisions made by selfinterested individuals. And countries such as the United States have proven to be more successful in promoting social interest than were centrally planned, or communist, economies where people's self interest was suppressed and all important economic decisions were made by government. Topic: Self-Interest and Social Interest Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning 13) What is a tradeoff? Give an example. Answer: A tradeoff occurs when one thing must be given up to get another. Tradeoffs are pervasive; at the personal level, students tradeoff time spent studying for time they otherwise could have spent socializing. Topic: Tradeoffs Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication 14) What is opportunity cost? Answer: Opportunity cost is the highest-valued alternative given up when selecting an action. For instance, the opportunity cost of studying an hour is whatever the highest-valued alternative would have been for the hour spent studying. Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication 15) 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 highestvalued alternative forgone, not all alternatives forgone. 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: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

16) 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 first roommate tells 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 roommate's comment correct? Answer: Your first roommate's comment is incorrect. The opportunity cost of preparing dinner at home is whatever is the highest-valued alternative forgone, 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: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication 17) Define marginal cost and marginal benefit. Answer: Marginal cost is the opportunity cost of an increase in an activity. Marginal benefit is the benefit of an increase in an activity. Topic: Marginal Benefit and Marginal Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication 18) 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 incentives. Answer: Policy makers know that people making 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 decision making by increasing the marginal benefit of returning bottles in order to reduce litter and clean the environment. Topic: Incentives, Marginal Cost and Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication 19) If the government raises the tax on cigarettes, what is the effect on people's incentives and choices? Answer: The government raises the tax on cigarettes to discourage smoking. With a higher tax the price of cigarettes rises. The opportunity cost of smoking increases, which gives people incentive to cut their consumption of cigarettes. Topic: Incentives, Marginal Cost and Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

20) 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 Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication 21) "The difference between positive and normative statements is that a positive statement is always true while a normative statement might or might not be true." True or false? Explain. Answer: False. The difference between positive and normative statements is that a positive statement is about what is, while a normative statement is about what ought to be. A positive statement can be tested against the facts and may be proved to be right or wrong, whereas a normative statement depends on values and cannot be tested. Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication 22) 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 Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning 64 Copyright © 2014 Pearson Education, Inc.

23) 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 and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication 24) Explain whether the statement, "Hillary Clinton was elected President of the United States in 2012," 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 2012, 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 2012" is a positive, albeit incorrect, statement. Topic: Positive and Normative Skill: Conceptual Status: Revised AACSB: Communication 25) 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: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication 26) 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: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

7 Numeric and Graphing Questions 1) Suppose you are working four nights per week at your courses and your grade point average is 3.5. You want a higher grade and decide to study an extra night each week. Your GPA now rises to 3.8. What is your marginal benefit from studying for one additional night a week? Answer: Marginal benefit is the benefit that arises from an increase in an activity. Your marginal benefit is the 0.3 increase in your grade. It's not the 3.8 grade because you already have the benefit from studying for four nights a week and should not count this benefit as resulting from the decision you are now making. Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 2) Jerry is studying three nights per week and his grade point average is 3.1. He wants a higher GPA and decides to study an extra night each week. His GPA now rises to 3.5. Had Jerry not decided to study an extra night, he would have spent this night with his friends. What is Jerry's marginal benefit from studying for one additional night a week? What is his marginal cost of increasing the study time by one night per week? Why does Jerry decide to study an extra night? Answer: Marginal benefit is the benefit that arises from an increase in an activity. Jerry's marginal benefit is the 0.4 increase in his grade. Marginal cost is the opportunity cost of an increase in an activity. Jerry's marginal cost is a night spent with his friends that he gives up. Jerry decides to stud an extra night because he values the marginal benefit from it (the 0.4 increase in his grade) more highly than its marginal cost (a night spent with his friends). Topic: Marginal Benefit and Marginal Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 8 True or False 1) Scarcity applies to both the rich and the poor. Answer: TRUE Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 2) Scarcity affects only those who are in need. Answer: FALSE Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

3) Microeconomics is the study of topics such as national production and unemployment. Answer: FALSE Topic: Microeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 4) Macroeconomics is the study of aggregate variables such as national production and unemployment. Answer: TRUE Topic: Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 5) The tools, instruments, machines, and buildings that people use to produce goods and services are called human capital. Answer: FALSE Topic: Human Capital Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 6) Most income in the United States is earned by business owners as profit. Answer: FALSE Topic: Labor Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 7) The United States produces more services than goods. Answer: TRUE Topic: Production Trends Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 8) When I buy an $8.00 movie ticket rather than two paperback books, the opportunity cost of going to the movie is the two paperback books I did not buy. Answer: TRUE Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

9 Extended Problems 1) Suppose you plan to go to school this summer. The cost of tuition and textbooks is $1,400 and housing, board, and entertainment will cost you $500. If you didn't go to school, you'd live in your parents' house for free, but your other living expenses would be about the same. Also, if you didn't go to school you'd work full time and could earn $8,000. You can still work part time while attending the summer school, but you will earn only $3,000. a) What will the summer school cost you in terms of money explicitly paid? b) What are the opportunity costs of going to summer school that you don't pay explicitly? Explain. c) What is your total opportunity costs of going to school this summer? Explain your answer. Answer: a) You explicitly pay the cost of tuition and textbooks ($1,400) and the cost of housing ($500), so your total explicit costs are $1,900. b) Your opportunity cost is what your give up to go to summer school. You forego a fulltime job, at which you would earn $8,000, in exchange for a part-time job, where you earn $3,000, which means you give up $5,000. Although you don't pay this money explicitly, you lose the opportunity to earn it and so it's an opportunity cost of attending summer school. c) First, your opportunity cost includes the cost that you pay explicitly ($1,900), which you have to pay only if you go to school. If you decide not to go to school, you can use this money to buy something else—an opportunity you are giving up. Second, as explained in the previous part, you are also giving up $5,000, although not paying this money explicitly. So your full opportunity cost of going to school is $1,900 + $5,000 = $6,900. Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

2) Jane is deciding whether to go to school for 8 weeks this summer. The cost of tuition and textbooks is $1,700 and housing and other expenses will cost her $600. If she does not go to school, she will live in her parents' house for free and they will cover her food and other expenses for her. Also, if Jane does not go to summer school she could work fulltime. But the best job she can get pays only $600 per week, and Jane would only agree to give up her free time for no less than $750 per week. However, if she goes to summer school, she'll have to spend 40 hours a week attending classes and studying. a) What will the summer school cost Jane in terms of money spent? b) What are the opportunity costs of going to summer school that Jane does not pay explicitly? Explain. c) What is Jane's total opportunity cost of going to school this summer? Explain your answer. d) Suppose that if Jane does not go to summer school, she will eventually take the classes anyway. What is Jane's marginal benefit of going to summer school? e) Suppose Jane decides to go to school in the summer. Explain her decision using the concepts of marginal cost and marginal benefit. Answer: a) Jane explicitly pays the cost of tuition and textbooks ($1,700) and the cost of housing ($600), so her total explicit costs are $2,300. b) Jane's opportunity cost is what she gives up (her best alternative forgone) to go to summer school. In this case she forgoes 40 hours per week of her free time, which she values more highly then the income from the best job she could find. To place a dollar value on this time, notice that the value that she places on this time is the amount of money she is willing to accept to give it up: $750 per week. So for the eight weeks, her free time has a value of $750 × 8 = $6,000. Although she does not pay $6,000 explicitly, she gives up this value of her free time and hence it's an opportunity cost to her. c) Jane's total opportunity cost includes the cost that she pays explicitly, $2,300, which she has to pay only if she goes to school. Also, as explained in the previous part, Jane is giving up the value of her free time, $6,000. Thus, her full opportunity cost of going to school is $2,300 + $6,000 = $8,300. d) Jane's marginal benefit of going to summer school is the possibility of getting her degree faster. For instance, if the summer school allows her to graduate one semester earlier, she can start to work and earn income earlier. The additional income and work experience that she gets because of her earlier graduation is what she gains if she decides to go to school in the summer. e) Jane decides to go to school in the summer if her marginal benefit from this decision, the value of extra income and work experience that she gets if she graduates earlier, is greater than the marginal cost of her summer school, $8,300. Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

3) Suppose Canon Inc. decided to invest 45 billion yen in developing and launching a new model of its digital camera, expecting that it will bring additional sales of 60 billion yen. The company has already invested 38 billion yen when the marketing department suddenly finds out that the introduction of a similar camera by Sony will reduce Canon's expected additional sales to 30 billion yen. The company's management is trying to decide whether to continue investing in the new product or close the project. Canon hires you as an economic consultant. So, think like an economist to help the company's management make their decision: a) At this point in time, what is Canon's marginal cost of introducing the new product? b) What is Canon's marginal benefit from introducing the new product? c) Will you advise Canon to finish the project and introduce the new product? Why or why not? What principles of economic thinking will help you analyze the situation and make the right choice? Answer: a) Canon's marginal cost is the additional investment needed to finish the project, which is 7 billion yen. b) Canon's marginal benefit is the benefit that arises from the new product, the additional revenue from sales, which in the changed situation is expected to be 30 billion yen. c) The principle of choosing at the margin will help. According to this principle, the amount of money already spent is irrelevant to the decision you are making now. That is, you should only consider the marginal costs and marginal benefits that will result from the decision in question. Now, if Canon goes ahead, finishes the project and introduces the new camera, it will cost them additional 7 billion yen, but they will gain additional sales of 30 billion yen. The marginal benefit of introducing the new product exceeds the marginal cost, which means the company should invest 7 billion yen to finish development and introduce the new product. Notice also that if Canon abandons the project, there will be no additional money costs, but the opportunity cost will be the additional sales (30 million yen) that the company is potentially losing. Thus, the concept of opportunity cost also helps to clarify the situation. Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

4) Your student association is looking for an auditorium to rent for an all-day conference. The university's Performing Arts Center is vacant on that day, so the association wants to rent it. The physical plant manager tells you that the daily rent is $660, which includes $400 to cover part of the cost paid to build the Center, $40 to cover part of its regular maintenance cost, $50 to help pay for the building's insurance, $100 to cover the extra cost of electricity that the university would incur because of the conference, and $70 to pay for additional janitorial services for the conference. You know that no one else wants to rent the Center on that day and you think that the price that the manager charges is too high. But how much should you pay? Use the economic way of thinking to answer this question and to convince the manager to accept your offer: a) If you rent the Center, what will be the university's marginal cost of renting the center to you? b) If you rent the Center, what will be the university's marginal benefit of renting the center to you? c) What amount of rent should you offer? Convince the manager to accept your offer. Answer: a) The university's marginal cost is $170. These are the extra cost of electricity ($100) and janitorial services ($70) that the university will only pay if you rent the Center. The costs of building the Center, insurance, and regular maintenance costs are not extra costs incurred because you rent the Center. The university has already paid for building it and pays the cost of insurance and regular maintenance no matter whether you rent the Center or not. Therefore these costs are not marginal costs of renting the center to you. b) The university's marginal benefit is the amount of rent that you pay. c) You should start negotiating from $171. Because the university's marginal cost is $170 and the amount you pay is its marginal benefit, the university will be better off if it accepts any amount greater than $170. If the manager is still not convinced, tell the manager that, since no one else wants to rent the Center on that day, declining your offer is not cost free. The opportunity cost of not accepting it will be the difference between the offered rent and $170. In practice, of course, there are transaction costs, such as the time spent by both parties to negotiate and sign the agreement, and accepting your offer will cost the manager some extra time and organizational effort. Also, as you learnt in this chapter, people are guided by self interest when they make their decisions and the manager's self interest is not necessarily the same as the university's interest. On the other hand, you might want to support your university. Therefore the amount of rent you will agree upon is likely to be higher than $171. Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

10 Appendix: Graphing Data 1) The horizontal axis in a graph A) measures time in a scatter diagram. B) measures the quality of a variable. C) is named the y-axis. D) is named the x-axis. Answer: D Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 2) The vertical axis in a graph A) is named the y-axis. B) is named the x-axis. C) is not used in a scatter diagram. D) has no origin. Answer: A Topic: Graphing Data Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills 3) The value of the y-coordinate of a point in a graph is the length of a line from the point to the A) origin. B) scalar. C) x-axis. D) y-axis. Answer: C Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 4) The value of the x-coordinate of a point in a graph is the length of a line from the point to the A) origin. B) scalar. C) x-axis. D) y-axis. Answer: D Topic: Graphing Data Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

5) On the horizontal axis of a graph, generally A) values increase from left to right. B) values increase from right to left. C) values can be positive and/or negative. D) Both answers A and C are correct. Answer: D Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

6) In the above figure, the x-coordinate of point b is A) 1. B) 2. C) 3. D) 14. Answer: C Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

7) In the above figure, the y-coordinate of point b is A) 1. B) 2. C) 3. D) 14. Answer: D Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

8) In the above figure, when income is zero, household expenditures equal A) 0. B) $1000. C) $4000. D) $8000. Answer: D Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

9) In the figure above, the value on the x-axis increases as we move from A) point G to point A. B) point C to point A. C) point F to point A. D) point E to point A. Answer: A Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 10) In the figure above, the value on the y-axis decreases as we move from A) point G to point A. B) point C to point A. C) point F to point A. D) point E to point A. Answer: D Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11) In the figure above, point B is ________. A) on the x-axis B) on the y-axis C) at the origin D) a coordinate Answer: A Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

12) Using the above figure, the origin is at which point? A) Point a B) Point b C) Point c D) None of the points in the figure is the origin. Answer: B Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

13) Using the above figure, which of the following is true? A) Axis 1 is typically called the y-axis. B) Axis 1 is also known as the origin. C) Axis 2 is typically called the x-axis. D) Point b is known as the origin. Answer: D Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 14) A scatter diagram shows the A) level of one variable over time. B) change in one variable over time. C) relationship between two variables. D) evolution of a variable. Answer: C Topic: Scatter Diagrams Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 15) A scatter diagram will be most useful A) in discerning a possible relationship between height and weight for individuals. B) in resolving a dispute over two normative assertions. C) in predicting next year's rate of unemployment. D) All of the above are correct. Answer: A Topic: Scatter Diagrams Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 16) You notice that when interest rates increases, new residential housing prices tend to decrease. This observation indicates that A) there must be false causality between interest rates and housing prices. B) higher interest rates must cause low housing prices. C) a scatter diagram between interest rates and housing prices will show a negative relationship. D) a scatter diagram between interest rates and housing prices will show a direct relationship. Answer: C Topic: Scatter Diagrams Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

17) The above figure plots income and consumption in a nation. In 2007 A) consumption was equal to $25,000 and income was equal to $28,000. B) consumption was equal to $28,000 and income was equal to $25,000. C) consumption was equal to $25,000 and income was equal to $25,000. D) consumption was equal to $27,000 and income was equal to $31,000. Answer: A Topic: Scatter Diagrams Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

18) The above figure graphs the price of a bushel of wheat and housing starts. The graph shows the variables are A) strongly positively related. B) strongly negatively related. C) not related. D) related via an indirect relationship. Answer: C Topic: Scatter Diagrams Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

19) The figure above shows that in 1996, unemployment was equal to about ________ and the inflation rate was equal to about ________. A) 7.0 percent; 3.0 percent B) 3.0 percent; 5.5 percent C) 5.5 percent; 3.0 percent D) 6.0 percent; 4.0 percent Answer: C Topic: Scatter Diagrams Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

20) The above figure reveals A) no relationship between household income and average household expenditure on automobiles. B) that as household income increases the average household expenditure on automobiles decreases. C) that as household income increases the average household expenditure on automobiles increases. D) All of the above are possible. Answer: C Topic: Scatter Diagrams Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

21) In the above figure, the axis breaks are used A) to create a misleading graph. B) to indicate that there are jumps from the origin, 0, to the first values recorded along the axes. C) to indicate that there are not enough data to be included in the graph. D) to show that there are no data available for the omitted ranges. Answer: B Topic: Breaks in the Axes Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

22) In the above figure, the axis break in the x-axis A) reflects the fact that for the years covered in the figure, the unemployment rate was never less than 3 percent. B) shows that there is no relationship between inflation and unemployment. C) misleadingly shows that inflation has changed very little even though the unemployment rate has increased a great deal. D) implies that for the years covered in the figure, the inflation rate was always greater than 1 percent. Answer: A Topic: Breaks in the Axes Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 23) On a graph, high correlation between the variable measured along the x-axis and the variable measured along the y-axis A) means that changes in the variable measured along the x-axis must cause changes in the variable measured along the y-axis. B) means that changes in the variable measured along the y-axis must cause changes in the variable measured along the x-axis. C) means that changes in either variable must cause changes in the other variable. D) does NOT mean that a change in the variable measured along the x-axis must cause a change in the variable measured along the y-axis. Answer: D Topic: Correlation and Causation Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

24) You notice that when the inflation rate increases, the interest rate tends to increase. This observation indicates that A) there might be false causality between inflation and the interest rate. B) higher inflation rates must cause a higher interest rate. C) a scatter diagram of the inflation rate and the interest rate will show a positive relationship. D) the variables have an inverse relationship. Answer: C Topic: Study Guide Question, Scatter Diagrams Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

25) In the figure above, when income equals $20,000, what does consumption equal? A) $0 B) $10,000 C) $20,000 D) impossible to tell Answer: D Topic: Study Guide Question, Scatter Diagrams Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11 Appendix: Graphs Used in Economic Models 1) If two variables are positively related, then A) they move in opposite directions. B) they are independent of each other. C) they move in the same direction. D) their graph will have a negative slope. Answer: C Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 2) If two variables both increase at the same time or decrease at the same time, they are A) unrelated to each other. B) positively related. C) negatively related. D) conversely related. Answer: B Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 3) If there is a direct 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 (or the slope of a tangent line to the curve) will be negative. D) Both answers A and C are correct. Answer: A Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 4) The variable measured on the y-axis increases whenever the variable measured on the x-axis increases. As a result, the relationship between the variables will A) be negatively sloped. B) have a slope of zero. C) be a vertical line. D) be none of the above. Answer: D Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 85 Copyright © 2014 Pearson Education, Inc.

5) A positive relationship exists between two variables if A) one variable has "positively" no effect on the other variable. B) a reduction in one variable is associated with an increase in the other variable. C) a reduction in one variable is associated with a decrease in the other variable. D) both variables are inflation-distorted. Answer: C Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 6) If the slope of a line that graphs the relationship between variable x and variable y is positive, then we know that A) when the value of variable x increases, then the value of variable y decreases. B) when the value of variable x decreases, then the value of variable y decreases. C) the two variables are unrelated. D) the two variables have an inverse relationship. Answer: B Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 7) For the Jones household it has been estimated that for every ten degrees increase in the outdoor temperature the consumption of ice tea increases by 5 glasses. What type of relationship exists between temperature change and the consumption of ice tea? A) negative relationship B) positive relationship C) no relationship D) maximum relationship Answer: B Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

8) In the above figure, which curve shows a positive relationship between x and y? A) Only curve A. B) Only curve B. C) Only curve C. D) All the curves show a positive relationship. Answer: D Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 9) In the above figure, which curve shows a negative relationship between x and y? A) Only curve A. B) Only curve B. C) Only curve C. D) None of the curves show a negative relationship. Answer: D Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

10) A scatter diagram with the price of vacations to Mexico on the vertical axis and the price of vacations to California on the horizontal axis shows a positive relationship. If the price of vacations to Mexico were placed on the horizontal axis, and the price of vacations to California on the vertical axis, the relationship would be A) negative relationship, also called a direct relationship. B) negative relationship, also called an inverse relationship. C) positive relationship, also called a direct relationship. D) positive relationship, also called an inverse relationship. Answer: C Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11) The figure above shows ________ relationship between the two variables. A) a positive B) a negative C) no D) an inverse Answer: A Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

12) "As you devote more hours to studying, your GPA increases." A graph of this relationship would show A) a positive relationship. B) a direct relationship. C) an inverse relationship. D) Both answers A and B are correct. Answer: D Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 13) "As interest rates rise, people save more money." A graph displaying this relationship would show A) an inverse relationship. B) a positive relationship. C) a cross-section graph. D) a positive then a negative relationship. Answer: B Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 14) "If you hire 1 worker, the worker can produce 20 pizzas a day. If you hire a 2nd worker, that worker can produce 10 more pizzas. If you hire a 3rd worker, that worker can produce 2 more pizzas a day." A graph displaying this relationship between the number of employees and total pizza output per day would show A) a positive linear relationship. B) an upward-sloping curve that becomes less steep. C) a negative linear relationship. D) a negatively-sloped curve that becomes less steep. Answer: B Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

15) If you study 3 hours for an exam, you can raise your score by 30 points. If you study for another 3 hours your score increases by 10 points. And if you study for another 3 hours, your score will increase by 5 more points. A graph displaying this relationship between the number of hours studied and your total exam score would show A) a positive linear relationship. B) an upward-sloping curve that becomes less steep. C) a negative linear relationship. D) an upward-sloping curve that becomes more steep. Answer: B Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 16) Suppose you produce 10 bikes a day for a total cost of $1000. Total costs increase to $1100 when you produce 15 bikes. Finally, total costs increase to $1300 if you make 20 bikes. A graph showing the relationship between total costs and the number of bikes produced would be A) a negatively-sloped line that becomes steeper. B) a positively-sloped line that becomes steeper. C) a negatively-sloped line that becomes flatter. D) a positively-sloped line that becomes flatter. Answer: B Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills Total household income (dollars) 30,000 40,000 50,000

Total consumption (dollars) 27,000 35,000 38,000

17) The data in the table above shows the relationship between the Joneses' total consumption and total household income. Based on these data, total consumption varies A) directly with their total household income. B) independently of their total household income. C) inversely with their total household income. D) negatively with their income. Answer: A Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x 0 2 4 6 8 10

y 0 6 12 18 24 30

18) In the above table, when x increases from 4 units to 6 units, y changes by ________ units. A) 2 B) -2 C) 6 D) -6 Answer: C Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 19) The above table indicates that variables x and y are A) positively related. B) inversely related. C) negatively related. D) not related. Answer: A Topic: Variables That Move in the Same Direction Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

x 0 1 2 3 4 5

y 2 5 8 11 14 17

20) Given the information in the above table, the relationship between x and y is A) positive, and the curve becomes flatter as x increases. B) positive, and the curve becomes steeper as x increases. C) positive and linear. D) negative and linear. Answer: C Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

21) In the above figure, the relationship between x and y is A) positive, and the curve becomes flatter as x increases. B) positive, and the curve becomes steeper as x increases. C) positive and linear. D) negative and linear. Answer: C Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 92 Copyright © 2014 Pearson Education, Inc.

22) The above figure shows the relationship between the Joneses' total consumption and total household income. The figure illustrates that the Joneses' total consumption varies A) directly with their total household income. B) independently of their total household income. C) inversely with their total household income. D) negatively with their income. Answer: A Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

23) The relationship depicted in the above figure is A) a negative linear relationship. B) a positive linear relationship. C) a positive becoming less steep relationship. D) a positive becoming steeper relationship. Answer: C Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 24) 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. Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

25) If variable x always increases when variable y decreases, x and y are said to be A) positively related. B) negatively related. C) unrelated. D) trend related. Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 26) If there is an inverse relationship between variable x and variable y, then an increase in the value of variable x will be accompanied by A) an increase in the value of variable y. B) a decrease in the value of variable y. C) no change in the value of variable y. D) variable y reaching its maximum value. Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 27) If there is an inverse relationship between two variables, the graph of this relationship A) will be a horizontal line. B) will be downward-sloping. C) might be horizontal. D) will be upward-sloping. Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

28) A negative relationship exists between the variable measured along the y-axis and the variable measured along the x-axis if A) a reduction in the variable measured along the x-axis is associated with a reduction in the variable measured along the y-axis. B) an increase in the variable measured along the x-axis is associated with an increase in the variable measured along the y-axis. C) the variable measured along the x-axis and the variable measured along the y-axis move in the opposite direction. D) the variable measured along the x-axis and the variable measured along the y-axis move in the same direction. Answer: C Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 29) Along a curve, when one variable increases, the other variable decreases. The curve showing this relationship A) might be horizontal. B) has a positive slope. C) has a negative slope. D) has an increasing then a decreasing slope. Answer: C Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills 30) "As the price of gasoline increases, fewer people buy cars that are gas guzzlers." A graph showing this relationship would have A) a negative slope. B) a positive relationship. C) a direct relationship. D) a horizontal line. Answer: A Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

31) A graph shows that as fees to use ATM machines increase, people use them less frequently. The graph of this relationship would show A) an inverse relationship. B) a negative relationship. C) a direct relationship. D) Both answers A and B are correct. Answer: D Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 32) As the number of days without rain increases, the amount of wheat per acre grown declines. A graph showing this relationship would have a curve A) that is a horizontal line. B) that is a vertical line. C) showing a positive relationship. D) None of the above answers are correct. Answer: D Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 33) As a firm produces more and more CDs, the average cost of producing each CD falls. A curve showing the behavior of the average cost of a CD as more CDs are produced A) would be positively and then negatively-sloped. B) would be positively sloped. C) would be horizontal. D) would be negatively sloped. Answer: D Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 34) Suppose that we find that student grades and time spent at parties move in opposite directions. A graph of the relationship between these two variables would curve A) upward and be linear. B) upward and may be linear or nonlinear. C) downward and be linear. D) downward and may be linear or nonlinear. Answer: D Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 97 Copyright © 2014 Pearson Education, Inc.

35) The faster an automobile is driven (speed), the lower the miles per gallon (mpg) for that automobile. Given this information, we say that an automobile's speed and mpg have A) a direct relationship. B) an inverse relationship. C) a linear relationship. D) a maximum relationship. Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 36) If the quantity of wood purchased decreases when the price of wood rises, a graph representing these variables would have A) time on the vertical axis. B) the slope on the vertical axis. C) a negative slope. D) a positive slope. Answer: C Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 37) A scatter diagram with the price of peanut butter on the vertical axis and the price of jelly on the horizontal axis shows a negative relationship. If the price of jelly was placed on the vertical axis and the price of peanut butter was placed on the horizontal axis, the relationship would be a A) negative relationship, also called a direct relationship. B) negative relationship, also called an inverse relationship. C) positive relationship, also called a direct relationship. D) positive relationship, also called an inverse relationship. Answer: B Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

38) In the above figure, if there is a negative relationship between the variables x and y, which of the graphs above can be used to indicate this? A) Figure A B) Figure B C) Figure C D) both Figure A and Figure C Answer: D Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 39) In the above figure, which of the graphs demonstrates a curve with a decreasing slope, that is, a slope getting smaller in magnitude as x increases? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

40) In the above figure, a negative relationship is demonstrated in which of the graphs? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

41) The above figure depicts a A) positive non-linear relationship between age and the number of hamburgers purchased per year. B) negative non-linear relationship between age and the number of hamburgers purchased per year. C) positive linear relationship between age and the number of hamburgers purchased per year. D) negative linear relationship between age and the number of hamburgers purchased per year. Answer: D Topic: Variables That Move in Opposite Directions Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

42) In the above figure, the relationship between costs and quantity is negative A) between point A and point B. B) between point B and point C. C) along the entire curve. D) no where along the curve. Answer: A Topic: Variables That Move in Opposite Directions Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

43) In the above, a positive relationship between price and quantity is shown in A) Figure A B) Figure B C) both Figure A and Figure B D) neither Figure A nor Figure B Answer: B Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 44) In the above figure, a negative relationship between price and quantity is shown in A) Figure A. B) Figure B. C) Both Figure A and Figure B. D) Neither Figure A nor Figure B. Answer: A Topic: Variables That Move in Opposite Directions Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 45) If a graph shows a negative relationship between two variables which then becomes a positive relationship, this curve would A) always be an upward-sloping line. B) have a minimum point. C) have a maximum point. D) always be a downward-sloping line. Answer: B Topic: Maximum and Minimum Points Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

46) As a firm expands its output, cost per unit of output (average cost) decreases and then increases. Average cost and output have A) a relationship with a minimum. B) a relationship with a maximum. C) no relationship. D) a linear positive relationship. Answer: A Topic: Variables That Have a Maximum or Minimum Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

47) In the above figure, the relationship between the tax rate and tax revenue is positive and becoming less steep between tax rates of A) 0 percent and 30 percent. B) 30 percent and 100 percent. C) 0 percent and 100 percent. D) None of the above answers are correct. Answer: A Topic: Variables That Have a Maximum or Minimum Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

48) In the above figure, if the tax rate is increased from 20 percent to 30 percent, tax revenue A) decreases. B) is constant. C) increases. D) may increase or decrease. Answer: C Topic: Variables That Have a Maximum or Minimum Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 49) In the above figure, tax revenue is at a maximum when the tax rate is A) 0 percent. B) 30 percent. C) 50 percent. D) 100 percent. Answer: B Topic: Variables That Have a Maximum or Minimum Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 50) As a curve approaches a maximum point, the slope will A) be positive, then negative after the maximum point. B) be negative, then positive after the maximum point. C) remain constant on either side of the maximum point. D) increase before and after the maximum point. Answer: A Topic: Maximum and Minimum Points Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

51) 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. Answer: C Topic: Variables That Have a Maximum or Minimum Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

Average cost Total number of producing a of workers television set (dollars) 4 125 10 75 13 77 15 85 52) Graphing the data in the above table with the number of workers on the horizontal axis and the average cost on the vertical axis, the graph would show A) first a negative and then a positive relationship. B) a horizontal line. C) no relationship. D) a linear relationship. Answer: A Topic: Variables That Have a Maximum or Minimum Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 53) If a curve rises and then falls, it shows a A) maximum. B) minimum. C) linear relationship. D) constant slope relationship. Answer: A Topic: Maximum and Minimum Points Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 54) If a curve falls and then rises, it shows A) a maximum. B) a minimum. C) a linear relationship. D) a constant slope relationship. Answer: B Topic: Maximum and Minimum Points Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

55) When y changes, x stays the same. The line depicting this relationship would be A) vertical. B) horizontal. C) linear with a negative slope. D) linear with a positive slope. Answer: A Topic: Variables That Are Unrelated Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 56) A graph measures y on the vertical axis and x on the horizontal. The curve on the graph is a horizontal line. From this fact we know that A) the value of x never changes. B) the value of y does not depend on the value of x. C) the ratio of x to y is constant. D) the slope of the line is not defined because y never changes. Answer: B Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 57) A graph measures y on the vertical axis and x on the horizontal. The curve on the graph is a vertical line. From this fact we know that A) the value of x does not change when the value of y changes. B) the value of y is constant. C) the ratio of x to y is constant. D) the ratio of y to x is constant. Answer: A Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 58) The graph of two variables, x and y, is a horizontal line. This result indicates that x and y are A) positively related. B) negatively related. C) not related. D) falsely related. Answer: C Topic: Variables That Are Unrelated Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

59) A diagram shows the quantity of tomatoes on the horizontal axis and the quantity of coffee on the vertical axis. The quantity of tomatoes remains constant as the quantity of coffee increases. The graph of these data is A) a horizontal line. B) a vertical line. C) a positively sloped line. D) a negatively sloped line Answer: B Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 60) A graph shows the price of a pound of cucumbers on the vertical axis and the quantity of new cars sold by GM 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) a vertical line. C) a curve with a maximum. D) a positively-sloped line. Answer: A Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 61) If two variables are unrelated, a scatter diagram of those variables will A) be a vertical line. B) be a horizontal line. C) be either a vertical or horizontal line. D) have a constant positive slope. Answer: C Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

62) Which of the following correctly describes the above figure? I) There is no relationship between the price of an avocado and a student's grade in economics. II) The value of variable measured on the y-axis is constant as the variable measured on the xaxis increases. III) As a student's grade in economics increases, the price of an avocado increases. A) I B) I and II C) II and III D) I, II, and III Answer: B Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

63) In the above, 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. Answer: A Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

64) Which of the following correctly describes the above figure? A) There is no relationship between x and y. B) There is a positive relationship between x and y. C) There is a negative relationship between x and y. D) None of the above answers are correct. Answer: A Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

65) In the above figure, which curve indicates that the level of food production does not affect the population growth rate? A) F B) G C) H D) I Answer: C Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

66) In the above figure, the relationship between income and expenditures is A) positive. B) negative. C) independent. D) random. Answer: A Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 67) The relationship in the above figure suggests that when the interest rate is 5 percent, A) a decrease in income will be associated with a decrease in expenditures. B) a decrease in income will be associated with an increase in expenditures. C) an increase in income will be associated with a decrease in expenditures. D) there is no relationship between expenditures and income. Answer: A Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

68) If variables x and y move up and down together, they are A) positively related. B) negative related. C) unrelated. D) trend related. Answer: A Topic: Study Guide Question, Variables That Move Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 69) The term "direct relationship" means the same as A) correlation. B) trend. C) positive relationship. D) negative relationship. Answer: C Topic: Study Guide Question, Variables That Move Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

70) The relationship between income and consumption illustrated in the figure above is A) positive and linear. B) positive and nonlinear. C) negative and linear. D) negative and nonlinear. Answer: A Topic: Study Guide Question, Variables That Move Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

71) The figure above shows A) a positive relationship. B) a direct relationship. C) a negative relationship. D) no relationship between the variables. Answer: C Topic: Study Guide Question, Variables That Move Opposite Direction Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 72) The relationship between two variables, x and y, is a vertical line. Thus x and y are A) positively correlated. B) negatively correlated. C) not related. D) falsely related. Answer: C Topic: Study Guide Question, Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

12 Appendix: The Slope of a Relationship 1) The slope of a line equals the A) change in the variable measured along the x-axis divided by the change in the variable measured along the y-axis. B) change in the variable measured along the y-axis divided by the change in the variable measured along the x-axis. C) change in the variable measured along the x-axis minus the change in the variable measured along the y-axis. D) change in the variable measured along the x-axis multiplied by the change in the variable measured along the y-axis. Answer: B Topic: The Slope of a Relationship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 2) A curve is plotted with y measured on the vertical axis and x measured on the horizontal axis. The slope of the curve equals A) y divided by x. B) the change in y divided by x. C) the change in y divided by the change in x. D) y divided by the change in x. Answer: C Topic: The Slope of a Relationship Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills 3) The slope of a line A) can never equal zero. B) is always a constant. C) measures the ratio of the change in the value of the y-axis variable relative to the change in the value of the x-axis variable. D) measures the value of the y-axis variable relative to the value of the x-axis variable. Answer: C Topic: The Slope of a Relationship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

4) The slope of a positive relationship is A) positive. B) undefined. C) positive to the right of the maximum point and negative to the left. D) constant as long as the relationship is nonlinear. Answer: A Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 5) In which of the following cases is the slope of a line positive? A) As x increases, y increases. B) As x increases, y decreases. C) As x increases, y remains the same. D) As x increases, y equals a positive number. Answer: A Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 6) If a large change in the variable measured on the x-axis is associated with a small change of the variable measured on the y-axis, the line is ________ and the slope is ________. A) downward-sloping; large B) downward-sloping; small C) upward-sloping; small D) either downward or upward-sloping; small Answer: D Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 7) Suppose we are considering the relationship between two variables y and x. y is measured on the y-axis and x is measured on the x-axis, and the relationship between then is a straight line. Suppose that the slope of the line is positive and is less than 1. This slope means that a change in x is associated with A) a bigger change in y. B) a smaller change in y. C) no change in y. D) an equal change in y. Answer: B Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 119 Copyright © 2014 Pearson Education, Inc.

8) Suppose we are considering the relationship between two variables y and x. y is measured on the y-axis and x is measured on the x-axis, and the relationship between then is a straight line. Suppose that the slope of the line is equal to 1. This slope means that A) a change in x is associated with a bigger change in y. B) a change in x is associated with a smaller change in y. C) a change in x is associated with no change in y. D) a change in x is associated with an equal change in y. Answer: D Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 9) Suppose we are considering the relationship between two variables y and x. y is measured on the y-axis and x is measured on the x-axis, and the relationship between then is a straight line. Suppose that the slope of the line is greater than 1. This slope means that A) a change in x is associated with a bigger change in y. B) a change in x is associated with a smaller change in y. C) a change in x is associated with no change in y. D) a change in x is associated with an equal change in y. Answer: A Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 10) In which of the following cases is the slope of a line positive and less than infinity? A) As the variable measured on the x-axis decreases, the variable measured on the y-axis decreases. B) As the variable measured on the x-axis increases, the variable measured on the y-axis decreases. C) As the variable measured on the y-axis increases, the variable measured on the x-axis does not change. D) As the variable measured on the y-axis increases, the variable measured on the x-axis decreases. Answer: A Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11) In a graph, a line has a negative slope if A) the line is vertical. B) the line is horizontal. C) the line rises from right to left. D) the line rises from left to right. Answer: C Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 12) Suppose that for a curve, as the variable measured on the x-axis increases, the variable measured on the y-axis decreases. The curve has a ________ slope. A) tangent B) positive C) negative D) hypothetical Answer: C Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 13) If the slope of the relationship between savings and interest rates is 0.5, then A) savings and interest rates have a positive relationship. B) savings and interest rates have a negative relationship. C) savings and interest rates have no relationship. D) savings and interest rates have an inverse relationship. Answer: A Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 14) If an increase in x (the variable on the horizontal axis) from 6 to 8 units causes a decrease in y (the variable on the vertical axis) from 4 to 3 units, the slope equals A) 2. B) -2. C) 1/2. D) -1/2. Answer: D Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x 0 2 4 6 8 10

y 0 6 12 18 24 30

15) In the table above, y is measured along the y-axis and x along the x-axis. The slope of the relationship between x = 0 and x = 2 is A) -6. B) 2. C) 3. D) 6. Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills x 10 9 8 7 6 5

y 50 70 100 130 170 220

16) In the table above, y is measured along the y-axis and x along the x-axis. What is the value of the slope between the x = 8 and x = 6? A) -0.057 B) -19.28 C) -35 D) 70 Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

Point a b c d e f

X 100 200 300 400 500 600

Y 50 75 100 100 75 50

17) In the table above, Y is measured along the y-axis and X along the x-axis. The slope between points a and b is A) 25. B) 4. C) 0.25. D) -0.25. Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 18) In the table above, Y is measured along the y-axis and X along the x-axis. The slope between points c and d is A) 100. B) 0. C) 0.25. D) -4. Answer: B Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 19) In the table above, Y is measured along the y-axis and X along the x-axis. The slope between points e and f is A) -25. B) 4. C) 0.25. D) -0.25. Answer: D Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

20) In the above figure, the curve has a slope that is ________. A) positive and becoming larger in magnitude B) positive and becoming smaller in magnitude C) negative and becoming larger in magnitude D) negative and becoming smaller in magnitude Answer: A Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

21) In the above figure, the curve has a slope that is ________. A) positive and becoming larger in magnitude B) positive and becoming smaller in magnitude C) negative and becoming larger in magnitude D) negative and becoming smaller in magnitude Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x 0 1 2 3 4

y 4 5 8 13 20

22) In the above table, the relationship between x and y is ________ and, with y measured on the vertical axis, the slope between and is equal to ________. A) negative; 8 B) negative; 6 C) positive; 5 D) positive; 3 Answer: D Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 23) The slope of a straight line is A) variable. B) increasing. C) decreasing. D) constant. Answer: D Topic: The Slope of a Straight Line Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 24) The slope of a straight line is A) always equal to zero. B) calculated as y/x at any point. C) constant. D) always greater than zero. Answer: C Topic: The Slope of a Straight Line Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

25) 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). Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 26) Along a straight line, when x equals 90, then y equals 30. When x equals 120, then y equals 40. The slope of the straight line is A) 1/3. B) -1/3. C) 3. D) -3. Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 27) Along a straight line, the value of y is always equal to the value of x. The slope of the line is A) -1. B) 0. C) 1. D) infinite. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x 0 1 2 3 4 5

y 0 3 6 9 12 15

28) Using the data in the table above, with y measured on the vertical axis, the slope of the line relating y to x is A) 1/3. B) 1. C) 3. D) 6. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills x-variable (on the horizontal axis) 10 15 20

y-variable (on the vertical axis) 28 31 34

29) The above table shows data on two variables. If these data were graphed, the slope of the line would be A) 3/5. B) 3. C) 5/3. D) impossible to determine from the information given. Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x-variable y-variable (on the horizontal axis) (on the vertical axis) 8 14 10 18 12 22 30) The above table gives data on two variables. If these data were graphed, the slope of the line would be A) 1. B) -2. C) 2. D) -4. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 31) The above table gives data on two variables. If these data were graphed, their relationship would A) be a straight line. B) be a curved line. C) show a negative relationship. D) nonexistent. Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x-variable y-variable (on the horizontal axis) (on the vertical axis) 100 50 200 125 300 200 32) The above table 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. Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills Quantity 0 8 16 24 32 36

Price 50 40 30 20 10 5

33) Using the data in the above table, A) the variables quantity and price are positively related. B) the variables quantity and price are negatively related. C) the variables quantity and price are neither positively nor negatively related. D) an increase in price is likely to cause an increase in quantity. Answer: B Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

34) If we use the numbers in the above table to draw a graph, with the price on the vertical axis and the quantity on the horizontal axis, the line relating price and quantity has a slope of A) 0.8. B) -8.0. C) -1.25. D) 8.0. Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills Income (dollars per month) 50 100 150 200

Amount spent on restaurant meals (dollars per month) 20 40 60 80

35) Using the data in the above table, if income is on the x-axis and the amount spent on restaurant meals is on the y-axis, the graph of the two variables would be A) upward sloping. B) downward sloping. C) vertical. D) horizontal. Answer: A Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 36) Using the data in the above table, if income is on the x-axis and the amount spent on restaurant meals is on the y-axis, the slope of the straight line graph equals A) 0.2. B) 0.4. C) 0.5. D) 2.5. Answer: B Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x 100 200 300 400

y 500 300 100 -100

37) Based on the information in the table above, what is the relationship between x and y? A) direct B) inverse C) positive D) No relationship exists between x and y. Answer: B Topic: Variables That Move in Opposite Directions Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 38) Using the information in the table above, what does the slope of the line between x and y equal? A) 5 B) -0.5 C) 2 D) -2 Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

39) In the above, which figure shows a linear relationship? A) Figure A B) Figure B C) both Figure A and Figure B D) neither Figure A nor Figure B Answer: C Topic: Linear Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 40) In the above, which figure shows a line with a slope of 1.0? A) Figure A B) Figure B C) both Figure A and Figure B D) neither Figure A nor Figure B Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

41) The slope of the line shown in the above figure is A) -1/3. B) -5. C) -1. D) -3. Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

42) The slope of the line shown in the above figure is A) 5. B) 2/5. C) 2/3. D) 5/2. Answer: B Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

43) 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. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

44) The slope of the line shown in the above figure is A) 2. B) 0.75. C) 0.25. D) 1 1/3. Answer: B Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

45) The slope of the line shown in the above figure is A) 0.90. B) 1.5. C) 1.11. D) 2. Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

46) The slope of the line in the above figure is A) -1/2. B) -3. C) -4. D) -1/3. Answer: B Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

47) The slope of the line in the above figure is A) 8. B) 0.05. C) 0.125. D) 0.10. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

48) The slope of the line in the above figure is A) 2/5 = 0.4. B) 5/2 = 2.5. C) -2/5 = -0.4. D) -5/2 = -2.5. Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

49) The slope of the line in the above figure is A) 1/2 = 0.5. B) 2. C) -1/2 = -0.5. D) -2. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

50) The slope of the line in the above figure is A) -10. B) 10. C) 5. D) -5. Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

51) The slope of the line shown in the above figure is A) -1 3/8. B) -1 2/3. C) 5/8. D) -0.625. Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

52) The slope of the line shown in the above figure is A) 3/4. B) 2/3. C) 1 1/3. D) 1 3/4. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

53) In the above figure, A) consumption expenditures are a linear function of labor income. B) the slope of the function depicted is 0.9. C) consumption expenditures are positively related to labor income. D) All of the above answers are correct. Answer: D Topic: Slope Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

54) The slope of the line in the above figure is A) -4. B) -2.5. C) -1.0. D) 1.0. Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 55) On a graph, an upward-sloping curve that is flatter as you move away from the origin indicates a A) positive relationship with an increasing slope. B) positive relationship with a decreasing slope. C) negative relationship with an increasing slope. D) negative relationship with a decreasing slope. Answer: B Topic: The Slope of a Curved Line Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

56) In the above figure, the curve's slope is A) positive and is becoming steeper. B) positive and is becoming less steep. C) negative and is becoming steeper. D) negative and is becoming less steep. Answer: B Topic: Slope of a Curved Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 57) If the price of apples is on the vertical axis and the quantity of apples demanded is on the horizontal axis, the slope between two points on the line describing the relationship between price and quantity is A) the change in price multiplied by the change in quantity. B) the change in price divided by the change in quantity. C) the change in quantity divided by the change in price. D) price divided by quantity. Answer: B Topic: The Slope of a Curved Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

58) The formula for the slope across an arc is used to approximate the slope for A) linear relationships only. B) a curved line. C) a positive relationship only. D) a negative relationship only. Answer: B Topic: The Slope Across an Arc Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 59) The slope of a curved line can be approximated by A) the average of the variable measured along the y-axis divided by the average of the variable measured along the x-axis. B) the inverse of the straight-line method. C) the average of the variable measured along the x-axis divided by the average of the variable measured along the y-axis. D) the slope across an arc from one point on the curve to another point on the curve. Answer: D Topic: The Slope Across an Arc Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

60) In the above figure, the slope across the arc between c and d is A) 1/2. B) 1. C) 4/3. D) 2. Answer: A Topic: The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 61) In the above figure, the slope across the arc between b and c is A) 1/2. B) 2/3. C) 1. D) 2. Answer: C Topic: The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

62) In the above figure, the slope across the arc between a and b is A) 2/5. B) 1. C) 3/2. D) 5/2. Answer: D Topic: The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 63) In the above figure, the slope at point b is A) 1. B) 5/2. C) between 1 and 5/2. D) greater than 5/2. Answer: C Topic: The Slope at a Point Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 64) In the above figure, the relationship between x and y is A) positive, with slope decreasing as x increases. B) negative, with slope decreasing as x increases. C) negative, with slope increasing as x increases. D) positive, with slope increasing as x increases. Answer: A Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 65) The slope in the above figure is A) negative and increasing. B) negative and decreasing. C) positive and increasing. D) positive and decreasing. Answer: D Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

66) In the above figure, using the slope across an arc, the slope of the curve between points b and c is A) 1/3. B) -1/3. C) 3. D) -3. Answer: A Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 67) In the above figure, using the slope across an arc, the slope of the curve between points a and c is A) -3/5. B) 3/5. C) 5/3. D) -5/3. Answer: B Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

68) In the above figure, using the slope across an arc, the slope of the curve between points a and b is A) 1/2. B) -1/2. C) 2. D) -2. Answer: B Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 69) In the above figure, using the slope across an arc, the slope of the curve between points a and c is A) 3/5. B) 5/3. C) -3/5. D) -5/3. Answer: D Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

70) In the above figure, the slope across the arc between a and b is A) 1. B) -4. C) 1/4. D) -1/4. Answer: B Topic: The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

71) In the above figure, the slope across the arc between b and d is A) 1/2. B) 1/3. C) 5/3. D) 6/5. Answer: C Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 72) In the above figure, the slope at point b A) lies between 1/3 and 1. B) equals 1. C) lies between 1 and 2. D) exceeds 2. Answer: A Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

73) In the above figure, the slope across the arc between c and d is A) 1/6. B) 12/11. C) 3. D) 4. Answer: C Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 74) In the above figure, the slope across the arc between a and b is A) 3. B) 1. C) 3/5. D) 1/3. Answer: D Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 75) Along a curved line, the slope at the maximum A) is greater than zero. B) is zero. C) is less than zero. D) may be greater than, less than, or equal to zero. Answer: B Topic: Maximum and Minimum Points Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 76) 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 is of this relationship is a A) perpendicular line. B) line with slope equal to zero. C) line that has positive slope. D) line that has a negative slope. Answer: B Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

77) The slope of a negative relationship is A) negative. B) undefined. C) positive to the right of the maximum point and negative to the left. D) constant as long as the relationship is nonlinear. Answer: A Topic: Study Guide Question, The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 78) A linear relationship A) always has a maximum. B) always has a constant slope. C) always slopes up to the right. D) never has a constant slope. Answer: B Topic: Study Guide Question, The Slope of a Straight Line Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

79) In the above figure, between x = 2 and x = 3, what is the slope of the line? A) 1 B) -1 C) 2 D) 3 Answer: A Topic: Study Guide Question, The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 80) In the above figure, how does the slope of the line between x = 4 and x = 5 compare with the slope between x = 2 and x = 3? A) The slope is greater between x = 4 and x = 5. B) The slope is greater between x = 2 and x = 3. C) The slope is the same. D) The slope is not comparable. Answer: C Topic: Study Guide Question, The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

81) The relationship between x and y in the above figure is A) positive with an increasing slope. B) positive with a decreasing slope. C) negative with an increasing slope. D) negative with a decreasing slope. Answer: A Topic: Study Guide Question, The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 82) In the above figure, the slope across the arc between points a and b equals A) 5. B) 4. C) 2. D) 1. Answer: C Topic: Study Guide Question, The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

13 Appendix: Graphing Relationships Among More Than Two Variables 1) 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. Answer: C Topic: Graphing Relationships, Two+ Variables, Ceteris Paribus Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 2) In evaluating a relationship between x and y, ceteris paribus means other variables A) are not relevant to x and y. B) move in opposite directions to x and y. C) are not changing while x and y change. D) move in the same direction as x and y. Answer: C Topic: Graphing Relationships, Two+ Variables, Ceteris Paribus Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 3) 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. Answer: D Topic: Graphing Relationships, Two+ Variables, Ceteris Paribus Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4) Assume that the quantity consumed of pizza is dependent on three factors: the price of a pizza, the income of pizza purchasers, and consumers' taste for pizza. When graphing the relationship between the price of a pizza and the quantity of pizza consumed A) the price of a pizza and the income of pizza consumers are the only variables that are allowed to change. B) the price of pizza and quantity consumed of pizza are the only variables that are allowed to change. C) consumers' taste for pizza and the income of pizza purchasers are the only variables that are allowed to change. D) None of the above answers are correct. Answer: B Topic: Graphing Relationships, Two+ Variables, Ceteris Paribus Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 5) 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; marginal benefit D) one; ceteris paribus Answer: B Topic: Graph Relationships-More than Two Variables, Ceteris Paribus Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

6) In the above figure, while moving along the line showing the relationship between household income and expenditure, A) household expenditures are held constant. B) household income is held constant. C) the interest rate is held constant. D) no variable is held constant. Answer: C Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 7) In the above figure, if the interest rate is negatively related to household expenditures for any given level of household income, an increase in the interest rate will A) shift the line vertically upward. B) shift the line vertically downward. C) make the line negatively sloped. D) cause no change in the line's position. Answer: B Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

8) The slope of the line in the above figure is A) positive. B) negative. C) direct. D) independent. Answer: B Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 9) In the above figure, when the interest rate is 8 percent and household income is $40,000, household consumption is A) $0. B) $20,000. C) $35.000. D) $60,000. Answer: B Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

10) The relationship in the above figure indicates that A) a decrease in the interest rate leads to a decrease in household income. B) a decrease in household consumption leads to a decrease in interest rates. C) a decrease in household income will lead household consumption to increase. D) none of the above Answer: D Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 11) Household consumption depends on both income and interest rates. In the above figure A) household consumption is held constant. B) interest rates are held constant. C) household income is held constant. D) no variable is held constant. Answer: C Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 12) In the above figure, if household consumption is positively related to household income, then an increase in household income will A) shift the line rightward. B) shift the line leftward. C) make the line positively sloped. D) cause a movement along the line. Answer: A Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

13) 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) 1000 pounds of peanuts. C) 2000 pounds of peanuts. D) 4000 pounds of peanuts. Answer: A Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 14) 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 is held constant. B) price of a pound of peanuts is held constant. C) quantity of peanuts that farmers supply is constant. D) Both answers A and B are true. Answer: A Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

15) 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. Answer: B Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

16) In the above figure, x is A) positively related to y and negatively related to z. B) positively related to both y and z. C) negatively related to y and positively related to z. D) negatively related to both y and z. Answer: C Topic: Study Guide Question, Graphing Relationships Among 2+ Var. Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

17) In the figure above, ceteris paribus, an increase in x is associated with A) an increase in y. B) a decrease in y. C) a decrease in z. D) None of the above answers is correct. Answer: A Topic: Study Guide Question, Graphing Relationships Among 2+ Var. Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 18) 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. Answer: C Topic: Study Guide Question, Graphing Relationships Among 2+ Var. Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

14 Appendix: Essay Questions 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: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication 2) 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: Recognition Status: Previous edition, Chapter 1 AACSB: Communication 3) 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: Recognition Status: Previous edition, Chapter 1 AACSB: Communication 4) 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: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 168 Copyright © 2014 Pearson Education, Inc.

5) What does the slope of a straight line equal? How is the slope of a curved line calculated at a point on the curve? 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 calculated at a point on the curve is equal to the slope of a tangent straight 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: Recognition Status: Modified 10th edition AACSB: Analytical Skills 6) "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: Graphing Relationships Among More Than Two Variables Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

15 Appendix: Numeric and Graphing Questions

1) 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: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

2) 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: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

3) 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: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

4) 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: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 5) If two points on a line are x = 2, y = 5 and x = 7, y= 10, what is the slope of this line? Answer: The slope equals the change in the y-variable divided by the change in the x-variable. So, the slope equals Topic: Slope Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

Katie's income Katie's purchases (dollars per year) (books per year) 50,000 14 70,000 16 90,000 18 110,000 20

6) 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 of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

X 2 4 6 8

Y 20 16 12 8

7) 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 of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

8) In the above diagram, 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: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

9) 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: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

10) 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: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11) 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: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

12) 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: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

13) 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 of a Curved Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

Hours studies SAT scores (per week) 2 900 4 1000 6 1050 8 1075 10 1090

14) 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: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

16 Appendix: True or False 1) The vertical axis of a graph shows only positive values. Answer: FALSE Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 2) A scatter diagram plots the value of one economic variable against time. Answer: FALSE Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 3) A cross-section graph can show how economic variables for different groups of people vary over time. Answer: FALSE Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 4) If the x-axis variable increases while the y-axis variable decreases, the variables x and y are negatively related. Answer: TRUE Topic: Graphs Used in Economic Models Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 5) A graph cannot be used to show that two variables are unrelated. Answer: FALSE Topic: Graphs Used in Economic Models Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 6) When graphed, variables that are unrelated are shown by either a horizontal or a vertical line. Answer: TRUE Topic: Graphs Used in Economic Models Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

7) The slope of a line is the change in the y-axis variable divided by the change in the x-axis variable. Answer: TRUE Topic: The Slope of a Relationship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 8) The slope of a straight line increases as the numbers on the x-axis become larger. Answer: FALSE Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 9) To calculate the slope of a curved line, you can calculate the slope at a point on the curve or across an arc of the curve. Answer: TRUE Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 10) If the change in the y-axis variable is 4 and the change in the x-axis variable is 2, the slope of this line is 1/2. Answer: FALSE Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 11) If the change in the y-axis variable is 6 and the change in the x-axis variable is 5, the slope of this line is 6/5. Answer: TRUE Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 12) To graph a relationship that involves more than two variables, we use the "ceteris paribus" assumption. Answer: TRUE Topic: Graphing Relationships Among More Than Two Variables Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 187 Copyright © 2014 Pearson Education, Inc.

13) "Ceteris paribus" refers to the idea that if more than two variables are graphed, only one variable must be held constant. Answer: FALSE Topic: Graphing Relationships Among More Than Two Variables Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

Macroeconomics, 11e (Parkin) Chapter 2 The Economic Problem 1 Production Possibilities and Opportunity Cost 1) The production possibilities frontier is the boundary between A) those combinations of goods and services that can be produced and those that can be consumed. B) those resources that are limited and those that are unlimited. C) those combinations of goods and services that can be produced and those that cannot. D) those wants that are limited and those that are unlimited. Answer: C Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 2) The production possibilities frontier is A) upward sloping and reflects unlimited choices. B) upward sloping and reflects tradeoffs in choices. C) downward sloping and reflects unlimited choices. D) downward sloping and reflects tradeoffs in choices. Answer: D Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 3) The production possibilities frontier A) depicts the boundary between those combinations of goods and services that can be produced and those that cannot given resources and the current state of technology. B) shows how many goods and services are consumed by each person in a country. C) is a model that assumes there is no scarcity and no opportunity cost. D) is a graph with price on the vertical axis and income on the horizontal axis. Answer: A Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

4) The production possibilities frontier itself illustrates A) all goods that can be produced by an economy B) the combination of goods and services that can be produced efficiently C) all goods and services that are desired but cannot be produced due to scarce resources. D) all possible production of capital goods Answer: B Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 5) The production possibilities frontier is the boundary between those combination of goods and services that can be A) produced and those that can be consumed. B) consumed domestically and those that can be consumed by foreigners. C) produced and those that cannot be produced. D) consumed and those that cannot be produced. Answer: C Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 6) The production possibilities frontier itself shows A) the maximum amount of resources available at any given time. B) combinations of goods and services that do not fully use available resources. C) the maximum rate of growth of output possible for an economy. D) the maximum levels of production that can be attained. Answer: D Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 7) The production possibilities frontier represents A) the maximum amount of labor and capital available to society. B) combinations of goods and services among which consumers are indifferent. C) the maximum levels of production that can be attained. D) the maximum rate of growth of capital and labor in a country. Answer: C Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

8) Which of the following is NOT true concerning a society's production possibilities frontier (PPF)? A) It reveals the maximum amount of any two goods that can be produced from a given quantity of resources. B) Tradeoffs occur when moving along a PPF. C) Production efficiency occurs when production is on the frontier itself. D) Consumers will receive equal benefits from the two goods illustrated in the PPF. Answer: D Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 9) The production possibilities frontier separates ________. A) the goods and services that people want from those that they do not want B) the types of goods that can be attained from those that can't be attained C) the quantities of goods and services that can be produced from those that cannot be produced D) the combinations of goods that people value and those that they don't Answer: C Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 10) When producing at a production efficient point, ________. A) our choice of the goods can be either on or within the production possibilities frontier B) we can satisfy our all wants C) the opportunity cost of another good is zero D) we face a tradeoff and incur an opportunity cost Answer: D Topic: Production Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 11) Harry produces 2 balloon rides and 4 boat rides an hour. Harry could produce more balloon rides but to do so he must produce fewer boat rides. Harry is ________ his production possibilities frontier. A) producing inside B) producing on C) producing outside D) producing either inside or on Answer: B Topic: Production Possibilities Frontier Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 3 Copyright © 2014 Pearson Education, Inc.

12) Production efficiency occurs when production ________. A) is at a point beyond the production possibilities frontier B) is on the production possibilities frontier or inside it C) is at any attainable point D) is on the production possibilities frontier Answer: D Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 13) A point outside a production possibilities frontier indicates A) that resources are not being used efficiently. B) an output combination that society cannot attain given its current level of resources and technology. C) that resources are being used very efficiently. D) that both goods are characterized by increasing costs. Answer: B Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 14) Which of the following is NOT illustrated by a production possibilities frontier? A) scarcity B) opportunity cost C) necessity for choice D) who gets the goods Answer: D Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 15) A production possibilities frontier figure does NOT illustrate A) the limits on production imposed by our limited resources and technology. B) the exchange of one good or service for another. C) opportunity cost. D) attainable and unattainable points. Answer: B Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

16) Any production point outside the production possibilities frontier is A) unattainable. B) associated with unused resources. C) attainable only if prices fall. D) attainable only if prices rise. Answer: A Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 17) Which of the following statements regarding the production possibilities frontier is true? A) Points outside the frontier are attainable. B) Points inside the frontier are attainable. C) Points on the frontier are less efficient than points inside the frontier. D) None of the above because all of the above statements are false. Answer: B Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 18) Jane produces only corn and cloth. Taking account of her preferences for corn and cloth A) makes her production possibilities frontier straighter. B) makes her production possibilities frontier steeper. C) makes her production possibilities frontier flatter. D) does not affect her production possibilities frontier. Answer: D Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 19) On the vertical axis, the production possibilities frontier shows ________; on the horizontal axis, the production possibilities frontier shows ________. A) the quantity of a good; the number of workers employed to produce the good B) the quantity of a good; the price of the good C) the quantity of a good; a weighted average of resources used to produce the good D) the quantity of one good; the quantity of another good Answer: D Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Analytical Skills

20) Scarcity is represented on a production possibilities frontier figure by A) the amount of the good on the horizontal axis forgone. B) the fact that there are only two goods in the diagram. C) technological progress. D) the fact there are attainable and unattainable points. Answer: D Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

21) The figure above shows Roger's production possibilities frontier. Point a is an ________ point and at that point production is ________. A) attainable; efficient B) attainable; inefficient C) unattainable; inefficient D) unattainable; efficient Answer: B Topic: Production Possibilities Frontier Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

22) The above figure illustrates that if this country wishes to move from its current production point (labeled "Current") and have 10 more tons of food, it can do this by producing A) 10 more tons of clothing. B) 10 fewer tons of clothing. C) 5 more tons of clothing. D) 5 fewer tons of clothing. Answer: D Topic: Production Possibilities Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 23) Suppose the country of Popcorn produces only jets and corn. If Popcorn cannot produce any more jets without giving up corn, we say that Popcorn has achieved A) the highest marginal benefit. B) production efficiency. C) the lowest marginal cost. D) the highest opportunity cost. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

24) A society that is producing on its production possibilities frontier is A) not utilizing all of its resources. B) not being technologically efficient. C) producing too much output. D) fully utilizing all of its productive resources. Answer: D Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 25) If a country must decrease current consumption to increase the amount of capital goods it produces today, then it must A) be using resources inefficiently today, but will be more efficient in the future. B) be producing along the production possibilities frontier today and its production possibilities frontier will shift outward if it produces more capital goods. C) must be producing outside the production possibilities frontier and will continue to do so in the future. D) must not have private ownership of property and will have to follow planning authorities' decisions today and in the future. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 26) A country that must decrease production of one good in order to increase the production of another A) must be using resources inefficiently. B) must be producing on its production possibilities frontier. C) must be producing beyond its production possibilities frontier. D) must have private ownership of property. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

27) If an economy is operating at a point inside the production possibilities frontier, then A) society's resources are being inefficiently utilized. B) the PPF curve will shift inward. C) society's resources are being used to produce too many consumer goods. D) economic policy must retard further growth of the economy. Answer: A Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 28) Any point on a production possibilities frontier (PPF) itself is A) production efficient. B) unattainable. C) inefficient. D) equitable. Answer: A Topic: Production Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 29) If production point is inside the production possibilities frontier A) it is not possible to produce more of both goods B) production is inefficient. C) in order to produce more of one good, less of the other must be produced. D) production is in the "unattainable" region. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 30) If a society is operating at a point inside its production possibilities frontier, then this society's A) resources are being inefficiently utilized. B) production possibilities frontier will shift rightward. C) resources are being used in the most efficient manner. D) economy will grow too fast. Answer: A Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

31) A president of the United States promises to produce more defense goods without any decreases in the production of other goods. This promise can be valid A) if the United States is producing at a point on its production possibilities frontier. B) if the United States is producing at a point inside its production possibilities frontier. C) if the United States is producing at a point beyond its production possibilities frontier. D) only if the production possibilities frontier shifts rightward. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 32) Using the production possibilities frontier model, unemployment is described as producing at a point A) on the exact middle of the PPF curve. B) on either end of the PPF curve. C) inside the PPF curve. D) outside the PPF curve. Answer: C Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 33) A reduction in the amount of unemployment A) shifts the production possibilities frontier outward. B) moves the economy's point of production closer to the production possibilities frontier. C) moves the economy's point of production along the production possibilities frontier. D) moves the economy's point of production further away from the production possibilities frontier. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 34) A point inside a production possibilities frontier A) could indicate that some resources are unemployed. B) is unattainable. C) is more efficient than points on the production possibilities frontier. D) implies that too much capital and not enough labor are being used. Answer: A Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 10 Copyright © 2014 Pearson Education, Inc.

35) A point inside a production possibilities frontier A) could indicate that resources are misallocated. B) is more efficient than a point on the production possibilities frontier. C) reflects the fact that more technology needs to be developed to fully employ all resources. D) implies that too much labor and not enough capital is being used. Answer: A Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 36) Production points inside the production possibilities frontier A) are unattainable. B) are attainable only with the full utilization of all resources. C) are associated with unused or misallocated resources. D) result in more rapid growth. Answer: C Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 37) When resources are assigned to inappropriate tasks, that is, tasks for which they are not the best match, the result will be producing at a point A) where the slope of the PPF is positive. B) where the slope of the PPF is zero. C) inside the PPF. D) outside the PPF. Answer: C Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

38) Some time ago the government of China required many highly skilled technicians and scientists to engage in unskilled agricultural labor in order to develop "proper social attitudes." This policy probably caused China to produce A) at an inappropriate point along its production possibilities frontier. B) outside its production possibilities frontier with respect to food, but inside with respect to high-technology goods. C) inside its production possibilities frontier with respect to food, but outside with respect to high-technology goods. D) inside its production possibilities frontier. Answer: D Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 39) Sam's production possibilities frontier has good A on the horizontal axis and good B on the vertical axis. If Sam is producing at a point inside his frontier, then he A) can increase production of both goods with no increase in resources. B) is fully using all his resources. C) values good A more than good B. D) values good B more than good A. Answer: A Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 40) A situation in which some resources are NOT fully utilized is represented in a production possibilities frontier diagram by A) any point on either the horizontal or the vertical axis. B) the midpoint of the production possibilities frontier. C) a point outside the production possibilities frontier. D) a point inside the production possibilities frontier. Answer: D Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

41) Consider the PPF for office buildings and housing shown in the figure above. Which point in the diagram shows that resources to produce office buildings and housing are being misallocated, unused, or both? A) Point F B) Point G C) Point H D) Point I Answer: A Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

42) Refer to the production possibilities frontier in the figure above. Which production point indicates that resources are NOT fully utilized or are misallocated? A) Point a B) Point b C) Point c D) Point e Answer: C Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 43) Refer to the production possibilities frontier in the figure above. Which production point is unattainable? A) Point a B) Point b C) Point c D) Point e Answer: D Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

44) Refer to the production possibilities frontier in the figure above. Production point ________ represents an ________ production point. A) b; unattainable. B) c; unattainable. C) e; inefficient. D) c; inefficient. Answer: D Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 45) In the figure above, moving from production at point d to production at point a requires A) technological change. B) a decrease in unemployment. C) decreasing the output of consumer goods in order to boost the output of capital goods. D) both capital accumulation and a decrease in unemployment. Answer: C Topic: Tradeoff Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 46) Refer to the production possibilities frontier in the figure above. Suppose a country is producing at point a. A movement to point ________ means that the country ________. A) d; must give up 20 million capital goods B) e; is not operating efficiently C) d; gives up 10 million consumer goods. D) b; is producing at an inefficient point. Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 47) Refer to the production possibilities frontier in the figure above. If the country moves from point a to point c, the opportunity cost of the move is A) 30 million capital goods. B) 20 million capital goods. C) 10 million capital goods. D) 10 million consumption goods. Answer: B Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 15 Copyright © 2014 Pearson Education, Inc.

48) Point C on the production possibilities frontier in the above diagram illustrates A) a point that achieves production efficiency. B) a combination of goods and services that cannot be produced efficiently C) all goods and services that are desired but cannot be produced due to scarce resources. D) a production point that has underutilization of resources Answer: A Topic: Production Efficiency Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 49) In the above figure, which point represents an unattainable production combination of the two goods? A) Point C B) Point L C) Point D D) Point N Answer: B Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

50) In the above figure, which point represents an attainable but inefficient production point? A) Point C B) Point N C) Point L D) Point D Answer: B Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 51) A tradeoff is A) represented by a point inside a PPF. B) represented by a point outside a PPF. C) a constraint that requires giving up one thing to get another. D) a transaction at a price either above or below the equilibrium price. Answer: C Topic: Tradeoff Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 52) When producing goods and services along a PPF, tradeoffs exist because A) not all production is efficient. B) society has only a limited amount of productive resources. C) buyers and sellers often must negotiate prices. D) human wants and needs are limited at a particular point in time. Answer: B Topic: Tradeoffs Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 53) Considering a PPF with health care services on the vertical axis and other goods and services on the horizontal axis, the increasing production of health care services in the United States as a result of the aging population represents A) a movement upward along the PPF. B) an outward shift of the PPF from the vertical axis. C) an outward shift of the PPF from the horizontal axis. D) a movement downward along the PPF. Answer: A Topic: Tradeoffs Skill: Conceptual Status: New AACSB: Analytical Skills

54) A tradeoff is illustrated by A) a point inside the PPF. B) a point outside the PPF. C) a change in the slope of the PPF. D) the negative slope of the PPF. Answer: D Topic: Tradeoff Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 55) Moving from one point on the production possibilities frontier to another ________. A) involves a tradeoff but does not incur an opportunity cost B) involves an opportunity cost but no tradeoff C) involves a tradeoff and incurs an opportunity cost D) involves no tradeoff but it does incur an opportunity cost Answer: C Topic: Opportunity Cost and Tradeoff Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 56) When we choose a particular option, we must give up alternative options. The highest-valued alternative forgone is the ________ of the option chosen. A) opportunity cost B) comparative advantage C) nonmonetary cost D) absolute advantage Answer: A Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 57) Ted can study for his economics exam or go to a concert. He decides to study for his economics exam instead of going to the concert. The concert he will miss is Ted's ________ of studying for the exam. A) opportunity cost B) explicit cost C) implicit cost D) discretionary cost Answer: A Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 18 Copyright © 2014 Pearson Education, Inc.

58) Opportunity cost is best defined as A) the amount of money that an individual is willing to pay to purchase a good that means a great deal to that person. B) the amount of money lost by one individual in an exchange process so that another individual might gain. C) the highest-valued alternative that is forgone when choosing among various alternatives. D) a situation in which one individual cannot have an absolute advantage over another individual in the production of all goods. Answer: C Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 59) Most students attending college pay tuition and are unable to hold a full-time job. For these students, tuition is A) part of the opportunity cost of going to college. So are their forgone earnings from not holding a full-time job. B) part of the opportunity cost of going to college. Their forgone earnings from not holding a full-time job are not part of the opportunity cost of attending college. C) not part of the opportunity cost of going to college, but their forgone earnings from not holding a full-time job are part of the opportunity cost of attending college. D) not part of the opportunity cost of going to college. Neither are their forgone earnings from not holding a full-time job. Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 60) If Sam is producing at a point on his production possibilities frontier, then he A) cannot produce any more of either good. B) can produce more of one good only by producing less of the other. C) will be unable to gain from trade. D) is not subject to scarcity. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

61) Opportunity cost is illustrated in a production possibilities frontier (PPF) by a movement A) from the region within the PPF to a point on the PPF. B) from the region within the PPF to the region outside of the PPF. C) from the region outside of the PPF to a point on the PPF. D) along the PPF where to gain more of one good it is necessary to give some of another good. Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 62) When moving along the production possibilities frontier, opportunity cost is measured as the A) increase in the quantity produced of one good divided by the decrease in the quantity produced of another good. B) decrease in the quantity produced of one good divided by the increase in the quantity produced of another good. C) quantity produced of one good divided by the quantity produced of another good. D) quantity produced of one good multiplied by the quantity produced of another good. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 63) While producing on the production possibilities frontier, if additional units of a good could be produced at a constant opportunity cost, the production possibilities frontier would be A) bowed outward. B) bowed inward. C) positively sloped. D) a straight line. Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 64) Opportunity cost is represented on the production possibilities frontier by A) attainable and unattainable points. B) efficient and inefficient points. C) the amount of good Y forgone when more of good X is produced. D) technological progress. Answer: C Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 20 Copyright © 2014 Pearson Education, Inc.

65) At one point along a PPF, 50 tons of coffee and 100 tons of bananas are produced. At another point along the same PPF, 30 tons of coffee and 140 tons of bananas are produced. The opportunity cost of a ton of coffee between these points is A) 7/5 of a ton of bananas per ton of coffee. B) 1/2 of a ton of bananas per ton of coffee. C) 5/7 of a ton of bananas per ton of coffee. D) 2 tons of bananas per ton of coffee. Answer: D Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 66) When operating on its PPF, a country can produce 2 tons of butter and 200 cars OR 3 tons of butter and 150 cars. The opportunity cost of 1 ton of butter is ________ cars per ton of butter. A) 300 B) 200 C) 50 D) 0.75 Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 67) In one day, Sue can change the oil on 20 cars or change the tires on 20 cars. In one day, Fred can change the oil on 20 cars or change the tires on 10 cars. Sue's opportunity cost of changing oil is ________ than Fred's and her opportunity cost for changing tires is ________ than Fred's. A) greater; less B) less; greater C) less; less D) greater; greater Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

68) At one point along a PPF, 10 pizzas and 7 sandwiches can be produced. At another point along the same PPF, 9 pizzas and 10 sandwiches can be produced. The opportunity cost of a pizza between these points is ________ per pizza. A) 7/10 of a sandwich B) 10/7 of a sandwich C) 1/3 of a sandwich D) 3 sandwiches Answer: D Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 69) At one point along a PPF 40 tons of wheat are produced while 80 tons of rice are produced. At another point along the same PPF, 41 tons of wheat are produced while 70 tons of rice are produced. The opportunity cost of producing a ton of wheat between these points is ________ per ton of wheat. A) 1/2 ton of rice B) 10 tons of rice C) 1/10 ton of rice D) 4/7 ton of rice Answer: B Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Point A B C D E F

Production of grain (tons) 0 2 4 6 8 10

Production of cars (cars) 30 28 24 18 10 0

70) The table above lists six points on the production possibilities frontier for grain and cars. Given this information, which of the following combinations is unattainable? A) 6 tons of grain and 18 cars B) 4 tons of grain and 26 cars C) 2 tons of grain and 27 cars D) 7 tons of grain and 10 cars Answer: B Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 71) The table above lists six points on the production possibilities frontier for grain and cars. From this information you can conclude that production is inefficient if this economy produces A) 6 tons of grain and 18 cars. B) 4 tons of grain and 26 cars. C) 2 tons of grain and 27 cars. D) 8 tons of grain and 10 cars. Answer: C Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 72) The table above lists six points on the production possibilities frontier for grain and cars. What is the opportunity cost of producing the 5th ton of grain? A) 16 cars per ton of grain B) 6 cars per ton of grain C) 3 cars per ton of grain D) 2 cars per ton of grain Answer: C Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 23 Copyright © 2014 Pearson Education, Inc.

73) The table above lists six points on the production possibilities frontier for grain and cars. What is the opportunity cost of producing the 26th car? A) 2 tons of grain per car B) 4 tons of grain per car C) 0.25 tons of grain per car D) 0.5 tons of grain per car Answer: D Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills Point A B C D E

Production Production chocolate bars cans of cola 0 100 10 90 20 70 30 40 40 0

74) The above table shows production points on Sweet-Tooth Land's production possibilities frontier. Which of the following statements is TRUE? A) Producing 0 chocolate bars and 100 cans of cola is both attainable and efficient. B) Producing 20 chocolate bars and 80 cans of cola is attainable, but inefficient. C) Producing 30 chocolate bars and 38 cans of cola is only attainable with an increase in technology. D) Producing 40 chocolate bars and 0 cans of cola is unattainable and inefficient. Answer: A Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 75) The above table shows production points on Sweet-Tooth Land's production possibilities frontier. Which of the following is an example of a point that is inefficient? A) 0 chocolate bars and 100 cans of cola B) 20 chocolate bars and 80 cans of cola C) 32 chocolate bars and 40 cans of cola D) 38 chocolate bars and 0 cans of cola Answer: D Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

76) The above table shows production points on Sweet-Tooth Land's production possibilities frontier. What is the opportunity cost of one chocolate bar if Sweet-tooth Land moves from point C to point D? A) 30 cans of cola per chocolate bar B) 10 cans of cola per chocolate bar C) 3 cans of cola per chocolate bar D) 1/3 can of cola per chocolate bar Answer: C Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 77) The above table shows production points on Sweet-Tooth Land's production possibilities frontier. What is the opportunity cost of one can of cola if Sweet-tooth Land moves from point C to point B? A) 20 chocolate bars per can of cola B) 10 chocolate bars per can of cola C) 2 chocolate bars per can of cola D) 1/2 chocolate bars per can of cola Answer: D Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 78) The above table shows production points on Sweet-Tooth Land's production possibilities frontier. A movement from ________ represents the greatest opportunity cost of increasing cola production. A) point E to point D B) point D to point C C) point C to point B D) point B to point A Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Point

Production of X

Production of Y

A B C D E

0 3 6 9 12

40 36 28 16 0

79) The above table shows production combinations on a country's production possibilities frontier. Which of the following is an example of a point that is unattainable? A) 0 units of good X and 40 units of good Y. B) 6 units of good X and 28 units of good Y. C) 10 units of good X and 16 units of good Y. D) 3 units of good X and 35 units of good Y. Answer: C Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 80) The above table shows production combinations on a country's production possibilities frontier. Which of the following is an example of a production point that is inefficient? A) 0 units of good X and 40 units of good Y B) 6 units of good X and 28 units of good Y C) 10 units of good X and 16 units of good Y D) 3 units of good X and 35 units of good Y Answer: D Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 81) The above table shows production combinations on a country's production possibilities frontier. Which of the following points signifies efficient production? A) 0 units of good X and 40 units of good Y B) 3 units of good X and 25 units of good Y C) 10 units of good X and 16 units of good Y D) 12 units of good X and 1 unit of good Y Answer: A Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

82) The above table shows production combinations on a country's production possibilities frontier. The opportunity cost of increasing the production of Y from 16 to 28 units is ________ units of good X per unit of good Y. A) 12 B) 6 C) 3 D) There is no opportunity cost when moving from one point to another along a production possibilities frontier so none of the above answers is correct. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 83) The above table shows production combinations on a country's production possibilities frontier. What is the opportunity cost of one unit of Y when the production of good Y increases from 16 to 28 units? A) 4 units of good X per unit of good Y B) 3 units of good X per unit of good Y C) 1/4 unit of good X per unit of good Y D) There is no opportunity cost when moving from one point to another along a production possibilities frontier. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 84) The above table shows production combinations on a country's production possibilities frontier. What is the opportunity cost of increasing the production of X from 0 to 3 units? A) 40 units of good Y per unit of good X B) 3 units of good Y per unit of good X C) 4/3 units of good Y per unit of good X D) 0 units of good Y per unit of good X Answer: C Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

85) The above table shows production combinations on a country's production possibilities frontier. A movement from ________ involves the greatest opportunity cost of increasing the production of good Y. A) point E to point D B) point D to point C C) point C to point B D) point B to point A Answer: D Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

86) The opportunity cost of moving from point a to point b in the above figure is ________. A) zero B) 3/2 pairs of socks per sweater C) 3 pairs of socks D) 2 sweaters Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

87) The opportunity cost of producing a unit of consumption at point b in the figure ________ point a. A) is greater than at B) is less than at C) cannot be compared with D) is the same as Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

88) In the above figure, which of the following is TRUE regarding the movements from point A to B and from point C to D? I) The movement from point A to B shows that the economy has chosen to produce 100 more jets. II) The movement from point C to D shows that the economy has chosen to produce 100 more jets. III) The movement from point A to B and from point C to D have the same opportunity cost. A) I and II B) I and III C) II and III D) I, II and III Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

89) Molly just graduated from high school. The figure shows her possibilities frontier. If Molly goes to college, she will move from point M to point K. In terms of consumption goods, Molly's opportunity cost of going to college is A) MK. B) OL. C) KL. D) LM. Answer: D Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

90) In the figure above, the curve is known as the A) production possibilities frontier. B) substitution options frontier. C) production function. D) opportunity cost curve. Answer: A Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 91) The figure above illustrates that if this country wishes to have F2 - F1 additional food by moving from point A to point B, it will A) have to find additional workers, because the country already is operating on its production possibilities frontier. B) be unable to do so until additional technological progress is made. C) have to sacrifice C1 - C2 clothing in order to free the resources necessary to produce the additional food. D) require that all the unemployed resources in the country be put to work. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

92) The bowed outward shape of the production possibilities frontier in the above figure indicates that A) some resources are better suited for producing computers. B) the opportunity cost of producing more computers decreases as more computers are produced. C) computer technology is subject to the principle of decreasing costs. D) All of the above answers are correct. Answer: A Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Analytical Skills 93) According to the figure above, the opportunity cost of producing another computer is A) higher at A. B) higher at B. C) the same at every point along the frontier. D) different at most points along the frontier but equal at points A and B because they are equally distant from the axes. Answer: B Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

94) In the production possibilities frontier depicted in the figure above, which of the following combinations of hats and bananas is unattainable? A) 4 million pounds of bananas and 4 million hats B) 2 million pounds of bananas and 5 million hats C) 0 pounds of bananas and 6 million hats D) 1 million pounds of bananas and 3 million hats Answer: A Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 95) In the production possibilities frontier depicted in the figure above, which of the following combinations of hats and bananas is inefficient? A) 4 million pounds of bananas and 4 million hats B) 2 million pounds of bananas and 5 million hats C) 0 pounds of bananas and 6 million hats D) 1 million pounds of bananas and 3 million hats Answer: D Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

96) In the production possibilities frontier depicted in the figure above, what is the opportunity cost of increasing the production of bananas from two million pounds to three million pounds? A) 1/2 hat per pound of bananas B) 1 hat per pound of bananas C) 2 hats per pound of bananas D) 3 hats per pound of bananas Answer: B Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 97) Jane produces only corn, measured in tons, and cloth, measured in bolts. For her, the opportunity cost of one more ton of corn is A) the same as the opportunity cost of one more bolt of cloth. B) the inverse of the opportunity cost of one more bolt of cloth. C) the ratio of all the bolts of cloth she produces to all the tons of corn she produces. D) the ratio of all the tons of corn she produces to all the bolts of cloth she produces. Answer: B Topic: Opportunity Cost is a Ratio Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 98) The principle of increasing opportunity cost leads to A) a production possibilities frontier (PPF) that is bowed inward from the origin. B) a production possibilities frontier (PPF) that is bowed outward from the origin. C) an inward shift of the production possibilities frontier (PPF). D) an outward shift of the production possibilities frontier (PPF). Answer: B Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 99) A PPF bows outward because A) not all resources are equally productive in all activities. B) consumers prefer about equal amounts of the different goods. C) entrepreneurial talent is more abundant than human capital. D) resources are used inefficiently. Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

100) Generally, opportunity costs increase and the production possibilities frontier bows outward. Why? A) Unemployment is inevitable. B) Resources are not equally useful in all activities. C) Technology is slow to change. D) Labor is scarcer than capital. Answer: B Topic: Increasing Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 101) Increasing opportunity cost occurs along a production possibilities frontier because A) resources are not equally productive in all activities. B) increasing wants need to be satisfied. C) in order to produce more of one good decreasing amounts of another good must be sacrificed. D) production takes time. Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 102) Increasing opportunity cost while moving along a production possibilities frontier is the result of A) taxes. B) firms' needs to produce profits. C) the fact that it is more difficult to use resources efficiently the more society produces. D) the fact that resources are not equally productive in alternative uses. Answer: D Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 103) Increasing opportunity cost implies that A) producing additional units of one good results in proportionately smaller reductions in the output of the other good. B) producing additional units of one good results in increasing amounts of lost output of the other good. C) the production possibilities frontier will be a straight line. D) the society will be producing inside its production possibilities frontier. Answer: B Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 36 Copyright © 2014 Pearson Education, Inc.

104) When the production possibilities frontier is bowed outwards, the opportunity cost of producing more of one good A) increases in terms of the amount foregone of the other good. B) decreases in terms of the amount foregone of the other good. C) remains constant. D) cannot be determined. Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 105) As a country that has a bowed-out production possibilities frontier produces more of one good, the opportunity cost of a unit of that good ________. A) might increase or decrease B) remains the same C) increases D) decreases Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 106) As we move along a bowed-out production possibility frontier, producing more tacos and less pizza, the opportunity cost of a pizza ________. A) increases B) remains the same C) decreases D) increases and then decreases Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 107) The production possibilities frontier bows outward because A) opportunity costs are decreasing as the production of a good increases. B) opportunity costs are increasing as the production of a good increases. C) opportunity costs are fixed as the production of a good increases. D) resources are of uniform quality. Answer: B Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 37 Copyright © 2014 Pearson Education, Inc.

108) The fact of increasing opportunity costs means that a production possibilities frontier will A) be a straight line. B) reach a maximum and then gradually decrease. C) bow outward. D) shift outward over time. Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 109) A bowed outward production possibilities frontier occurs when A) opportunity costs are constant. B) resources are not scarce. C) as more of a good is produced, producing additional units of it require greater reductions in the other good. D) the society is operating on the production possibilities frontier. Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 110) When the production possibilities frontier bows outward from the origin, A) some of society's resources are unemployed. B) opportunity costs are constant. C) opportunity costs are increasing. D) opportunity costs are decreasing. Answer: C Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 111) The slope of a production possibilities frontier that displays increasing opportunity cost is A) positive and constant. B) negative and constant. C) steeper near the horizontal intercept than near the vertical intercept. D) steeper near the vertical intercept than near the horizontal intercept. Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

112) Assuming farmers can plant either corn or soybeans, as U.S. farmers plant more corn to meet rising global demand, A) the opportunity cost of producing corn increases. B) the opportunity cost of producing corn decreases. C) the U.S. PPF for corn and other goods and services shifts outward. D) the United States produces at a point beyond its PPF. Answer: A Topic: Increasing Opportunity Cost Skill: Analytical Status: New AACSB: Analytical Skills 113) The fact that individual productive resources are NOT equally useful in all activities A) implies that a production possibilities frontier will be bowed outward. B) implies that gain from specialization and trade is unlikely. C) follows from the law of demand. D) implies a linear production possibilities frontier. Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 114) Consider a PPF for tapes and soda. If the opportunity cost of a tape increases as the quantity of tapes produced increases and also the opportunity cost of a soda increases as the quantity of soda produced increases, then the PPF between the two goods will be A) a straight, downward-sloping line. B) a straight, upward-sloping line. C) bowed outward. D) All of the above are possible and more information is needed to determine which answer is correct. Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

115) One point on a PPF shows production levels at 50 tons of coffee and 100 tons of bananas. Remaining on the PPF, an increase of banana production to 140 tons shows coffee production at 30 tons. Still remaining on the PPF, coffee production at 10 tons allows banana production at 160 tons. The opportunity cost of a ton of bananas is A) constant because coffee production decreased by the same amount each time. B) decreasing, since the increase in banana production is less at each point considered. C) 16 to 1, that is every 1 ton of coffee given up will result in 16 more tons of bananas. D) increasing from 1/2 ton of coffee per ton of bananas to 1 ton of coffee per ton of bananas. Answer: D Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 116) The nation's production possibilities frontier is bowed outward. Suppose that the government decides to increase the production of armaments by $20 billion, and that as a result the output of consumer goods falls by $20 billion. If a further $20 billion increase beyond the initial $20 billion increase in armaments output is sought, we can expect that the output of consumer goods and services will fall further by A) less than $20 billion. B) $20 billion. C) more than $20 billion. D) There is not enough information to determine the answer. Answer: C Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

Production possibilities Possibility

Pizza (per hour)

A B C D E F

0 1 2 3 4 5

Soda (cases per hour) 100 95 80 60 35 0

117) In the above table, the production of 3 pizzas and 80 cases of soda is A) impossible unless more resources become available or technology improves. B) feasible but would involve unemployed or misallocated resources. C) possible only if the economy produces with maximum efficiency. D) possible only if there is inflation. Answer: A Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 118) In the above table, the production of 3 pizzas and 35 cases of soda is A) impossible unless more resources become available. B) feasible but would involve unemployed or misallocated resources. C) possible only if the economy produces with maximum efficiency. D) possible only if there is inflation. Answer: B Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 119) In the above table, the opportunity cost of the 2nd pizza is A) 0 cases of soda per pizza. B) 15 cases of soda per pizza. C) 95 cases of soda per pizza. D) 80 cases of soda per pizza. Answer: B Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

120) Based on the above table, as the production of pizza increases, the opportunity cost of pizza in terms of forgone cases of soda A) increases. B) decreases. C) does not change. D) initially increases then decreases. Answer: A Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

121) As Rainclouds Inc. moves downward along its production possibilities frontier, illustrated in the figure above, the opportunity cost of a raincoat ________. A) decreases B) depends on the initial quantity produced C) increases D) remains the same Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

122) In the figure above, the point labeled C in the production possibilities frontier A) is unattainable; it is beyond the productive capability of this country. B) represents a highly desirable output level in the long run, because it conserves scarce resources. C) represents either unemployed or inefficiently utilized resources. D) represents the maximum sustainable output level for this nation in the long run. Answer: C Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 123) The country whose production possibilities frontier is illustrated above is currently at position A on the production possibilities frontier. If it wishes to move to position B, it will A) find this change impossible to achieve given the resources it currently possesses. B) have to employ all currently unemployed resources to accomplish this. C) incur an opportunity cost of having to give up some butter in order to make the additional amount of guns desired. D) be able to make the desired switch only if there is a significant improvement in the technology available to the nation. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

124) In the figure above, moving from point B to point D A) has an opportunity cost of one ton of butter per month. B) has an opportunity cost of one ton of guns per month. C) requires an increase in technology. D) is impossible. Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 125) In the figure above, which of the following movements has the largest opportunity cost? A) from point C to point B B) from point C to point A C) from point B to point A D) from point A to point E Answer: D Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

126) A PPF, such as the one above, that bows outward illustrates A) decreasing opportunity cost. B) increasing opportunity cost. C) that technology is improving. D) that productivity is falling. Answer: B Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 127) In the figure above, A) moving from point a to point b would require new technology. B) production at point b is efficient whereas production at point a is not efficient. C) some resources must be unemployed at point c. D) opportunity costs are decreasing. Answer: B Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

128) As we increase the production of computers, we find that we must give up larger and larger amounts of DVD players per computer. A) This situation illustrates increasing opportunity cost. B) As a result, we should specialize in the production of DVD players. C) The production possibilities frontier for computers and DVD players is a straight line. D) DVD players will be more highly regarded by consumers than computers. Answer: A Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

129) As output moves from point a to point b to point c along the PPF in the above figure, the opportunity cost of one more unit of good X A) rises. The opportunity cost of one more unit of good Y also rises. B) rises. The opportunity cost of one more unit of good Y falls. C) falls. The opportunity cost of one more unit of good Y rises. D) falls. The opportunity cost of one more unit of good Y also falls. Answer: B Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

130) Refer to the production possibilities frontier in the figure above. More of good X must be given up per unit of good Y gained when moving from point b to point a than when moving from point c to point b. This fact A) illustrates decreasing opportunity cost. B) illustrates increasing opportunity cost. C) indicates that good X is more capital intensive than good Y. D) indicates that good Y is more capital intensive than good X. Answer: B Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

131) The figure above illustrates Mary's production possibilities frontier. If Mary wants to move from point b to point c, she must A) improve technology. B) increase the accumulation of capital. C) give up some of good Y in order to obtain more of good X. D) give up some of good X in order to obtain more of good Y. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

132) The above figure illustrates Mary's production possibilities frontier. If Mary wants to move from point d to point c, she must A) improve technology. B) increase her accumulation of capital. C) give up some of good X in order to obtain more of good Y. D) give up some of good Y in order to obtain more of good X. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 133) The above figure illustrates Mary's production possibilities frontier. Which of the following movements show opportunity costs increasing? A) point a to point b to point c B) point a to point f C) point f to point a D) point c to point f to point d Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 134) Refer to the production possibilities frontier figure above. Which of the following movements requires the largest opportunity cost, in terms of good X forgone, per extra unit of good Y? A) from point e to point d B) from point d to point c C) from point c to point b D) from point b to point a Answer: D Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

135) Refer to the production possibilities frontier in the figure above. Which of the following movements requires the largest opportunity cost, in terms of good Y forgone, per extra unit of good X? A) from point a to point b B) from point b to point c C) from point c to point d D) from point d to point e Answer: D Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills Point a b c d e

Production of X 0 4 8 12 16

Production of Y 40 36 28 16 0

136) Refer to the table above, which gives five points on a nation's PPF. The production of 7 units of X and 28 units of Y is A) impossible given the available resources. B) possible but leaves some resources less than fully used or misallocated. C) on the production possibilities frontier between points c and d. D) on the production possibilities frontier between points b and c. Answer: B Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 137) Refer to the table above, which gives five points on a nation's PPF. The opportunity cost of increasing the production of Y from 16 to 36 units is a total of A) 1/5 unit of X per unit of Y. B) 2/5 unit of X per unit of Y. C) 1/2 unit of X per unit of Y. D) 3/5 unit of X per unit of Y. Answer: B Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

138) Refer to the table above, which gives five points on a nation's PPF. As we increase the production of X, A) the output of Y increases. B) unemployment increases. C) the opportunity cost of each new unit of X increases. D) the opportunity cost of each new unit of X decreases. Answer: C Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 139) If the United States can increase its production of automobiles without decreasing its production of any other good, the United States must have been producing at a point A) within its PPF. B) on its PPF. C) beyond its PPF. D) None of the above is correct because increasing the production of one good without decreasing the production of another good is impossible. Answer: A Topic: Study Guide Question, Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 140) Production points inside the PPF are A) efficient but not attainable. B) efficient and attainable. C) inefficient and not attainable. D) inefficient and attainable. Answer: D Topic: Study Guide Question, Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

141) In the above figure, at point a what is the opportunity cost of producing one more audio tape? A) 1 video tape per audio tape B) 2 video tapes per audio tape C) 14 video tapes per audio tape D) There is no opportunity cost. Answer: A Topic: Study Guide Question, Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 142) In the above figure, at point b what is the opportunity cost of producing 2 more audio tapes? A) 1/2 video tape per audio tape B) 1 video tape per audio tape C) 6 video tapes per audio tape D) There is no opportunity cost. Answer: A Topic: Study Guide Question, Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

143) Production efficiency means that A) scarcity is no longer a problem. B) producing more of one good is possible only if the production of some other good is decreased. C) as few resources as possible are being used in production. D) producing another unit of the good has no opportunity cost. Answer: B Topic: Study Guide Question, Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 144) The existence of the tradeoff along the PPF means that the PPF is A) bowed outward. B) linear. C) negatively sloped. D) positively sloped Answer: C Topic: Study Guide Question, Tradeoff Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 145) The bowed-outward shape of a PPF A) is due to capital accumulation. B) reflects the unequal application of technology in production. C) illustrates the fact that no opportunity cost is incurred for increasing the production of the good measured on the horizontal axis but it is incurred to increase production of the good measured along the vertical axis. D) is due to the existence of increasing opportunity cost. Answer: D Topic: Study Guide Question, Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 146) Moving along a bowed-out PPF between milk and cotton, as more milk is produced the marginal cost of an additional gallon of milk A) rises. B) does not change. C) falls. D) probably changes, but in an ambiguous direction. Answer: A Topic: Study Guide Question, Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 52 Copyright © 2014 Pearson Education, Inc.

147) A nation can produce at a point outside its PPF A) when it trades with other nations. B) when it produces inefficiently. C) when its PPF is bowed out. D) never. Answer: D Topic: Study Guide Question, Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Communication

148) In the above figure, point A is ________, and point B is ________. A) attainable, attainable B) attainable, unattainable C) unattainable, attainable D) unattainable, unattainable Answer: A Topic: Parallel MyEconLab Questions, Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

149) Abe can catch 15 pounds of fish an hour or pick 30 pounds of fruit an hour. He works an 8hour day, spending 5 hours picking fruit and 3 hours catching fish. Calculate Abe's opportunity cost of a pound of fruit. A) 6 minutes B) 3 hours a day C) 2 pounds of fish D) 0.5 pounds of fish Answer: D Topic: Parallel MyEconLab Questions, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

150) In the figure above, if the quantity of yogurt produced increases from 2 gallons an hour to 3 gallons an hour, the opportunity cost of a gallon of yogurt in terms of ice cream is A) half a gallon. B) 1 gallon. C) 3 gallons. D) 4 gallons. Answer: B Topic: Parallel MyEconLab Questions, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

151) Claire and Dag are farmers who produce beef and corn. In a year, Claire can produce 16 tons of beef or 40 bushels of corn, while Dag can produce 5 tons of beef or 25 bushels of corn. The opportunity cost of producing a ton of beef is A) 10 bushels of corn for Dag and 8 bushels of corn for Claire. B) 5 bushels of corn for Dag and 2.5 bushels of corn for Claire. C) 20 bushels of corn for Dag and 50 bushels of corn for Claire. D) 36.5 days for Dag and 45.6 days for Claire. Answer: B Topic: Parallel MyEconLab Questions, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 152) Abe can catch 10 pounds of fish an hour or pick 10 pounds of fruit. Zeb can catch 30 pounds of fish an hour or pick 20 pounds of fruit. The opportunity cost of fish is ________ for Abe than for Zeb, and the opportunity cost of fruit is ________ for Abe than for Zeb. A) higher, lower B) lower, higher C) higher, higher D) lower, lower Answer: A Topic: Parallel MyEconLab Questions, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

2 Using Resources Efficiently 1) Marginal cost is the opportunity cost A) that your activity imposes on someone else. B) that arises from producing one more unit of a good or service. C) of a good or service that exceeds its benefit. D) of a good or service divided by the number of units produced. Answer: B Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 2) Marginal cost is the ________ one more unit of a good and ________ of the good increases. A) opportunity cost of producing; increases as production B) opportunity cost of producing; decreases as production C) price that must be paid to consume; increases as consumption D) price that must be paid to consume; decreases as consumption Answer: A Topic: Marginal Cost Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 3) Moving along a PPF, marginal cost is A) the cost of producing the first unit of a good or service. B) the total cost, less the production of the other good or service. C) greater than the opportunity cost. D) equal to the opportunity cost of producing one more unit of a good or service. Answer: D Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 4) The quantity of shoes produced is measured along the horizontal axis of a PPF and the quantity of shirts is measured along the vertical axis. As you move down toward the right along the PPF, the marginal cost of A) shoes decreases. B) shoes increases. C) shirts increases. D) shoes and shirts is equal at the midpoint between the vertical and horizontal axis. Answer: B Topic: Opportunity Cost and Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 56 Copyright © 2014 Pearson Education, Inc.

5) Marginal cost A) increases as more is produced. B) remains constant as more is produced. C) decreases as more is produced. D) decreases as marginal benefits decrease. Answer: A Topic: Marginal Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 6) When the opportunity cost of producing more of a good is increasing, the marginal cost of producing more of the good is A) decreasing. B) constant. C) increasing. D) More information is needed to answer the question. Answer: C Topic: Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 7) A marginal cost curve A) is upward sloping. B) shows that as more of a good is produced, opportunity costs of producing another unit increase. C) is bowed inward so that its slope can become negative. D) Both answers A and B are correct. Answer: D Topic: Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

Quantity of beans (bushels) 5 4 8 2 1 0

Quantity of carrots (bushels) 0 5 9 12 14 15

8) The table above represents different points along a production possibilities curve. What is the marginal cost of moving from 2 bushels to 3 bushels of beans? A) 9 bushels of carrots per bushel of beans B) 12 bushels of carrots per bushel of beans C) 3 bushels of carrots per bushel of beans D) 21 bushels of carrots per bushel of beans Answer: C Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

9) Victor currently produces nuts and bolts at point a in the figure. Victor's marginal cost of producing an additional nut is ________. A) 1 bolt per nut B) 1/2 bolt per nut C) 8/6 bolts per nut D) 8 bolts per nut Answer: A Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

10) In the figure above, the marginal cost of producing a computer A) increases as more computers are produced. B) stays the same as more computers are produced. C) decreases as more computers are produced. D) is the same as the marginal cost of producing a television set. Answer: A Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 11) In the figure above, the marginal cost of the second computer is A) 2 television sets per computer. B) 3 television sets per computer. C) 5 television sets per computer. D) 30 television sets per computer. Answer: B Topic: Marginal Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

12) In the figure above, the marginal cost of the fifth computer is A) 0 television sets per computer. B) 4 television sets per computer. C) 20 television sets per computer. D) 35 television sets per computer. Answer: C Topic: Marginal Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 13) Marginal cost curves slope A) upward because of increasing opportunity cost. B) upward because of decreasing opportunity cost. C) downward because of increasing opportunity cost. D) downward because of decreasing opportunity cost. Answer: A Topic: Marginal Cost Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 14) Marginal benefit is the benefit A) that your activity provides to someone else. B) of producing a good or service when the total benefit from the good or service exceeds its total cost. C) that is received from consuming one more unit of a good or service. D) of consuming another good or service divided by the total number of goods or services produced. Answer: C Topic: Marginal Benefit Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 15) Marginal benefit is the A) benefit that a person receives from consuming one more unit of a good or service. B) amount of one good or service that a person gains when another good or service is consumed. C) minimum amount a person is willing to pay for one more unit of a good or service. D) dollars sacrificed to purchase a good or service. Answer: A Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

16) The marginal benefit from a good is the amount a person is willing to pay for A) all of the good the person consumes. B) one more unit of the good. C) all of the units of the good the person consumes divided by the number of units he or she purchases. D) one more unit of the good divided by the number of units purchased. Answer: B Topic: Marginal Benefit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 17) We measure the marginal ________ of a good by what a ________ for another unit of the good. A) benefit; person must pay B) cost; person is willing to pay C) benefit; person is willing to pay D) cost; person's preferences are Answer: C Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 18) The marginal benefit of a good or service A) increases as more is consumed. B) decreases as more is consumed C) remains constant as more is consumed. D) decreases as less is consumed Answer: B Topic: Marginal Benefit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 19) The principle of decreasing marginal benefit means that as the quantity of a good consumed A) decreases, its marginal benefit decreases. B) increases, its marginal benefit decreases. C) increases, its total benefit decreases. D) None of the above answers is correct. Answer: B Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

20) As a person consumes more of a good, the A) marginal benefit increases. B) marginal benefit decreases. C) marginal benefit increases or decreases depending whether or not the economy is on the PPF. D) price of the good falls. Answer: B Topic: Marginal Benefit Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 21) The principle of decreasing marginal benefit implies that the A) additional benefit from obtaining one more of a good or service decreases as more is consumed. B) additional benefit from obtaining one more of a good or service increases as more is consumed. C) total benefit from obtaining more of a good or service decreases as more is consumed. D) total benefit from obtaining more of a good or service remains the same as more is consumed. Answer: A Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 22) Which of the following is TRUE regarding marginal benefit? I) The marginal benefit curve shows the benefit firms receive by producing another unit of a good. II) Marginal benefit increases as more of a good is consumed. A) I and II B) I only C) II only D) neither I nor II Answer: D Topic: Marginal Benefit Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

23) Susan likes to drink sodas. The ________ soda Susan drinks, the ________ of the last soda. A) more; higher the marginal benefit B) less; higher the opportunity cost C) less; lower the marginal benefit D) more; lower the marginal benefit Answer: D Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 24) Marginal benefit is the benefit ________ one more unit of the good and ________ of the good increases. A) of producing; increases as production B) of producing; decreases as production C) from consuming; increases as consumption D) from consuming; decreases as consumption Answer: D Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 25) A marginal benefit curve shows A) the efficient use of resources. B) the quantity of one good that must be forgone to get more of another good. C) the quantity of one good that people are willing to forgo to get another unit of another good. D) there are increasing opportunity costs. Answer: C Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 26) Marginal benefit curves slope A) upward because of increasing opportunity cost. B) upward, but not because of increasing opportunity cost. C) downward because of increasing opportunity cost. D) downward, but not because of increasing opportunity cost. Answer: D Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

27) Marginal benefit curves slope ________ and marginal cost curves slope ________. A) upward; upward B) upward; downward C) downward; downward D) downward; upward Answer: D Topic: Marginal Benefit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 28) Suppose that the government is trying to decide between allocating its resources to build more dams or to build more freeways. In terms of forgone dams, as more freeways are constructed, the marginal benefit of additional freeways ________ and the marginal cost of additional freeways ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Topic: Marginal Benefit and Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills Television sets (millions per year) 1 2 3 4 5

Willingness to pay (computers per television set) 2.5 2.0 1.5 1.0 0.5

29) In the table above, the marginal benefit of the 4 millionth television set is A) negative 0.5 computers per television set. B) 0.25 computers per television set. C) 0.5 computers per television set. D) 1.0 computer per television set. Answer: D Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

30) Resource use is allocatively efficient when A) we produce the goods with the highest opportunity cost. B) we produce the goods with the lowest opportunity cost. C) we cannot produce more goods and services. D) we produce the amount of the different goods we value most highly. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 31) When we cannot produce more of any good without giving up some other good that we value more highly, we have achieved A) production. B) equity. C) allocative efficiency. D) the production point where the marginal benefit exceeds the marginal cost by as much as possible. Answer: C Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Modified 10th edition AACSB: Communication 32) If the marginal benefit of a good exceeds its marginal cost A) we've achieved efficient resource use. B) we should produce more to achieve the allocatively efficient use of resources. C) we should produce less to achieve the allocatively efficient use of resources. D) we cannot tell if more or less should be produced to achieve the allocatively efficient use of resources. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 33) When an economy produces at its allocatively efficient production point, A) scarcity is not a problem. B) resources are not limited. C) a society can increase the production of all goods. D) a society can increase the production of one good only by decreasing the production of some other good that is valued more highly. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 66 Copyright © 2014 Pearson Education, Inc.

34) Allocative efficiency occurs when A) we cannot produce more of any good without giving up some other good that we value more highly. B) we cannot produce more of any one good without giving up some other good. C) marginal benefit exceeds marginal cost. D) opportunity costs are decreasing. Answer: A Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Communication 35) Allocative efficiency occurs when it is A) possible to produce more of one good without giving up the production of some other good. B) possible to produce more of all goods. C) not possible to produce more of one good without giving up the production of some other good that is valued less highly. D) not possible to produce more of one good without giving up the production of some other good that is valued more highly. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 36) An efficient allocation of resources occurs when we A) produce the goods and services that people need. B) cannot produce more of a good or service without giving up some other good or service that we value more highly. C) produce the goods and services that people want. D) cannot produce more of a good or service without giving up some other good or service that we need. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

37) Which of the following statements can used to describe efficiency? I. Efficiently using resources means that producers make the highest profits possible. II. Using resources efficiently means that we cannot produce more of one good without producing less of another good that has a higher value. III. Resource use is efficient when we produce goods and services that people value most highly. A) I only B) I and II C) II and III D) I, II and III Answer: C Topic: Allocatively Efficient Use of Resources Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 38) Resource use is allocatively efficient when marginal benefit is A) greater than marginal cost. B) equal to marginal cost. C) less than marginal cost. D) at its maximum value. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 39) Resource use is allocatively efficient A) when marginal benefit equals marginal cost. B) whenever marginal benefit exceeds marginal cost. C) whenever marginal cost exceeds marginal benefit. D) when the maximum possible quantity is being produced. Answer: A Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

40) Resource use is allocatively efficient if the A) total cost of what the resource produces is less than the total benefit of what is produced. B) total cost of what the resource produces is equal to the total benefit of what is produced. C) marginal benefit of what the resource produces has diminished to zero. D) marginal cost of what the resource produces is equal to the marginal benefit of what is produced. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 41) A country produces only pencils and erasers. Pencil production is allocatively efficient if the marginal ________ of a pencil equals the marginal ________ of ________. A) cost; benefit; an eraser B) cost; cost; an eraser C) benefit; benefit; an eraser D) benefit; cost; a pencil Answer: D Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 42) If the marginal benefit of consuming another unit of a good is positive, then to reach the allocatively efficient level of output more of the good should be produced and consumed A) no matter what. B) as long as the consumer can afford to pay for it. C) if the total benefit of the good is greater than its total cost. D) if the marginal benefit of the good is greater than its marginal cost. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Conceptual Status: Modified 10th edition AACSB: Communication

Quantity (pizzas per day) 10 20 30 40 50 60 70

Marginal Marginal cost benefit (cans per day) (cans per day) 26 14 24 16 22 18 20 20 18 22 16 24 14 26

43) The table above shows the marginal benefit from pizza and the marginal cost of pizza in cans of soda forgone. If ________ pizzas are produced, the quantity of soda that people are willing to give up to get an additional pizza is more than the quantity of soda that they must give up to get that additional pizza. A) any quantity other than 40 B) 40 C) more than 40 D) fewer than 40 Answer: D Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 44) The table above shows the marginal benefit from pizza and the marginal cost of pizza in cans of soda forgone. The allocatively efficient quantity of pizza is ________ pizzas per day. A) 70 B) 10 C) more than 70 D) 40 Answer: D Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

Camel rides (per day) 1 2 3 4 5 6

Marginal benefit Marginal cost (tubes of (tubes of sunscreen) sunscreen) 20 11 18 12 16 13 14 14 12 15 10 16

45) Leisure Land produces only sun screen and camel rides. The table shows the marginal benefit and marginal cost schedules for sun screen and camel rides. The allocatively efficient number of camel rides is ________. A) 1 ride per day because the marginal benefit exceeds the marginal cost by as much as possible B) 2 rides per day C) 4 rides per day D) 6 rides per day because that is the maximum number of rides Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills Quantity of pizza 5 6 7 8

Marginal benefit 25 20 15 10

Marginal cost 11 13 15 17

46) The table above represents the marginal cost and marginal benefit associated with pizza (in terms of movies). What quantity of pizza should be produced if resources are to be used efficiently? A) 5 pizzas B) 6 pizzas C) 7 pizzas D) 8 pizzas Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

47) According to the diagram in the above figure, what is the marginal benefit of consuming the 3 millionth gallon of gasoline per month? A) 5 pounds of shrimp per gallon of gasoline B) 3 pounds of shrimp per gallon of gasoline C) 2 pounds of shrimp per gallon of gasoline D) 1 pound of shrimp per gallon of gasoline Answer: D Topic: Marginal Benefit Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 48) According to the diagram in the figure above, what is the marginal cost of producing the 3 millionth gallon of gasoline per month? A) 5 pounds of shrimp per gallon of gasoline B) 4 pounds of shrimp per gallon of gasoline C) 3 pounds of shrimp per gallon of gasoline D) 1 pound of shrimp per gallon of gasoline Answer: A Topic: Marginal Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

49) According to the diagram in the figure above, an allocatively efficient use of resources requires that production and consumption of gasoline be A) 1 million gallons of gasoline per month. B) 2 million gallons of gasoline per month. C) 3 million gallons of gasoline per month. D) 4 million gallons of gasoline per month. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

50) In the above figure, the curve labeled a is the ________ curve and the curve labeled b is the ________ curve. A) marginal cost; marginal benefit B) marginal cost; trade line C) marginal benefit; trade line D) production possibilities frontier; trade line Answer: A Topic: Marginal Benefit and Marginal Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

51) In the above figure, curve b shows the A) bottles of soda that people are willing to forgo to get another bicycle. B) bottles of soda that people must forgo to get another bicycle. C) benefits of producing more bicycles is greater than the benefits of producing more soda. D) benefits of producing more soda is greater than the benefits of producing more bicycles. Answer: A Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 52) In the above figure, when 2000 bicycles are produced each month, we can see that A) the marginal benefit from another bicycle is greater than the marginal cost of another bicycle. B) more bicycles should be produced to reach the allocatively efficient level of output. C) the economy is very efficient at the production of bicycles because the marginal benefit exceeds the marginal cost. D) Both answers A and B are correct. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 53) In the above figure, if 4000 bicycles are produced per month, A) marginal benefit is greater than marginal cost. B) fewer bicycles should be produced to reach the allocatively efficient level of output. C) the marginal cost of production is 2 bottles of soda per bicycle. D) Both answers A and B are correct. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

54) In the above figure, if 2 million computers are produced per year then the ________ should be produced to achieve the allocatively efficient use of resources A) marginal cost of a computer exceeds the marginal benefit of a computer, so more computers B) marginal cost of a computer exceeds the marginal benefit of a computer, so fewer computers C) marginal benefit of a computer exceeds the marginal cost of a computer, so more computers D) marginal benefit of a computer exceeds the marginal cost of a computer, so fewer computers Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 55) In the figure above, if 4 million computers are produced per year then the ________ should be produced to achieve the allocatively efficient use of resources A) marginal cost of a computer exceeds the marginal benefit of a computer, so more computers B) marginal cost of a computer exceeds the marginal benefit of a computer, so fewer computers C) marginal benefit of a computer exceeds the marginal cost of a computer, so more computers D) marginal benefit of a computer exceeds the marginal cost of a computer, so fewer computers Answer: B Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

56) In the figure above, the allocatively efficient output of computers is A) 2 million per year. B) 3 million per year. C) 4 million per year. D) the largest amount possible. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 57) In the figure above, at the allocatively efficient level of computer production consumers are willing to give up A) 0 televisions per computer. B) between 0 and 3 televisions per computer. C) 3 televisions per computer. D) more than 3 televisions per computer. Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 58) In the figure above, at the allocatively efficient level of computer production the marginal cost of producing a computer is A) 0 televisions per computer. B) between 0 and 3 televisions per computer. C) 3 televisions per computer. D) more than 3 televisions per computer. Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 59) The most anyone is willing to pay for another purse is $30. Currently the price of a purse is $40, and the cost of producing another purse is $50. The marginal benefit of a purse is A) $50. B) $40. C) $30. D) an amount not given in the answers above. Answer: C Topic: Study Guide Question, Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 76 Copyright © 2014 Pearson Education, Inc.

60) If the marginal benefit from another computer exceeds the marginal cost of the computer, then to use resources allocatively efficiently, A) more resources should be used to produce computers. B) fewer resources should be used to produce computers. C) if the marginal benefit exceeds the marginal cost by as much as possible, the efficient amount of resources are being used to produce computers. D) None of the above is correct because marginal benefit and marginal cost have nothing to do with using resources allocatively efficiently. Answer: A Topic: Study Guide Question, Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 3 Economic Growth 1) An expansion of the production possibilities frontier is A) called economic growth. B) proof that scarcity is not a binding constraint. C) a free gift of nature. D) something that has occurred only rarely in history. Answer: A Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 2) Economic growth can be represented by A) a movement down the production possibilities frontier (PPF). B) a movement up the production possibilities frontier (PPF). C) an inward shift of the production possibilities frontier (PPF). D) an outward shift of the production possibilities frontier (PPF). Answer: D Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

3) When economic growth occurs, the A) economy moves along its production possibilities frontier B) production possibilities frontier shifts outward C) production possibilities frontier becomes steeper D) production possibilities frontier shifts outward but no longer limits the amount that can be produced. Answer: B Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 4) After Hurricane Katrina devastated parts of Mississippi and New Orleans in 2005, we can be sure that the production possibilities frontier for that area temporarily A) shifted inward, toward the origin. B) shifted outward, away from the origin. C) became flatter. D) became steeper. Answer: A Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 5) Economic growth is the result of all of the following EXCEPT A) technological change. B) capital accumulation. C) opportunity cost. D) investment in human capital. Answer: C Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 6) A key factor that leads to economic growth is A) human capital accumulation. B) increasing current consumption. C) avoiding the opportunity cost of investment. D) Both answers A and B are correct. Answer: A Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7) Technological progress makes the production possibilities frontier A) shift inward toward the origin. B) become more linear and less bowed. C) shift outward from the origin. D) become less linear and more bowed. Answer: C Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 8) Economic growth is shown on the production possibilities frontier as A) a movement from one point on the PPF to another. B) an outward shift in the PPF. C) an inward shift in the PPF. D) the curvature of the PPF. Answer: B Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 9) Economic growth can be pictured in a production possibilities frontier diagram by A) making the production possibilities frontier more bowed out. B) making the production possibilities frontier less bowed out. C) shifting the production possibilities frontier outward. D) shifting the production possibilities frontier inward. Answer: C Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 10) Using a production possibilities frontier, economic growth is illustrated by a A) point inside the curve. B) point on the curve. C) movement from one point on the curve to another point on the curve. D) rightward shift of the curve. Answer: D Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

11) Capital accumulation definitely A) has no impact on the production possibilities frontier. B) shifts the production possibilities frontier inward. C) makes the production possibilities frontier steeper. D) shifts the production possibilities frontier outward. Answer: D Topic: Economic Growth Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 12) President Obama has proposed a goal that everyone complete at least one year of formal education or training beyond high school. This policy would A) increase human capital and increase economic growth. B) increase physical capital and increase economic growth. C) increase financial capital and increase economic growth. D) eliminate opportunity costs and increase economic growth. Answer: A Topic: Production Possibilities Skill: Analytical Status: New AACSB: Analytical Skills 13) Economic growth comes from ________. A) people willing to increase their skills in which case, economic growth is free B) producing more goods than people want to consume C) capital accumulation and the avoidance of opportunity cost D) capital accumulation and technological advance Answer: D Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 14) The production possibilities frontier shifts as A) tastes and preferences change. B) the money supply grows or shrinks. C) technology changes. D) the unemployment rate changes. Answer: C Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

15) Technological change A) generates economic growth. B) shifts the PPF leftward. C) creates inefficiency. D) Both answers A and C are correct. Answer: A Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 16) As an economy's capital stock increases, the economy A) generally experiences increased unemployment of other resources, such as labor. B) generally decides to engage in international trade. C) experiences economic growth. D) gains an absolute advantage in the production of capital goods. Answer: C Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 17) An increase in the production of capital goods A) must increase the current production of consumer goods. B) must decrease the future production of consumer goods. C) shifts the production possibilities frontier inward in the future. D) shifts the production possibilities frontier outward in the future. Answer: D Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 18) Suppose a scientific breakthrough made free solar power available in unlimited quantities in the United States. The effect of this invention would be to move the A) United States beyond its production possibilities frontier. B) United States inside its production possibilities frontier. C) U.S. production possibilities frontier outward. D) U.S. production possibilities frontier inward. Answer: C Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

19) In March a factory used new technology to produce its output. Then in August a fire destroys half the factory. The new technology shifted the factory's PPF ________ and the fire shifted it ________. A) inward; outward B) outward; inward C) outward; outward D) inward; inward Answer: B Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 20) Suppose the United States discovers a way to produce clean nuclear fuel. The effect of this discovery would be to A) lead the United States to produce less nuclear fuel. B) force the United States to produce at a point inside its PPF. C) shift the U.S. PPF outward. D) shift the U.S. PPF inward. Answer: C Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 21) Consider a production possibilities frontier with corn on the vertical axis and cars on the horizontal. Unusually good weather for growing corn shifts A) the horizontal intercept rightward and the vertical intercept upward. B) the horizontal intercept rightward but does not shift the vertical intercept. C) the vertical intercept upward but does not shift the horizontal intercept. D) neither the horizontal intercept nor the vertical intercept. Answer: C Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

22) In the figure above, how can the economy represented by the production possibilities frontier move from point C to point F ? A) Increase the available amount of resources. B) Increase the level of technology. C) Redistribute the existing resources to produce more apples and fewer oranges. D) First move to point B and then move to point F. Answer: C Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 23) In the figure above, a point showing an inefficient production point is point A) A. B) B. C) C. D) D. Answer: D Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

24) In the figure above, what can be said about point B? A) It can be reached only after economic growth occurs. B) It can be attained only if some resources are left unused. C) It represents all resources being devoted to the production of apples. D) It represents all resources being devoted to the production of oranges. Answer: A Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

25) In the figure above, point D is A) less production efficient than point C. B) production efficient and point A is not production efficient. C) not production efficient and point B is production efficient. D) production efficient and point B is not production efficient. Answer: B Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

26) In the figure above, point A is undesirable because A) there is an inefficient use of resources. B) too much health care is being produced. C) the opportunity costs of health care is too high. D) point E is a more realistic option in this economy. Answer: A Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 27) In the figure above, the opportunity cost of moving from point C to point D is A) the loss in production in the health care sector. B) the increase in production in the education sector. C) zero. D) the loss in production in the education sector. Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 28) In the figure above, point E could be obtained if A) resources were shifted from education to health care. B) resources were used more efficiently. C) society's resources increased. D) resources were shifted from health care to education. Answer: C Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

29) Two countries, Alpha and Beta, have identical production possibilities frontiers illustrated above. If Alpha produces at point a and Beta produces at point b, then ________. A) Beta's economic growth rate will exceed Alpha's B) Alpha consumes less than Beta today, but it will grow faster than Beta C) Alpha's and Beta's economic growth rates will be the same D) Beta's future consumption will be greater than Alpha's Answer: B Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

30) In the figure above, an economy would grow fastest if it produces at point A) A. B) B. C) C. D) D. Answer: A Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

31) In 2006, Country X and Country Y had the same production possibilities, illustrated in the figure above. Country X chose to produce at point A, while country Y chose to produce at point B. In 2012, most likely, Country X will be at point such as ________ while Country Y will be at point such as ________. A) A; B B) B; A C) N; Q D) Q; N Answer: C Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

32) In the above figure, in order for this country to move from production possibilities frontier PPF1 to PPF2, it might A) increase the skills and productivity of its work force. B) put all unemployed resources to work producing desired output. C) engage in exchange with other nations. D) increase the average level of prices for all goods produced and consumed. Answer: A Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 33) In the above figure, once on PPF2, a country would grow slowest by producing at point A) A. B) B. C) C. D) D. Answer: D Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

34) The figure above shows the production possibilities frontiers for four nations that have identical production possibilities frontiers in the present. The one that will grow most rapidly in the future is most likely to be producing at point A) A. B) B. C) C. D) D. Answer: C Topic: Economic Growth Rate Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

35) Based on the above, which figure shows the impact of a decrease in the population available to work? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Economic Growth Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 36) Which graph shows the impact of scientists developing a more powerful fertilizer? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

37) Economic growth A) leads to less consumption in the present and increased consumption in the future. B) is free. C) is the major reason we face scarcity. D) allows us to increase our consumption in the present and in the future. Answer: A Topic: The Cost of Economic Growth Skill: Conceptual Status: Modified 10th edition AACSB: Communication 38) The opportunity cost of more capital goods today is A) fewer capital goods in the future. B) fewer consumer goods in the future. C) fewer consumer goods today. D) more unemployed resources in the future. Answer: C Topic: The Cost of Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 39) The opportunity cost of economic growth is A) future consumption that a nation gets if it gives up some present consumption. B) future consumption that a nation gives up to consume more today C) present consumption that a nation gives up to accumulate capital D) present investment that a nation gives up to increase its economic growth. Answer: C Topic: The Cost of Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 40) An opportunity cost of economic growth is A) essentially zero because economic growth leads to such large gains in the long run. B) the decrease in production of consumption goods in the present time period. C) decreased by the creation of capital goods rather than consumption goods. D) so high that places such as Hong Kong have had to do without it. Answer: B Topic: The Cost of Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

41) The tradeoff between current consumption and the production of capital goods also reflects a tradeoff between A) the future production of capital goods and future consumption of goods. B) economic growth and technological change. C) satisfying today the needs of the poor and the wants of the wealthy. D) current consumption and future consumption. Answer: D Topic: The Cost of Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 42) President Obama has proposed a goal that everyone complete at least one year of formal education or training beyond high school. This policy would ________ the production of current consumption goods and services and ________ the future production of consumption goods and services. A) decrease; increase B) increase; decrease C) not change; increase D) increase; increase Answer: A Topic: The Cost of Economic Growth Skill: Analytical Status: New AACSB: Analytical Skills 43) Economic growth A) creates unemployment. B) has no opportunity cost. C) shifts the PPF outward. D) makes it more difficult for a nation to produce on its PPF. Answer: C Topic: Study Guide Question, Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 44) The PPF shifts if A) the unemployment rate falls. B) people decide they want more of one good and less of another. C) the prices of the goods and services produced rise. D) the resources available to the nation change. Answer: D Topic: Study Guide Question, Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 93 Copyright © 2014 Pearson Education, Inc.

45) An increase in the nation's capital stock will A) shift the PPF outward. B) cause a movement along the PPF upward and leftward. C) cause a movement along the PPF downward and rightward. D) move the nation from producing within the PPF to producing at a point closer to the PPF. Answer: A Topic: Study Guide Question, Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 46) One of the opportunity costs of economic growth is A) capital accumulation. B) technological change. C) reduced current consumption. D) the gain in future consumption. Answer: C Topic: Study Guide Question, Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 47) In general, the more resources that are devoted to technological research, the A) greater is current consumption. B) higher is the unemployment rate. C) faster the PPF shifts outward. D) more the PPF will bow outward. Answer: C Topic: Study Guide Question, Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 48) An increase in the nation's capital stock will A) shift the PPF outward. B) cause a movement along the PPF up and to the left. C) cause a movement along the PPF down and to the right. D) move the nation from producing within the PPF to producing at a point closer to the PPF. Answer: A Topic: Study Guide Question, Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

4 Gains from Trade 1) Because of the existence of comparative advantage, the total output of goods is higher when each producer A) produces many different goods. B) produces at the midpoint of its PPF. C) specializes in the production of one good or a few goods. D) makes both intermediate and final goods. Answer: C Topic: Comparative Advantage Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 2) A person has a comparative advantage in producing a particular good if that person A) has higher productivity in producing it than anyone else has. B) can produce it at lower opportunity cost than anyone else can. C) has less desire to consume that good than anyone else has. D) has more human capital related to that good than anyone else has. Answer: B Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 3) Comparative advantage is A) the ability to perform an activity at a lower opportunity cost than anyone else. B) the ability to perform an activity at a higher opportunity cost than anyone else. C) the ability to perform an activity at a zero opportunity cost. D) another name for absolute advantage. Answer: A Topic: Comparative Advantage Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 4) A person has a comparative advantage in an activity if that person can A) produce more goods in a given amount of time than another person. B) produce fewer goods in a given amount of time than another person. C) perform the activity at a lower opportunity cost than anyone else. D) perform that activity at a higher opportunity cost than anyone else. Answer: C Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 95 Copyright © 2014 Pearson Education, Inc.

5) A person has a comparative advantage in an activity whenever he or she A) has an absolute advantage in the activity. B) can perform the activity at a lower opportunity cost than can anyone else. C) can do the activity in less time than anyone else. D) can do everything better than anyone else. Answer: B Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 6) A country possesses a comparative advantage in the production of a good if A) the opportunity cost in terms of forgone output of alternative goods is lower for this country than it is for its trading partners. B) it possesses an absolute advantage in the production of this good. C) it is able to produce more of this good per hour than can any other country. D) all of the above Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 7) Individuals A and B both produce good X. A has a comparative advantage in the production of good X if A A) has a lower opportunity cost of producing good X than has B. B) has a lower opportunity cost of producing good X than of producing good Y. C) can produce more units of X in a given time period than can B. D) can produce X using newer technology than can B. Answer: A Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 8) Which of the following describes comparative advantage? A) To produce a bushel of wheat Farmer John must give up 2 bushels of corn whereas Farmer Ben must give up 3 bushels of corn. B) Company A can produce 4 boxes of cereal in a day whereas Company B can produce 5 boxes of cereal in a day. C) Firm A can produce a good at a cost of $3 and Firm B can produce the good at a cost of $4. D) Jane can type 50 words per minute and Joe can type 60 words per minute. Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 96 Copyright © 2014 Pearson Education, Inc.

9) In an eight-hour day, Andy can produce either 24 loaves of bread or 8 pounds of butter. In an eight-hour day, Bob can produce either 8 loaves of bread or 8 pounds of butter. Andy has a comparative advantage in the production of A) bread, while Bob has a comparative advantage in the production of butter. B) butter, while Bob has a comparative advantage in the production of bread. C) bread and neither has a comparative advantage in the production of butter. D) both bread and butter. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 10) The kitchen manager at an Italian restaurant is deciding what assignments he should give to his two cooks, John and David. John can make 25 pizzas or 40 servings of pasta per hour and David can make 20 pizzas or 30 servings of pasta. Which of the following should be the manager's choice? A) Fire David because he is not as productive as John. John will do both jobs. B) John will make pizza because he has comparative advantage in making pizza. C) David will make pizza because he has comparative advantage in making pizza. D) John and David both will spend half their time making pizza and half their time making pasta because each has a comparative advantage in making pizza. Answer: C Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 11) An economy produces only food and shelter. There are two individuals in the economy: Bill and Mary. Mary's opportunity cost of producing 1 unit of shelter is 2 units of food. Bill's opportunity cost of producing 1 unit of shelter is 4 units of food. A) Bill has a comparative advantage over Mary in the production of shelter. B) Mary has a comparative advantage over Bill in the production of food. C) Mary has a comparative advantage over Bill in the production of shelter. D) Bill has an absolute advantage over Mary in the production of shelter. Answer: C Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

12) Country A can produce 1 cello by giving up the production of 5 guitars. Country B can produce 1 guitar by giving up the production of 4 cellos. In which good does country A have a comparative advantage? A) guitars B) cellos C) both goods D) neither good Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 13) The opportunity cost of producing one ton of wheat for Country Gamma is 4 tons of corn. The opportunity cost of producing one ton of wheat for Country Beta is 8 tons of corn. Which country has the comparative advantage in the production of wheat? A) Gamma B) Beta C) Neither country has a comparative advantage. D) Both countries have the comparative advantage. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 14) Suppose that in an hour Joe can prepare 10 sandwiches or 5 pizzas. The opportunity cost of Joe producing one sandwich is A) 2 pizzas. B) 1/2 pizza. C) 5 pizzas. D) 1 pizza. Answer: B Topic: Comparative Advantage, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

15) Suppose Joe can prepare 10 sandwiches or 5 pizzas in an hour and Beth can produce 12 sandwiches or 9 pizzas. Which of the following is true? A) Beth should produce pizza because she has a higher opportunity cost of producing pizza than does Joe. B) Beth should produce pizza because she has a lower opportunity cost of producing pizza than does Joe. C) Joe should produce pizza because he has a higher opportunity cost of producing pizza than does Beth. D) Joe should produce pizza because he has a lower opportunity cost of producing pizza than does Beth. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 16) Suppose Joe can prepare 20 sandwiches or 10 pizzas in an hour and Beth can produce 36 sandwiches or 27 pizzas. The concept of comparative advantage concludes that A) Beth should produce both goods because she can produce more of both goods in an hour than can Joe. B) Beth should produce sandwiches and Joe should produce pizza. C) Beth should produce pizza and Joe should produce sandwiches. D) Beth should produce both goods and Joe should produce sandwiches. Answer: C Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 17) Tom takes 20 minutes to cook an egg and 5 minutes to make a sandwich. Jerry takes 15 minutes to cook an egg and 3 minutes to make a sandwich. Tom has a comparative advantage in ________ and Jerry has a comparative advantage in ________. A) cooking eggs; making sandwiches B) making sandwiches; cooking eggs C) neither of these activities; both activities D) both activities; neither of these activities Answer: A Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

18) Tom takes 20 minutes to cook an egg and 5 minutes to make a sandwich. Jerry takes 15 minutes to cook an egg and 3 minutes to make a sandwich. If Tom and Jerry trade A) Tom will benefit and Jerry will not. B) Jerry will benefit and Tom will not. C) both will benefit. D) none of them will benefit. Answer: C Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 19) Tom takes 20 minutes to cook an egg and 5 minutes to make a sandwich. Jerry takes 15 minutes to cook an egg and 3 minutes to make a sandwich. Both individuals will be better off if A) Tom trades sandwiches in exchange for eggs. B) Jerry trades sandwiches in exchange for eggs. C) they trade, no matter who trades sandwiches and who eggs. D) they don't trade. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 20) In one week Alice can produce 5 pairs of shoes or 4 bookshelves while Roger can produce 10 pairs of shoes or 6 bookshelves. Alice has ________ advantage in producing ________. A) an absolute; shoes B) a comparative; shoes C) an absolute; bookshelves D) a comparative; bookshelves Answer: D Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 21) In one week Alice can produce 5 pairs of shoes or 4 bookshelves while Roger can produce 10 pairs of shoes or 6 bookshelves. Alice should specialize in the production of A) shoes. B) bookshelves. C) either shoes or bookshelves. D) neither shoes nor bookshelves. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 100 Copyright © 2014 Pearson Education, Inc.

22) In an hour, Andy can make either 5 pizzas or 12 pies and Chris can make either 6 pizzas or 18 pies. ________ advantage in making pizzas. A) Andy has an absolute B) Andy has a comparative C) Chris has a comparative D) None of the above answers is correct. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 23) Betty and Ann live on a desert island. With a day's labor, Ann can produce 8 fish or 4 coconuts; Betty can produce 6 fish or 2 coconuts. Ann's opportunity cost of producing 1 coconut is ________ and she should specialize in the production of ________. A) 8 fish per coconut; fish B) 2 fish per coconut; coconuts C) 6 fish per coconut; coconuts D) 0 fish per coconut; coconuts Answer: B Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 24) Betty and Ann live on a desert island. With a day's labor, Ann can produce 6 fish or 4 coconuts; Betty can produce 3 fish or 1 coconut. Betty's opportunity cost of producing 1 fish is ________, and she should specialize in the production of ________. A) 1/3 coconut per fish; fish B) 2/3 coconut per fish; coconuts C) 1 coconut per fish; fish D) 4 coconuts per fish; fish Answer: A Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

25) Homer and Teddy are stranded on a desert island. To feed themselves each day they can either catch fish or pick fruit. In a day, Teddy could pick 60 pieces of fruit or catch 20 fish. Homer could pick 100 pieces of fruit or catch 150 fish. Which of the following is correct? A) Homer has a comparative advantage in catching fish and Teddy has a comparative advantage in picking fruit. B) Homer has a comparative advantage in picking fruit and Teddy has a comparative advantage in catching fish. C) Homer has a comparative advantage in both catching fish and picking fruit. D) Teddy has a comparative advantage in both catching fish and picking fruit. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills Blue Violet's Orange Rose's production possibilities production possibilities Teapots Coffeepots Teapots Coffeepots (number (number (number (number per week) per week) per week) per week) 150 & 0 75 & 0 100 & 25 50 & 50 50 & 50 25 & 100 0 & 75 0 & 150 26) Two countries, Blue Violet and Orange Rose, produce only two goods: teapots and coffeepots. The table above gives their production possibilities. ________ has a comparative advantage in teapots and ________ has a comparative advantage in coffeepots. A) Orange Rose; Blue Violet B) Blue Violet; Orange Rose C) Blue Violet; Blue Violet D) Orange Rose; Orange Rose Answer: B Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Blue Violet's Sweet Pansy's production possibilities production possibilities Teapots Coffeepots Teapots Coffeepots (number (number (number (number per week) per week) per week) per week) 150 & 0 150 & 0 100 & 25 100 & 50 50 & 50 50 & 100 0 & 75 0 & 150 27) Two countries, Blue Violet and Sweet Pansy, produce only two goods: teapots and coffeepots. The table above gives their production possibilities. A) Blue Violet has a comparative advantage in teapots. B) Sweet Pansy has a comparative advantage in teapots. C) Both have a comparative advantage in teapots. D) Sweet Pansy has an absolute advantage in teapots. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 28) Two countries, Blue Violet and Sweet Pansy, produce only two goods: teapots and coffeepots. The table above gives their production possibilities. With specialization and trade, Sweet Pansy produces ________ and Blue Violet produces ________. A) 150 coffeepots, 150 teapots B) 150 teapots, 75 coffeepots C) 150 teapots and 150 coffeepots, nothing D) 100 teapots and 25 coffeepots, 100 teapots and 50 coffeepots Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Country A Good X Good Y (units of X) (units of Y) 0 16 2 12 4 8 6 4 8 0

Country B Good X Good Y (units of X) (units of Y) 0 12 2 9 4 6 6 3 8 0

29) In the table above, country A is producing 4 units of X and 8 units of Y and country B is producing 4 units of X and 6 units of Y. The opportunity cost of producing more of A) good X is the same for both countries. B) good Y is the same for both countries. C) good X is lower in country A. D) good Y is lower in country A. Answer: D Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 30) In the table above, country A is producing 4 units of X and 8 units of Y and country B is producing 4 units of X and 6 units of Y. Regarding the production of good X A) country A has an absolute advantage. B) country B has an absolute advantage. C) country A has a comparative advantage. D) country B has a comparative advantage. Answer: D Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 31) In the table above, country B is producing 4 units of X and 6 units of Y. For country B, the opportunity cost of producing an additional unit of X is A) 4 units of Y per unit of X. B) 2 units of Y per unit of X. C) 3/2 units of Y per unit of X. D) 1 unit of Y per unit of X. Answer: C Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 104 Copyright © 2014 Pearson Education, Inc.

32) In the table above, country B is producing 4 units of X and 6 units of Y. For country B, the opportunity cost of producing an additional unit of Y is A) 1/2 unit of X per unit of Y. B) 2/3 unit of X per unit of Y. C) 2 units of X per unit of Y. D) 3 units of X per unit of Y. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 33) Both Mergatroid and the Geebocks produce only gizmos and widgets. It is possible for Mergatroid to have A) an absolute and a comparative advantage in both products. B) an absolute but not a comparative advantage in both products. C) a comparative but not an absolute advantage in both products. D) neither a comparative nor an absolute advantage in both products. Answer: B Topic: Absolute Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 34) A person who has an absolute advantage in the production of all goods will A) also have a comparative advantage in the production of all goods. B) not be able to gain from specialization and exchange. C) have a production possibilities frontier with a constant slope. D) have a comparative advantage in the production of some goods but not in the production of others. Answer: D Topic: Absolute Advantage Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 35) A country that has an absolute advantage in producing all goods will ________. A) have a comparative advantage in some goods but not all B) produce all goods at lowest opportunity cost C) have a comparative advantage in all goods D) not gain from specialization and trade Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 105 Copyright © 2014 Pearson Education, Inc.

36) Homer and Teddy are stranded on a desert island. To feed themselves each day they can either catch fish or pick fruit. In a day, Teddy could pick 60 pieces of fruit or catch 20 fish. Homer could pick 100 pieces of fruit or catch 150 fish. Which of the following statements is correct? A) Homer has an absolute advantage in catching fish and Teddy has an absolute advantage in picking fruit. B) Homer has an absolute advantage in picking fruit and Teddy has an absolute advantage in catching fish. C) Homer has an absolute advantage in both catching fish and picking fruit. D) Teddy has an absolute advantage in both catching fish and picking fruit. Answer: C Topic: Absolute Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Pens Pencils

Don's production possibilities 10 20

Bob's production possibilities 5 15

37) The above table shows the number of pencils or pens that could be produced by Don and Bob in an hour. This schedule shows that A) Don has an absolute advantage in the production of pencils, and Bob has an absolute advantage in the production of pens. B) Bob has an absolute advantage in the production of pencils, and Don has an absolute advantage in the production of pens. C) Don has a comparative advantage in the production of both pencils and pens. D) Bob has a comparative advantage in the production of pencils. Answer: D Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Steel Concrete

U.S. production possibilities 100 200

France's production possibilities 25 100

38) The above table shows the tons of steel and concrete that can be produced by the United States and France in an hour. From the data in the table, A) France has a comparative advantage in the production of concrete. B) the United States has a comparative advantage in the production of concrete. C) France has an absolute advantage in the production of concrete. D) the United States has a comparative advantage in the production of both goods. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 39) Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. The opportunity cost of producing a unit of X is A) 1 unit of Y per unit of X for Agnes and 2 units of Y per unit of X for Brenda. B) 1 unit of Y per unit of X for Agnes and 1/2 unit of Y per unit of X for Brenda. C) 1 hour for Agnes and 1/2 hour for Brenda. D) 1 hour for Agnes and 2 hours for Brenda. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 40) Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. The opportunity cost of producing a unit of Y is A) 1 unit of X per unit of Y for Agnes and 2 units of X per unit of Y for Brenda. B) 1 unit of X per unit of Y for Agnes and 1/2 unit of X per unit of Y for Brenda. C) 1 hour for Agnes and 1/2 hour for Brenda. D) 1 hour for Agnes and 2 hours for Brenda. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

41) Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. There can be gains from exchange A) if Agnes specializes in the production of X and Brenda specializes in the production of Y. B) if Agnes specializes in the production of Y and Brenda specializes in the production of X. C) only if Agnes becomes faster at producing X. D) only if Brenda becomes faster at producing X or Y. Answer: A Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 42) Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. A) Brenda has an absolute advantage in the production of X and Y. B) Agnes has a comparative advantage in the production of Y. C) Brenda has a comparative advantage in the production of X. D) Brenda cannot gain from trade. Answer: A Topic: Absolute Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

43) Vicky currently produces at point a in the figure above. If Vicky moves from point a to point b to point c, her opportunity cost of a modem ________. A) decreases B) increases C) is zero D) remains the same Answer: D Topic: Comparative Advantage, Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

44) The figure above shows Freda's PPF. Freda currently produces 10 packets of fudge and no cookies. If Freda decides to produce 1 packet of cookies, her opportunity cost of the packet of cookies is ________ of fudge. A) 1 packet B) 1/2 packet C) 2 packets D) 0 packets Answer: C Topic: Comparative Advantage, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

45) An economy produces at point a on the PPF shown in the above figure. A drought reduces the amount of wheat produced and the economy produces at point b. The opportunity cost of a unit of wheat ________. A) remains the same B) increases C) is impossible to calculate without numbers on the axes D) decreases Answer: B Topic: Comparative Advantage, Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

46) In the figure above, Joe is producing at point A. Joe's opportunity cost of producing one shirt is A) 5/3 of a pair of pants per shirt. B) 3/5 of a pair of pants per shirt. C) 5 pairs of pants per shirt. D) 2 pairs of pants per shirt. Answer: D Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 47) In the figure above, Jill is producing at point A. Jill's opportunity cost producing one pair of pants is A) 2 shirts per pair of pants. B) 3 shirts per pair of pants. C) 3/5 of a shirt per pair of pants. D) 5/3 of a shirt per pair of pants. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

48) In the figure above, both Joe and Jill initially produce at point A. If Joe and Jill realize that they each possess a comparative advantage, which outcome can we expect? A) Joe will specialize in shirts and Jill will specialize in pants. B) Joe will specialize in pants and Jill will specialize in shirts. C) Joe and Jill each will be able to consume more than 2 shirts and 2 pairs of pants. D) Both answers B and C are correct. Answer: D Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 49) One of the largest categories of exports from the United States is now pop culture: movies, music, TV programming, and videos. A direct conclusion from this information is that, compared to other countries, the United States has A) lower wages for producers of pop culture. B) higher wages for producers of pop culture. C) an absolute advantage in producing pop culture. D) a comparative advantage in producing pop culture. Answer: D Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 50) One of the largest categories of exports from the United States is now pop culture: movies, music, TV programming, and videos. A direct conclusion from this information is that, compared to other countries, the United States has A) lower wages for producers of pop culture. B) higher wages for producers of pop culture. C) a higher opportunity cost of producing pop culture. D) a lower opportunity cost of producing pop culture. Answer: D Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

51) A country that has a comparative advantage in producing capital goods will ________ a country that has a comparative advantage in consumption goods. A) reap all of the gains from trade when it trades with B) grow slower than C) reap fewer of the gains from trade when it trades with D) specialize in producing capital goods and trade with Answer: D Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 52) George and Michael can gain from exchange A) unless one has an absolute advantage in all goods. B) if each specializes in the production of the good for which he has the higher opportunity cost. C) if each specializes in the production of the good for which he has the lower opportunity cost. D) unless they have different opportunity costs. Answer: C Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 53) Tom and Di grow tomatoes and turnips. Tom has a comparative advantage in growing tomatoes if ________. A) Tom can grow more tomatoes than Di can B) his opportunity cost of tomatoes is less than Di's opportunity cost of tomatoes C) his opportunity cost of tomatoes is less than his opportunity cost of turnips D) his marginal benefit from tomatoes is greater than Di's Answer: B Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 54) If Tom and Di specialize in producing the goods in which he and she have a comparative advantage and they exchange goods, then ________. A) each will produce a combination of goods that is within her/his production possibility frontier B) they will lose because they are no longer able to produce and consume both goods. C) each will gain because each can consume a combination of goods that is outside her/his production possibility frontier D) one of them will gain and the other will lose Answer: C Topic: Achieving the Gains From Trade Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 114 Copyright © 2014 Pearson Education, Inc.

55) When a nation has a comparative advantage in the production of a particular good, A) the nation tends to avoid specialization. B) the comparative advantage encourages self-sufficiency. C) the opportunity cost of producing that good is higher than that of other goods. D) the nation can gain from trade. Answer: D Topic: Achieving the Gains From Trade Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 56) To obtain the gains available from comparative advantage, individuals or countries must do more than specialize; they must also A) save. B) invest. C) engage in research and development. D) trade. Answer: D Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 57) According to the principle of comparative advantage, if a rich country trades with a poor country, then A) the rich country will benefit and the poor country will lose. B) the rich country will lose and the poor country will benefit. C) both countries will benefit. D) neither of the countries will benefit. Answer: C Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 58) The idea of comparative advantage implies that people or countries A) should specialize in the production of goods. B) can gain from trading. C) can consume at a point outside their production possibilities frontier. D) all of the above Answer: D Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 115 Copyright © 2014 Pearson Education, Inc.

59) By specialization and trade, two individuals can A) consume at a point beyond their individual production possibilities frontiers. B) increase their comparative advantage. C) increase their absolute advantage. D) shift their individual production possibilities frontiers outward. Answer: A Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 60) Suppose that the United States and Cuba decide to open up trade. If each country specializes in the good in which it has a comparative advantage, ________ will gain from that trade because ________. A) both countries; consumption possibilities in both Cuba and the United States will lie outside their PPFs. B) neither country; their consumption possibilities will not change. C) only the United States; consumption possibilities in Cuba will lie outside its PPF and U.S. consumption possibilities will not change. D) only Cuba; consumption possibilities in Cuba will lie outside its PPF and U.S. consumption possibilities will not change. Answer: A Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 61) In one day, Sue can change the oil on 20 cars or change the tires on 20 cars. In one day, Fred can change the oil on 20 cars or change the tires on 10 cars. Sue and Fred can gain from trade if Sue changes the ________ and Fred changes the ________. A) tires; oil B) oil; oil C) oil; tires D) tires; tires Answer: A Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

62) Missouri can produce 10,000 tons of pecans per year or 5,000 tons of pears per year. Washington can produce 12,000 tons of pecans per year or 48,000 tons of pears per year. Which of the following statements about opportunity cost is correct? A) The opportunity cost of a ton of pecans is 2 tons of pears per ton of pecans for Missouri and 1/4 ton of pears per ton of pecans for Washington. B) The opportunity cost of a ton of pears is 2 tons of pecans per ton of pears for Missouri and 1/4 ton of pecans per ton of pears for Washington. C) The opportunity cost of a ton of pecans is 1/2 ton of pears per ton of pecans for Missouri and 4 tons of pears per ton of pecans for Washington. D) Both answers B and C are correct. Answer: D Topic: Achieving the Gains From Trade Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 63) Missouri can produce 10,000 tons of pecans per year or 5,000 tons of pears per year. Washington can produce 12,000 tons of pecans per year or 48,000 tons of pears per year. Which of the following statements is true? A) Washington has an absolute advantage in the production of both pecans and pears. B) Washington has a comparative advantage in the production of both pecans and pears. C) Washington has a comparative advantage in producing pecans and Missouri has a comparative advantage in producing pears. D) Both answers A and C are correct. Answer: A Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 64) Missouri can produce 10,000 tons of pecans per year or 5,000 tons of pears per year. Washington can produce 12,000 tons of pecans per year or 48,000 tons of pears per year. If these two states were to engage in trade, which of the following is true? A) Missouri would specialize in pear production and trade pears to Washington pecans. B) Missouri would specialize in pecan production and trade pecans to Washington for pears. C) Washington would produce both pears and pecans and Missouri would produce neither. D) Half of both Washington's and Missouri's resources would be devoted to pears and the other half to pecans because that is the comparative advantage. Answer: B Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

65) Suppose that a typical German factory can produce 20 cameras or 1 computer in an hour, and that a typical American factory can produce 10 cameras or 1 computer in an hour. The opportunity cost of 20 cameras in terms of computers in Germany is A) 10 computers per camera. B) 2 computers per camera. C) 1 computer per camera. D) 1/20 of a computer per camera. Answer: C Topic: Achieving the Gains From Trade Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 66) Suppose that a typical German factory can produce 20 cameras or 1 computer in an hour, and that a typical American factory can produce 10 cameras or one computer in an hour. The opportunity cost of 20 cameras in terms of computers in the United States is A) 10 computers per camera. B) 2 computers per camera. C) 1 computer per camera. D) 1/20 of a computer per camera. Answer: B Topic: Achieving the Gains From Trade Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 67) Suppose that a typical German factory can produce 20 cameras or 1 computer in an hour, and that a typical American factory can produce 10 cameras or one computer in an hour. If Germany produces one less computer and switches resources to cameras, and the United States produces one more computer and takes resources out of cameras, then the net change in camera production in both countries taken together is A) 0. B) minus 10 cameras. C) plus 10 cameras. D) plus 20 cameras. Answer: C Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

68) Suppose that a typical German factory can produce 20 cameras or 1 computer in an hour, and that a typical American factory can produce 10 cameras or one computer in an hour. Germany wishes to purchase computers from the United States in exchange for cameras. What is the maximum number of cameras per computer that Germany would be willing to pay the United States? A) 10 cameras per computer B) 20 cameras per computer C) 1 camera per computer D) 2 cameras per computer Answer: B Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Steel Concrete

U.S. production possibilities 100 200

France's production possibilities 25 100

69) The data in the above table demonstrates that gains from trade can be captured if A) the United States produced both goods. B) the United States produced steel in exchange for concrete produced in France. C) the United States produced concrete in exchange for steel produced in France. D) each country became self-sufficient, produced both goods for itself, and did not engage in trade. Answer: B Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

70) Anna and Maria produce shirts and ties. The figure above shows Anna's PPF and Maria's PPF. Anna and Maria can achieve the gains from trade if Anna produces ________ and Maria produces ________. A) ties; shirts B) shirts and ties; only ties C) only ties; shirts and ties D) shirts; ties Answer: A Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

71) In the figure above, suppose that Mac and Izzie trade and reach point c. Then A) Mac produces outside his production possibilities frontier. B) Izzie produces outside her production possibilities frontier. C) Mac and Izzie both produce outside their production possibilities frontiers. D) neither Mac nor Izzie produce outside their production possibilities frontiers. Answer: D Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 72) In the figure above, suppose that Mac and Izzie trade and reach point c. Then A) Mac and Izzie should both produce at point a. B) Mac should produce at point b and Izzie should produce at point d. C) Mac should produce at point d and Izzie should produce at point b. D) Mac and Izzie should both produce at point c. Answer: B Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

73) In the figure above, if Mac and Izzie both completely specialized and traded with one another, their joint output would be A) 3 computers and 3 TV sets per month. B) 6 computers and 6 TV sets per month. C) 12 computers and 12 TV sets per month. D) 24 computers and 24 TV sets per month. Answer: C Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 74) In the figure above, suppose that Mac and Izzie specialize and trade to reach point c. Mac sends Izzie A) 12 computers in exchange for 12 TVs. B) 12 computers in exchange for 6 TVs. C) 6 computers in exchange for 12 TVs. D) 6 computers in exchange for 6 TVs. Answer: D Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 75) In order to achieve the maximum gains from trade, people should specialize according to A) property rights. B) PPF. C) absolute advantage. D) comparative advantage. Answer: D Topic: Study Guide Question, Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 76) In one day, Brandon can either plow 10 acres or plant 20 acres. In one day, Christopher can either plow 14 acres or plant 14 acres. Which of the following statements about comparative advantage is correct? A) Brandon has a comparative advantage in both plowing and planting. B) Brandon has a comparative advantage only in plowing. C) Brandon has a comparative advantage only in planting. D) Christopher has a comparative advantage in both plowing and planting. Answer: C Topic: Study Guide Question, Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 122 Copyright © 2014 Pearson Education, Inc.

77) In one day, Brandon can either plow 10 acres or plant 20 acres. In one day, Christopher can either plow 14 acres or plant 14 acres. Brandon and Christopher can A) gain from exchange if Brandon specializes in planting and Christopher specializes in plowing. B) gain from exchange if Brandon specializes in plowing and Christopher specializes in planting. C) exchange, but only Brandon will gain from the exchange. D) exchange, but only Christopher will gain from the exchange. Answer: A Topic: Study Guide Question, Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

78) Refer to the above figure. Mario is self-sufficient and so is Mia. Each produces 6 dishes of pasta and 4 pizzas. Mario and Mia decide to specialize and trade. After they have specialized and traded, compared to the initial situation, Mia's opportunity cost of pasta has ________ and Mario's opportunity cost of a pizza has ________. A) decreased, decreased B) decreased, increased C) increased, increased D) increased, decreased Answer: C Topic: Parallel MyEconLab Questions, Achieving the Gains from Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

5 Economic Coordination 1) The term "market" refers to A) physical structures only. B) locations where buyers and sellers physically meet. C) any arrangement that enables buyers and sellers to get information and trade with one another. D) trading arrangements that have been approved by the government. Answer: C Topic: Markets Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 2) Markets are best defined as A) arrangements where buyers and sellers get together to buy and sell. B) specific geographic locations where people get together to buy and sell. C) hypothetical constructs used to analyze how people form their tastes and preferences. D) places where people can inspect goods and services carefully. Answer: A Topic: Markets Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 3) Markets A) facilitate trade. B) allow traders to enjoy gains from trade. C) coordinate price information between buyers and sellers. D) All of the above answers are correct. Answer: D Topic: Markets Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

4) Which of the following is TRUE regarding markets? I) Economists define a market as a geographic location where trade occurs. II) A market enables buyers and sellers to get information about each other and to buy and sell from each other. III) Markets coordinate decisions through prices. A) I only B) I and III C) II and III D) I, II and III Answer: C Topic: Markets Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 5) Two social institutions that are essential for trade to be organized are ________. A) property rights and laws B) markets and banks C) businesses and banks D) markets and property rights Answer: D Topic: Markets Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 6) The social arrangements that govern the ownership, use, and disposal of property are referred to as A) the double coincidence of wants. B) capitalism. C) private enterprise. D) property rights. Answer: D Topic: Property Rights Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7) In order to societies to reap the gains from trade, it is necessary to A) define and enforce property rights. B) foster economic growth. C) distribute resources equally. D) achieve productive efficiency. Answer: A Topic: Property Rights Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 8) In a world lacking property rights, it would be ________ to realize the gains from trade and there would be ________ specialization. A) easier; less B) easier; more C) harder; less D) harder; more Answer: C Topic: Property Rights Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 9) The rights of an owner to use and exchange property are A) capitalist rights. B) socialist rights. C) property rights. D) money rights. Answer: C Topic: Property Rights Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 10) The social arrangement that gives John Grisham, the writer of best-selling novels, the ownership of his novels is A) a market. B) property rights. C) absolute advantage. D) dynamic comparative advantage. Answer: B Topic: Property Rights Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

11) If property rights are not clearly defined and enforced, then A) incentives for specialization based on comparative advantage are weakened. B) some potential gains from specialization and trade are lost. C) resources are devoted to protecting possessions rather than to production. D) All of the above answers are correct. Answer: D Topic: Property Rights Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 12) A system of property rights A) encourages economic growth by creating incentives to invest in capital and to be innovative. B) discourages economic growth by discouraging the development of new ideas and ways of doing things. C) reduces the efficiency of government, which reduces the growth rate of the economy over time. D) encourages investment but discourages entrepreneurial activity, so the effect on economic growth is uncertain. Answer: A Topic: Property Rights Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 13) Intellectual property A) is protected by common law rather than by written laws. B) is protected by people's sense of decency rather than by written laws. C) belongs to everyone with the necessary human capital to use it. D) is often protected by copyrights and patents. Answer: D Topic: Property Rights Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 14) A computer software program is most strongly an example of A) real property. B) fiat property. C) intellectual property. D) vicarious property. Answer: C Topic: Property Rights Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 127 Copyright © 2014 Pearson Education, Inc.

15) A factor market is a market in which A) households buy goods and services. B) households sell the services of the factors of production they control. C) firms sell the services of the factors of production. D) firms sell goods and services. Answer: B Topic: The Circular Flows Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 16) In goods markets ________ and in factor markets ________. A) households sell to firms; firms sell to households B) firms sell to households; households sell to firms C) households sell to firms; households sell to firms D) firms sell to households; firms sell to households Answer: B Topic: Circular Flows Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 17) Individual economic decisions are coordinated by A) markets through adjustments in sales levels. B) markets through adjustments in prices. C) government through adjustments in sales taxes. D) government through adjustments in income taxes. Answer: B Topic: Coordinating Decisions Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 18) Which of the following does NOT help organize trade? A) property rights B) markets C) the production possibilities frontier D) None of the above because all these answers given help organize trade. Answer: C Topic: Study Guide Question, Coordinating Decisions Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

19) In markets, people's decisions are coordinated by A) specialization according to absolute advantage. B) changes in property rights. C) learning-by-doing. D) adjustments in prices. Answer: D Topic: Study Guide Question, Coordinating Decisions Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 6 News Based Questions 1) The state of Georgia offers free college tuition to high school students with a "B" average. In 2007, the state raised the requirement so that fewer students qualified for the scholarship. At the same time, Georgia increased state spending on health care. Suppose that college education is on the vertical axis and health care is on the horizontal axis of a PPF. These changes A) are example of a tradeoff. B) are an example of incentives C) will cause a shift out of the PPF. D) will cause a shift in the of the PPF. Answer: A Topic: Production Possibilities and Tradeoffs Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 2) The state of Georgia offers free college tuition to high school students with a "B" average. In 2007, the state raised the requirement so that fewer students qualified for the scholarship. At the same time, Georgia increased state spending on health care. Suppose that college education is on the vertical axis and health care is on the horizontal axis of a PPF. Georgia's change in spending would be shown as A) a movement up along the PPF B) a movement down along the PPF C) a shift out of the PPF D) a shift in of the PPF. Answer: B Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

3) The United States uses tax funds to build and repair the interstate highway system and to provide health care services via Medicare. Suppose Medicare services are on the horizontal axis and highway miles are on the vertical axis of a PPF. If the government decides to reduce funding to Medicare, this change would be shown as A) a shift out of the PPF. B) the PPF becoming flatter. C) a movement down along the PPF. D) a movement up along the PPF. Answer: D Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 4) BAE, a British defense company, has the contract to produce Tornado aircraft for the Royal Air Force. The BBC produces high-quality mystery shows for the British government. Both produce at the lowest possible cost. On a PPF with aircraft and mystery shows on the axes, A) BAE and the BBC do not face increasing opportunity costs. B) BAE and the BBC are achieving production efficiency. C) BAE and the BBC are producing at a point outside the PPF. D) the British government is operating outside its PPF. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills 5) BAE, a British defense company, has the contract to produce Tornado aircraft for the Royal Air Force. BAE is producing the aircraft at the lowest possible cost. If the RAF orders one more Tornado, there will be A) a decrease in opportunity costs as average costs decrease. B) a misallocation of resources. C) an increase in opportunity cost for Tornados. D) an outward shift in the PPF. Answer: C Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

6) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. If some bankers are moved to making ice cream, we get a small increase in the amount of ice cream produced and a large decrease in the amount of banking services provided. If the PPF has banking services on the vertical axis and ice cream on the horizontal axis, the effect of the change reflects A) decreasing opportunity costs. B) a bowed out PPF for banking services and ice cream. C) production efficiency. D) a shift to a flatter PPF. Answer: B Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. The figure above shows the marginal cost and marginal benefit curves for ice cream. As Ben & Jerry's increases production from 1 to 2 million gallons of ice cream, the A) marginal cost curve shifts downward. B) marginal cost curve shifts upward. C) opportunity cost of ice cream decreases. D) opportunity cost of ice cream increases to 2 banking services per gallon. Answer: D Topic: Using Resources Efficiently Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

8) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. The figure above shows the marginal cost and marginal benefit curves for ice cream. A movement from point a to point b reflects A) the economy must give up banking services to get extra gallons of ice cream. B) the opportunity cost of banking services increases. C) a decrease in the tradeoff between ice cream and banking services. D) a leftward shift in the marginal benefit curve. Answer: A Topic: Marginal Cost Curve Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 9) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. The figure above shows the marginal cost and marginal benefit curves for ice cream. Point b represents ________ of banking services and ice cream. A) allocation efficiency and possibly production efficiency B) neither allocative nor production efficiency C) allocative and production efficiency in the production D) production efficiency and possibly allocative efficiency in the production Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 10) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. The figure above shows the marginal cost and marginal benefit curves for ice cream. If 3 million gallons of ice cream are produced, marginal cost ________ marginal benefit and ________ produced. A) exceeds; too much ice cream is B) is less than; too much ice cream is C) exceeds; not enough ice cream is D) is less than; not enough banking services are Answer: A Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

11) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. The figure above shows the marginal cost and marginal benefit curves for ice cream. If 1 million gallons of ice cream are being produced, A) the cost an additional gallon of ice cream is more than people think it is worth. B) more banking services should be produced. C) the marginal cost of an additional gallon of ice cream is greater the value people place on it. D) people value an additional gallon of ice cream more highly than its cost of production. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 12) China's State Council has encouraged more spending to "improve transportation links and other infrastructure... ." It will also "step up its spending on vocational training and other educational programs for adults." www.nytimes.com, Keith Bradsher, October 19, 2008 Suppose that capital goods are on the vertical axis while consumption goods are on the horizontal axis of China's PPF. As a result of enacting the policies, China's PPF will A) shift outward. B) shift inward. C) rotate outward. D) become flatter. Answer: A Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

13) China's State Council has encouraged more spending to "improve transportation links and other infrastructure... ." It will also "step up its spending on vocational training and other educational programs for adults." www.nytimes.com, Keith Bradsher, October 19, 2008 Suppose that capital goods are on the vertical axis while consumption goods are on the horizontal axis of China's PPF. As a result of enacting the policies, we would expect I. an expansion of China's production possibilities. II. capital accumulation. III. an increase in human capital A) I and II only. B) I, II and III. C) I and III only. D) II and III only. Answer: B Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 14) Suppose that when NBC produces 1 new drama series in a season it gives up the chance to produce 3 new reality shows. This means that A) the opportunity cost of a new drama series is 1/3 of a new reality show. B) the opportunity cost of a 1 new reality show is 1/3 of a new drama series. C) NBC has a comparative advantage in producing new drama series. D) NBC has a comparative advantage in producing new reality shows. Answer: B Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 15) In the United States, Texas ranks number one in the amount of installed megawatts for wind power generation and Florida ranks number one in the number of beach vacations. These facts point out that A) Texas has a comparative advantage in wind power generation. B) Texas definitely has an absolute advantage in wind power generation. C) Florida should produce more wind energy. D) Florida can produce wind energy at a lower opportunity cost than can Texas. Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7 Essay Questions 1) A production point beyond the production possibilities frontier represents what? Answer: A production point beyond the production possibilities frontier is an unattainable combination of goods and services. Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 2) Explain how the production possibilities frontier illustrates scarcity. Answer: The PPF illustrates scarcity because we cannot attain the points outside the frontier. Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 3) "If Mexico is currently operating at a point beyond its production possibilities frontier, then there are unemployed 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, points within not beyond the production possibilities frontier have unemployed resources. Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 4) "If Mexico is currently operating at a point inside its production possibilities frontier, then there are unemployed 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 resources. Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 5) Are all points inside the production possibilities frontier unattainable? Answer: No, all points within the production possibilities frontier are attainable, though there are unemployed or misallocated resources at these points. Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 135 Copyright © 2014 Pearson Education, Inc.

6) 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 cannot gather coconuts, paint, or build a raft. Whatever he would have been otherwise doing 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. Topic: Production Possibilities and Tradeoffs Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 7) Explain the connection between opportunity cost and the PPF. Answer: When moving along the production possibilities frontier, more of one good or service can be obtained only by giving up another good or service. The good or service given up is the opportunity cost of the good or service obtained. Topic: Production Possibilities and Opportunity Costs Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 8) Explain why the production possibilities frontier bows outward. Answer: The bowed outward PPF reflects increasing opportunity costs. The opportunity cost increases as we produce more of a good because resources are not equally productive in all activities. For example, people with several years of experience working for Sony are good at producing DVDs, but not very good at making pizza. So if we want more pizza and move some of these workers from Sony to Domino's, we get a relatively large decrease in the quantity of DVDs per one additional pizza produced. Of course, first we try to move those workers who have less experience with Sony and who may have some skills to produce pizza. But if we want to produce even more pizza, we eventually will have to move some more experienced Sony workers to Domino's, where they might be very unproductive and therefore the quantity of DVDs that we will give up to produce an additional pizza, which is the opportunity cost of producing pizza, will increase. Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

9) 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 (a tradeoff). ∙ Increasing opportunity cost: The bowed out production possibilities frontier represents the increasing opportunity cost when more of a good or service is produced. ∙ Efficiency: Points on the production possibilities frontier use all resources while points below the production possibilities frontier represent unemployment or misallocated resources. Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 10) When economists state that the opportunity cost of a product increases as more of it is produced, what do they mean? What is the opportunity cost? 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. Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

11) 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. 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 Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 12) Why does the marginal benefit curve have a negative slope? Answer: Each successive increase in the consumption of any good or service provides a lower level of satisfaction, or benefit, than the preceding unit of consumption. For a specific example, think of drinking water on a hot day. What is the first glass worth? How about the second and third? The marginal benefit is the benefit from each additional glass of water and, as the example indicates, the marginal benefit decreases as the amount of the good increases. Topic: Marginal Benefit Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 13) Explain the difference between marginal cost and marginal benefit. Answer: Marginal benefit is the benefit someone in society obtains when another unit of a good or service is produced. Marginal cost is the cost to someone in society of producing another unit of a good or service. Topic: Marginal Benefit and Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

14) Compare and contrast production efficiency and allocative efficiency. Answer: Production efficiency means that we are operating at a point on the production possibilities frontier and so we cannot produce more of a good or service without producing less of some other good or service. Production efficiency occurs at all points on the PPF. At any point inside the frontier, production is inefficient because we have unemployed resources. Allocative efficiency means that we are producing the goods and services that society values most highly and so allocative efficiency implies that we are operating on the frontier. But not every point on the production possibilities frontier is the combination of goods and services valued most highly by society. Allocative efficiency only occurs at a single point on the PPF. To insure that allocative efficiency exists, we must compare the marginal benefit of a good with its marginal cost. When production is such that the marginal benefit equals the marginal cost, then we are producing the allocatively efficient level of output. Topic: Efficient Use of Resources Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 15) "Allocative efficiency in the production of cherries means that consumers can eat all of the cherries they desire." Is this statement true or false? Answer: Allocative efficiency means that we are producing the goods and services society values most highly. It does not mean that consumers can afford all of the cherries that they desire. The allocatively efficient quantity of cherries is the level of production such that the marginal benefit of a pound of cherries equals the marginal cost of a pound of cherries. The marginal cost of any product will be positive, so the marginal cost of a pound of cherries at the allocatively efficient quantity will be positive. Hence for the allocatively efficient quantity of cherries, the marginal benefit of cherries also must be positive. In order for consumers to have all the cherries they desire, the marginal benefit of a pound of cherries must be zero. (If the marginal benefit is positive, consumers desire more cherries.) Therefore the allocatively efficient quantity of cherries is not the quantity at which consumers are able to eat all they desire. Topic: Allocative Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 16) "If an economy is producing at a point on its PPF, it has achieved allocative efficiency." True or false? Explain. Answer: If an economy is producing at a point on its PPF, it has achieved production efficiency, but not necessarily allocative efficiency. We have achieved allocative efficiency if we are producing at the point on the PPF that we prefer to all other points because at this point we cannot produce more of any good without giving up some other good that we value more highly. Topic: Allocative Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

17) "Allocative efficiency requires that the maximum number of people have access to all of the goods and services that our economy produces." Is this statement true or false? Explain your answer. Answer: The statement is false. Allocative efficiency requires that production be such that the marginal benefit equals the marginal cost. Allocative efficiency has nothing to do with requiring that the maximum number of people have access to all the goods and services produced. Topic: Allocative Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 18) What factors generate economic growth? Answer: Two key factors create economic growth: Technological change and capital accumulation, including the accumulation of additional human capital. Both technological change and capital accumulation shift the nation's PPF outward. Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication 19) 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: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 20) 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 and Absolute Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

21) 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 and Absolute Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 22) Why does it make sense for economies to specialize according to comparative advantage and trade? Answer: A person has a comparative advantage in an activity that they can perform at a lower opportunity cost than other people. By participating in the activity in which they have a comparative advantage, less is given up. Because resources are scarce, more can be produced with available resources when less is given up. And, by trading people can consume more than just what they produce. Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 23) "The United States is more productive in most activities than are most of other countries because it has an absolute advantage in the production of most goods and services. Therefore we should restrict international trade as it only benefits other countries at the expense of the United States." Comment on this statement. Answer: The United States may be more productive than other countries in producing most goods and services so that it has an absolute advantage in most products, but it sill has a comparative disadvantage in many goods and services. Thus the United States and can gain from buying these goods and services from other countries and selling to these other countries the goods and services in which the United States has a comparative advantage to them. For example, the United States can have an absolute advantage over China in producing both cars and grain, but if China has a comparative advantage in grain, it can produce grain with a lower opportunity cost, that is, fewer cars given up to get a thousand tons of grain, than can the United States. In this case, the United States can benefit by importing Chinese grain and paying for it with fewer cars then the United States would have to give up if the same amount of grain was produced domestically. Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

24) How do property rights help organize production and trade? Answer: Property rights are necessary in order for people to specialize. If people specialize in production, they will want to consume more than just what they produce. Without property rights, people would worry that someone else would take their production, leaving them with little or nothing to trade for the other goods and services they want to consume. Topic: The Market Economy Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 8 Numeric and Graphing Questions 1) 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: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

2) 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? 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. Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

3) Before the first Gulf War in 1991, 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 had been set 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: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Production point A B C D E F G

Pizza produced 0 4 8 12 16 20 24

and and and and and and and

CDs produced 42 40 36 30 22 12 0

4) The table above lists seven points on the production possibilities frontier for pizza and CDs. Graph the PPF. What is the opportunity cost of producing the first four pizzas? What is the opportunity cost of producing the 10th pizza. What is the opportunity cost of producing the first 12 CDs? What is the opportunity cost of producing the 26th CD? Answer:

The PPF graph is shown above. The opportunity cost of the first four pizzas is 2 CDs per pizza. The 10th pizza is the midpoint between 8 and 12 pizzas. The opportunity cost of gaining 4 additional pizzas by producing 12 pizzas instead of 8 pizzas is 6 CDs given up, so the opportunity cost of an additional pizza is 6 ÷ 4 = 1.5 CDs per pizza. The opportunity cost of the first 12 CDs is 4 pizzas. The 26th CD is the midpoint between 22 and 30 CDs. The opportunity cost of gaining 8 CDs by producing 30 CDs instead of 22 CDs is 4 pizzas given up, so the opportunity cost of an additional CD is 4 ÷ 8 = 0.5 pizzas per CD. Topic: Production Possibilities Frontier Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Production point A B C D E

Milk (gallons) 0 2 4 6 8

and and and and and

Shirts (number) 100 90 70 40 0

5) A (very, very small) country produces milk and shirts and its production possibilities frontier is in the table above. 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? Answer: At point B, the opportunity cost of 2 additional gallons of milk is 20 shirts per gallon of milk. At point C, the opportunity cost of 2 additional gallons of milk at 30 shirts per gallon of milk. At point D, the opportunity cost of 2 additional gallons of milk is 40 shirts per gallon of milk. The opportunity cost of 2 additional gallons of milk increases as more milk is produced. Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Production point A B C D E

Pages typed 0 40 70 90 100

and and and and and

Web pages created 4 3 2 1 0

6) 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. Movement from A to B B to C C to D D to E

Increase in typed pages 40 30 20 10

Decrease in Web pages 1 1 1 1

Opportunity cost 1/40 1/30 1/20 1/10

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 table above gives the opportunity cost for typed pages. Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Production point A B C D

Wheat (bushels) 1,500 1,000 500 0

and and and and

Soybeans (bushels) 0 2,250 3,500 4,000

7) 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. Movement from A to B B to C C to D

Opportunity cost

Movement from D to C C to B B to A

Opportunity cost

Answer:

Movement from A to B B to C

Opportunity cost (bushels of soybeans per bushels of wheat) 0.22 0.40

Movement from D to C C to B

Opportunity cost (bushels of wheat per bushels of soybeans) 1.00 2.50

The table above gives the opportunity costs. The units of the opportunity costs are in the column headings. Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

8) 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? 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. Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Production point A B C D

Beef (pounds) 0 2 4 6

and and and and

Wheat (bushels) 9 7 4 0

9) 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? Explain your answer. Answer: The opportunity cost of a pound of beef is 1 bushel of wheat per pound of beef between points A and B, 11/2 bushels of wheat per pound of beef between points B and C, and 2 bushels of wheat per pound of beef between points C and D. The opportunity cost of a bushel of wheat is 1/2 pound of beef per bushel of wheat between points D and C, 2/3 pound of beef per bushel of wheat between points C and B, and 1 pound of beef per bushel of wheat 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 Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Production point A B C D E

Fish (pounds) 0 1 2 3 4

and and and and and

Berries (pounds) 50 45 35 20 0

10) The table above shows the production possibilities frontier for the nation of Isolanda. a) Find the marginal cost of a pound of fish using the above PPF. b) How does the marginal cost of a pound of fish change as more fish are caught? Answer: Marginal cost Fish (pounds of (pounds) berries) 0.5 5 1.5 10 2.5 15 3.5 20 a) The table above shows the marginal cost of a pound of fish. Remember that marginal cost is calculated at the mid-point, that is, midway between the two production possibilities. For instance, moving from production point A to production point B has an opportunity cost of 5 pounds of berries per pound of fish. Because this movement gains 1 pound of fish, the marginal cost is 5 pounds of berries. We then attribute this marginal cost to the point midway between points A and B, which is 0.5 pounds of fish per pound of berries. b) As more fish are caught, the marginal cost of a fish increases. Topic: Marginal Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 11) At the current point of production on a nation's production possibilities frontier, the marginal benefit of a slice of pizza is 500 tacos per slice of pizza while the marginal cost of producing a slice of pizza is 750 tacos per slice of pizza. To be allocatively efficient, what should be done? Answer: The marginal benefit of a slice of pizza is less than its marginal cost. Therefore to be allocatively efficient, less pizza and more tacos should be produced. Topic: Allocative Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

Quantity Marginal benefit (millions of (oranges per bushes of apples) bushel) 5 10 10 8 15 6 20 4 25 2

Marginal Cost (oranges per bushel) 1 3 6 9 12

12) Using the values for the marginal benefit and the marginal cost of a bushel of apples given in the table above, what is the allocatively efficient quantity of apples? Suppose 10 million bushels of apples are produced. Should the quantity be increased or deceased? What if 20 million bushels are produced; should the quantity be increased or decreased? Answer: The allocatively efficient quantity of apples is 15 million bushels because this is the quantity at which the marginal benefit equals the marginal cost. If 10 million bushels of apples are produced, the marginal benefit exceeds the marginal cost, so more apples should be produced. If 20 million bushels of apples are produced, the marginal cost exceeds the marginal benefit and so fewer apples should be produced. Topic: Allocative Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

13) Suppose a factory can be designed to produce either trucks or cars. The figure above shows the marginal cost and marginal benefit of producing trucks in terms of the forgone cars. a) What is the marginal benefit of the 25th truck? b) What is the marginal cost of the 25th truck? c) Should the 25th truck be produced? Why or why not. d) What is the marginal benefit of the 75th truck? e) What is the marginal cost of the 75th truck? f) Should the 75th truck be produced? Why or why not? g) What is the allocatively efficient quantity of trucks? Answer: a) 3 cars per truck b) 1 car per truck c) This truck should be produced because people value the 25th truck at 3 cars per truck, but it only costs 1 car per truck to make it. d) 1 car per truck e) 3 cars per truck f) This truck should not be produced because people value the 75th truck at 1 car per truck, but it costs 3 cars per truck to make it. g) 50 trucks is the allocatively efficient quantity of trucks. Topic: Allocative Efficiency Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

China's production in 1 day Cloth 8 Cheese 16

Pakistan's production in 1 day Cloth 4 Cheese 12

14) 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: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Omar's production in John's production in 1 1 day day Computers fixed Computers fixed 12 4 Lines of code Lines of code 800 200 15) 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: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

16) Jake takes 40 minutes to fry a chicken and 10 minutes to toast a slice of bread. His brother Elwood takes 60 minutes to fry a chicken and 4 minutes to toast a slice of bread. Calculate each brother's opportunity cost. Who has a comparative advantage in which activity? Explain. Will the brothers gain if they specialize? Answer: Jake can spend an hour to fry 1.5 chickens or toast 6 slices of bread, which means 1 chicken costs him 6 slices of bread ÷ 1.5 chickens = 4 slices of bread per chicken while 1 slice of bread costs him 1.5 chickens ÷ 6 slices of bread = 0.25 of a chicken per slice of bread. Elwood spends an hour to fry 1 chicken or toast 15 slices of bread, which means 1 chicken costs him 15 slices of bread ÷ 1 chicken = 15 slices of bread per chicken while 1 slice of bread costs him 1 chicken ÷ 15 slices of bread = 0.067 of a chicken per slice of bread. Thus, Jake has a comparative advantage (a lower opportunity cost) in frying chickens, whereas Elwood has a comparative advantage in toasting bread. The brothers can gain from specialization. For example, suppose each of them spends 2 hours to fry chickens and 2 hours to toast bread. Then, Jake will produce 3 chickens and 12 slices of bread and Elwood will produce 2 chickens and 30 slices of bread, so that together they will produce 5 chickens and 42 slices of bread. But, if Jake specializes in his comparative advantage, frying chickens and spends all 4 hours frying chickens, he will produce 6 chickens. And if Elwood specializes in his comparative ad-vantage, toasting bread, and spends all 4 hours toasting bread, he will produce 60 slices of bread. Then, together they will produce 6 chickens and 60 slices of bread. The gain from specialization is 1 extra chicken and 18 extra slices of bread. Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 17) Mary takes 4 minutes to make a sandwich and 6 minutes to mix a cocktail. Her sister Ash takes 4 minutes to make a sandwich and 4 minutes to mix a cocktail. Calculate each sister's opportunity cost. Which of the two sisters has an absolute advantage in making sandwiches? In mixing cocktails? Which of the two has a comparative advantage in making sandwiches? In mixing cocktails? Answer: Mary can spend an hour to make 15 sandwiches or mix 10 cocktails, which means 1 sandwich costs her 10 cocktails ÷ 15 sandwiches = 0.67 of a cocktail per sandwich while 1 cocktail costs her 15 sandwiches ÷ 10 cocktails = 1.5 sandwiches per cocktail. Ash can spend an hour to make 15 sandwiches or mix 15 cocktails, which means 1 sandwich costs her 15 cocktails ÷ 15 sandwiches = 1 cocktail per sandwich and 1 cocktail costs 1 sandwich per cocktail. The sisters are equally productive in sandwiches (15 sandwiches per hour) and therefore neither of them has an absolute advantage in sandwiches. But Ash has an absolute advantage in cocktails. She can mix 15 cocktails per hour while Mary can only mix 10. To see the sisters' comparative advantage we compare their opportunity costs. Mary's opportunity cost of a sandwich (0.67 of a cocktail per sandwich) is lower than Ash's (1 cocktail per sandwich), so Mary has a comparative advantage in sandwiches. Ash's opportunity cost of a cocktail (1 sandwich per cocktail) is lower than Mary's (1.5 sandwiches per cocktail), so Ash has a comparative advantage in cocktails. Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 156 Copyright © 2014 Pearson Education, Inc.

Nation A's production in 1 day Computers Software

Nation B's production in 1 day

100 Computers 140 Software

120 150

18) 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: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 19) 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: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

20) 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: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

9 True or False 1) Points outside the production possibilities frontier illustrate production points that cannot be attained. Answer: TRUE Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 2) If a country operates on its PPF, it achieves production efficiency. Answer: TRUE Topic: Production Possibilities and Opportunity Costs Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 3) Moving downward along a PPF, the opportunity cost of another unit of the good measured along the horizontal axis decreases. Answer: FALSE Topic: Production Possibilities and Opportunity Costs Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 4) We have achieved production efficiency if we can produce more of one good without producing less of some other good. Answer: FALSE Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 5) Each point on the production possibilities frontier achieves allocative efficiency. Answer: FALSE Topic: Allocative Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 6) We are using resources efficiently if we can produce more of one good without producing less of some other good that we value more highly. Answer: FALSE Topic: Using Resources Efficiently Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 159 Copyright © 2014 Pearson Education, Inc.

7) The more we have of a good or service, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it. Answer: TRUE Topic: Using Resources Efficiently Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 8) As long as the marginal benefit from a good is greater than its marginal cost, an economy is operating efficiently. Answer: FALSE Topic: Using Resources Efficiently Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 9) If marginal benefit is greater than marginal cost for the production of cars, to reach the allocative efficient quantity of cars, the production of cars must be increased. Answer: TRUE Topic: Using Resources Efficiently Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 10) When a nation is producing the allocatively efficient quantity of a product, the marginal benefit of producing the good equals the marginal cost of producing that good. Answer: TRUE Topic: Using Resources Efficiently Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 11) As long as technology increases, economic growth is free. Answer: FALSE Topic: Economic Growth Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

12) Over the past several decades, the United States has devoted a greater fraction of its resources to consumption than Hong Kong, which is why the U.S. economy grew faster than Hong Kong's economy. Answer: FALSE Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 13) If Hong Kong continues to devote more resources to accumulating capital than the United States, Hong Kong will continue to grow more rapidly than the United States. Answer: TRUE Topic: Economic Growth Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking 14) A country has a comparative advantage in the production of a good if its opportunity cost is lower compared to another country. Answer: TRUE Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 15) Specialization and trade allow countries to consume beyond their PPFs. Answer: TRUE Topic: Gains from Trade Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 16) If two countries specialize in the production of goods in which they have a comparative advantage, they can experience gains from trade. Answer: TRUE Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 17) Property rights facilitate the development of trade. Answer: TRUE Topic: The Market Economy Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 161 Copyright © 2014 Pearson Education, Inc.

18) A circular flow diagram shows the flows from the goods and resources markets. Answer: TRUE Topic: The Market Economy Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 19) Households are buyers in factor markets and sellers in goods markets. Answer: FALSE Topic: The Market Economy Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 20) In the United States, the government coordinates most of the economic activity. Answer: FALSE Topic: The Market Economy Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

10 Extended Problems Extra study time (hours per week) 10 8 6 4 2 0

Quidditch (hours per week) 0 2 4 6 8 10

Quidditch (hours per week) 1 3 5 7 9

Marginal benefit of an extra hour (points) 3.0 2.5 2.0 1.5 1.0

Harry's grade (points) 90 87 82 75 66 55

1) Harry usually spends 10 hours a week playing Quidditch. However, his Defense Against the Dark Arts exam is coming and he needs more time to study for the exam. If he does not study at all, the lowest grade he will receive is 55. But Harry realizes that this grade is unacceptable and so he has to give up some of his Quidditch time. But how much? He asks his friend Hermione, who is very good at Magical Economics, to help him figure this out. Together, they come up with the schedules of Harry's possibilities and values in the tables above. Then Hermione quickly finds the solution. But Harry still looks puzzled. Help Hermione to explain her solution to Harry. a) Draw Harry's production possibilities frontier with the Quidditch hours on the horizontal axis and Harry's grade, starting at 55, on the vertical axis. b) What is the opportunity cost of the first two hours of Quidditch? What is the marginal cost of the 5th hour? c) What is Harry's opportunity cost of raising his grade from 82 points to 87 points? d) Draw Harry's marginal cost of playing Quidditch curve. What happens to the marginal cost if Harry spends more time playing Quidditch? e) Draw Harry's marginal benefit from playing Quidditch curve. Describe the relationship between Harry's time spent playing Quidditch and the marginal benefit from playing Quidditch. f) For how many extra hours did Hermione recommend Harry to study? Why? If Harry follows her advice, what grade will he expect? What do you think Hermione said when Harry asked why he should not spend more time playing Quidditch?

Answer:

a) The figure above shows Harry's production possibilities frontier. b) Harry's opportunity cost of the first two hours of Quidditch is three points off his grade. According to the PPF, if Harry does not play Quidditch at all, the best grade he can get is 90 points, but if he plays Quidditch two hours a week, his grade falls to 87 points. So Harry gives up three points of his grade to get his first two hours of Quidditch. When Harry increases his Quidditch time from 4 hours to 6 hours, he gives up 7 points of his grade, which means each additional hour costs him 3.5 points. So the marginal cost of the 5th hour is 3.5 points. c) If Harry wants to raise his grade from 82 points to 87 points, he must give up 2 hours of Quidditch by playing 2 hours per week instead of 4 hours. So the opportunity cost of these 5 extra points is 2 hours of Quidditch.

d) To draw Harry's marginal cost curve, we calculate the marginal costs of the 1st, 3rd, 7th, and 9th hours of Quidditch the same way we calculated the marginal cost of the 5th hour. The marginal cost curve is shown in the figure above as MC. Harry's marginal cost of playing Quidditch increases as he spends more time playing. e) Harry's marginal benefit from playing Quidditch is measured by the value of an extra hour of Quidditch in terms of Harry's grade. The marginal benefit curve is graphed in the figure above using the data in the second table. The relationship between Harry's time spent to play Quidditch and the marginal benefit from playing is an inverse relationship. f) Hermione recommended to Harry that he study 7 extra hours a week, which leaves him only 3 hours per week to play Quidditch. The figure above shows that if Harry plays Quidditch 3 hours a week, the marginal cost of playing Quidditch equals the marginal benefit (Hermione calls this allocative efficiency). If Harry follows Hermione's advice, his grade will be 84.5 points. When Harry asked why he should not spend more time playing Quidditch, Hermione (who is a magical economist) probably said: "If you play for one more hour, your marginal cost will be 3 points off your grade, whereas your marginal benefit from this hour is only 2.25 points. I mean, the value that you get from your fourth hour of Quidditch is lower then the cost you pay for it, so you are worse off by spending more then three hours a week on Quidditch. This isn't magic, it's pure economics. Only the greatest wizards truly understand economics..." Topic: Allocative Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Combination A B C D E F G

Wine Bread (thousands of (thousands of bottles per year) loaves per year) 0 21 2 20 4 18 6 15 8 11 10 6 12 0

Willingness to Wine pay (thousands of (loaves of bread bottles per year) per bottle of wine) 1 2.5 3 2.0 5 1.5 7 1.0 9 0.5 2) The Hobbits of the Shire are trying to decide how much bread and how much wine to produce. They ask you to be their economic consultant and give you the information in the first table above about different combinations of wine and bread that they can produce if they are fully employed and doing their best. The Hobbits also give you the information in the second table above about their willingness to pay for wine depending on how much wine they already have. To help the Hobbits solve their problem: a) Draw the Shire's production possibilities frontier. Put wine on the horizontal axis. b) What is the opportunity cost of the first two thousand bottles of wine? What is the marginal cost of the 3000th bottle of wine? What is the marginal cost of the 3,000th loaf of bread? c) Draw the marginal cost of wine curve. What happens to the marginal cost if production of wine increases? Why? d) Draw the marginal benefit from wine curve on the same figure on which you put the marginal cost curve. Describe the relationship between the quantity of wine produced and the marginal benefit from wine. e) What combination of bread and wine will you recommend the Hobbits to produce? Why? Explain to the Hobbits why they would be worse off by producing a different combination of bread and wine.

Answer:

a) The figure above shows the Shire's production possibilities frontier. b) As the PPF shows, if the Hobbits produce no wine, they can produce 21,000 loaves of bread, but if they want to produce 2,000 bottles of wine, they can only produce 20,000 loaves of bread. The 1,000 loaves of bread that they have to give up to produce 2,000 bottles of wine is their opportunity cost of producing the first 2,000 bottles of wine, so the opportunity cost of the first 2,000 bottles of win is 1,000 loaves of bread. When the Hobbits increase their production of wine from 2,000 to 4,000, they give up 2,000 loaves of bread, which means each additional bottle of wine costs them 1 loaf of bread. The 3,000th bottle of wine is midway between 2,000 and 4,000, so the marginal cost of the 3,000th bottle is 1 loaf of bread. Similarly, when the Hobbits increase their production of bread from zero to 6,000, they give up 2,000 bottles of wine, or 1/3 of a bottle per loaf. The 3,000th loaf is in the middle of 0 and 6,000 loaves, so the marginal cost of the 3,000th loaf of bread is 1/3 of a bottle of wine.

c) To draw the marginal cost curve, we calculate the marginal costs of the 1,000th, 5,000th, 7,000th, 9,000th, and 11,000th bottles of wine the same way we calculated the marginal cost of the 3,000th bottle. The marginal cost curve is shown in the figure above as the curve labeled MC. The marginal cost of wine is increasing because all Hobbits are not equally productive in both activities. Some Hobbits are good at producing bread but not very good at producing wine. So if they stop producing bread and start to produce wine instead, the Shire will lose a large quantity of bread for a small quantity of additional wine, which means the cost of an additional bottle of wine in terms of bread, or the marginal cost of wine, will increase. d) The marginal benefit of wine is measured by what the Hobbits are willing to pay for an additional bottle. So, the marginal benefit curve can be graphed using the willingness to pay data in the table and is the curve in the figure labeled MB. The relationship between the quantity of wine produced and the marginal benefit from wine is an inverse relationship. If wine is relatively scarce, the Hobbits place a high value on it. But if they already have plenty of wine, they are not likely to be willing to pay a high price to get an extra bottle. e) You recommend that the Hobbits produce 5,000 bottles of wine and 16,500 loaves of bread. The figure shows that if the Shire produces 5,000 bottles, the marginal cost of wine equals the marginal benefit, and the Hobbits will achieve allocative efficiency. If the Hobbits produce 5,000 bottles of wine, they will have just enough resources (be on their PPF) to produce 16,500 loaves of bread. If the Hobbits produce a different combination of these two goods, they will be worse off. For example, if they produce 4,000 bottles of wine and 18,000 loaves of bread, the marginal benefit from wine is 1.75 loaves of bread while the marginal cost of wine is only 1.25 loaves. In this case, the Hobbits value an additional bottle of wine more than it costs them to produce it. So they can get more value from their resources by producing additional wine. On the other hand, if the Hobbits produce 6,000 bottles of wine, each additional bottle after the 5000th will cost them more than the value they place on it. The Hobbits will be better off if they decrease their production of wine and increase their production of bread. Topic: Allocative Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 168 Copyright © 2014 Pearson Education, Inc.

3) Sarah and her boyfriend Mike want to save some money to pay for their wedding. So they decided to help people in the neighborhood by cleaning their garages and mowing lawns. Sarah takes 60 minutes to clean a garage and 80 minutes to mow a lawn. Mike takes 80 minutes to clean a garage and 80 minutes to mow a lawn. Sarah and Mike devote 10 hours per week each to these activities and get paid $25 for each garage they clean and $25 for each lawn they mow. Sarah says to Mike: "I have an absolute advantage in cleaning and we are equally productive in mowing. Therefore I should do both cleaning and mowing but you should only mow lawns." Mike disagrees. He thinks Sarah should specialize in cleaning garages and he should specialize in mowing lawns. Help Sarah and Mike to resolve their dispute. a) Who has an absolute advantage in cleaning garages? In mowing lawns? Explain. b) Draw Sarah's and Mike's production possibilities frontiers. What are each individual's opportunity costs? c) Who has a comparative advantage in cleaning garages? In mowing lawns? Explain. d) Is Sarah right when she says that she should do both cleaning and mowing while Mike should only mow lawns? Or may be Mike is right when he suggests that Sarah specializes in cleaning and he specializes in mowing? Illustrate and substantiate your answer with a numerical example. Answer: a) Sarah has an absolute advantage in cleaning as she is more productive in this activity. She can clean 10 garages per week while Mike can only clean 7.5 garages. Sarah and Mike are equally productive in mowing lawns (each can mow 7.5 lawns per week) and therefore none of them has an absolute advantage in this activity.

b) Sarah's and Mike's PPFs are shown in the figure above. If Sarah works 10 hours a week, she can either mow 7.5 lawns or clean 10 garages. If she mows 7.5 lawns, she gives up 10 garages, which means her opportunity cost of one lawn is 1.33 garages (10 ÷ 7.5). If she cleans 10 garages, she gives up 7.5 lawns and her opportunity cost is 0.75 lawns per garage (7.5 ÷ 10). Mike can either mow 7.5 lawns or clean 7.5 garages, so his opportunity costs are 1 lawn per garage and 1 garage per lawn.

c) Sarah has a comparative advantage in cleaning garages. Her opportunity cost of cleaning a garage (0.75 lawns) is lower than Mike's (1 lawn). Mike has a comparative advantage in mowing lawns. His opportunity coast of mowing a lawn (1 garage) is lower than Sarah's (1.33 garages). d) Sarah is wrong and Mike is right. Individuals can gain if they specialize in the activities where they have a comparative advantage. Therefore Sarah should specialize in cleaning while Mike should specialize in mowing. A simple numerical example can show how Mike and Sarah are better off if they specialize this way. Suppose first that Sarah and Mike specialize as Sarah suggests. For example, Sarah spends 8 hours per week cleaning garages and 2 hours per week mowing lawns. Then, she will clean 8 garages and move 1.5 lawns per week. Mike spends all his time mowing lawns and mows 7.5 lawns per week. Together they will clean 8 garages and move 9 lawns, earning $425 ($25 × 8 garages + $25 × 9 lawns). Now, suppose Sarah and Mike specialize as Mike suggests. Then, Sarah will clean 10 garages a week while Mike will mow 7.5 lawns a week, so they will earn $437.5 ($25 × 10 garages + $25 × 7.5 lawns). Topic: Comparative Advantage and Absolute Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 3 Demand and Supply 1 Markets and Prices 1) A relative price is the A) slope of the demand curve. B) difference between one money price and another. C) slope of the supply curve. D) ratio of one money price to another. Answer: D Topic: Price and Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 2) A relative price is A) the number of dollars that must be given up in exchange for the good. B) also called the money price. C) not an opportunity cost. D) the ratio of one price to another price. Answer: D Topic: Price and Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 3) The opportunity cost of good A in terms of good B is equal to the A) money price of good A minus the money price of good B. B) money price of good B minus the money price of good A. C) ratio of the money price of good A to the money price of good B. D) ratio of the money price of good B to the money price of good A. Answer: C Topic: Price and Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

4) The relative price of a good is A) an opportunity cost. B) equal to the money price of a good. C) equal to the price of that good divided by the quantity demanded of the good. D) what you get paid for babysitting your cousin. Answer: A Topic: Price and Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 5) The opportunity cost of a hot dog in terms of hamburgers is the A) ratio of the slope of the demand curve for hot dogs to the slope of the demand curve for hamburgers. B) ratio of the slope of the supply curve for hot dogs to the slope of the supply curve for hamburgers. C) money price of a hot dog minus the money price of a hamburger. D) ratio of the money price of a hot dog to the money price of a hamburger. Answer: D Topic: Price and Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 6) Joe pays $8,000.00 in tuition. The 8,000 dollar tuition Joe pays is an example of what economists call A) a relative price. B) a money price. C) an indexed price. D) an opportunity price. Answer: B Topic: Price and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 7) If the price of a candy bar is $1 and the price of a fast food meal is $5, then the A) relative price of a candy bar is 5 fast food meals per candy bar. B) money price of a candy bar is 1/5 of a fast food meal per candy bar. C) relative price of a fast food meal is 5 candy bars per fast food meal. D) money price of a fast food meal is 1/5 of a candy bar per fast food meal. Answer: C Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 2 Copyright © 2014 Pearson Education, Inc.

8) If the price of a hot dog is $2 and the price of a hamburger is $4, then the A) relative price of a hot dog is 1/2 of a hamburger per hot dog. B) money price of a hot dog is 2 hamburgers per hot dog. C) relative price of a hamburger is 1/2 of a hot dog per hamburger. D) money price of a hamburger is 2 hot dogs per hamburger. Answer: A Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 9) Suppose the price of a football is $20.00 and the price of a basketball is $10.00. The ________ of a football is ________. A) relative price; 2 basketballs per football B) relative price; 1/2 basketball per football C) opportunity cost; $20.00 D) opportunity cost; $10.00 Answer: A Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 10) The price of a bag of corn chips is $3, and the price of a bottle of soda is $1. What is the relative price of a bag of corn chips? A) 3 bottles of soda per bag of corn chips B) 1/3 bottle of soda per bag of corn chips C) $3 D) 33¢ Answer: A Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 11) The price of a bag of corn chips is $3, and the price of a bottle of soda is $1. What is the relative price of a bottle of soda? A) 3 bags of corn chips per bottle of soda B) 1/3 bag of corn chips per bottle of soda C) $3 D) 33¢ Answer: B Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 3 Copyright © 2014 Pearson Education, Inc.

12) An ice cream cone costs $1.50. A can of soda costs $0.75. The relative price of an ice cream cone is A) 1/2 can of soda per ice cream cone, the opportunity cost of an ice cream cone. B) $1.50, the opportunity cost of a can of soda. C) 2 cans of soda per soda, the opportunity cost of an ice cream cone. D) $0.75, the opportunity cost of a can of soda. Answer: C Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 13) Twenty years ago a stove cost $300 and a refrigerator cost $1,500. Today a stove costs $600, while a refrigerator costs $1,800. Which of the following statements is true? A) The relative price of stoves and refrigerators has not changed. B) The relative price of a refrigerator has increased. C) The relative price of a stove has increased. D) The money price of a refrigerator has fallen. Answer: C Topic: Price and Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 14) If the money price of wheat increases and no other prices change, the A) relative price of wheat falls. B) opportunity cost of wheat rises. C) demand for wheat increases. D) relative price of wheat is unaffected. Answer: B Topic: Price and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 15) If the money price of hats rises and no other prices change, the I. relative price of a hat rises. II. opportunity cost of a hat rises. A) only I B) both I and II C) only II D) neither I nor II Answer: B Topic: Price and Opportunity Cost Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking 4 Copyright © 2014 Pearson Education, Inc.

16) The price of a DVD rental is $1.50 and the price of a downloaded movie is $1.00. If the price of a DVD rental increases by $0.50, the relative price a downloaded movie A) rises. B) falls. C) does not change. D) might change but more information is needed. Answer: B Topic: Price and Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 17) The price of a DVD rental is $2.50 and the price of a downloaded movie is $1.00. If the price of a DVD rental falls by $0.50, the relative price a downloaded movie A) rises. B) falls. C) does not change. D) might change but more information is needed. Answer: A Topic: Price and Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 18) The opportunity cost of a good is the same as its A) money price. B) relative price. C) price index. D) none of the above Answer: B Topic: Study Guide Question, Price and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 19) The money price of a pizza is $12 per pizza and the money price of a taco is $2 per taco. The relative price of a pizza is A) $12 per pizza. B) $24 per pizza. C) 6 tacos per pizza. D) 1/6 pizza per taco. Answer: C Topic: Study Guide Question, Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 5 Copyright © 2014 Pearson Education, Inc.

2 Demand 1) Wants, as opposed to demands, A) are the unlimited desires of the consumer. B) are the goods the consumer plans to acquire. C) are the goods the consumer has acquired. D) depend on the price. Answer: A Topic: Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 2) Demands differ from wants because A) demands are unlimited, whereas wants are limited by income. B) wants require a plan to acquire a good but demands require no such plan. C) wants imply a decision about which demands to satisfy, while demands involve no specific plan to acquire the good. D) demands reflect a decision about which wants to satisfy and a plan to buy the good, while wants are unlimited and involve no specific plan to acquire the good. Answer: D Topic: Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 3) Scarcity guarantees that A) demands will exceed wants. B) wants will exceed demands. C) demands will be equal to wants. D) most demands will be satisfied. Answer: B Topic: Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

4) The quantity demanded of a good or service is the amount that A) a consumer would like to buy but might not be able to afford. B) is actually bought during a given time period at a given price. C) consumers plan to buy during a given time period at a given price. D) firms are willing to sell during a given time period at a given price. Answer: C Topic: Quantity Demanded Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 5) The quantity demanded is A) always equal to the equilibrium quantity. B) independent of the price of the good. C) the amount of a good that consumers plan to purchase at a particular price. D) independent of consumers' buying plans. Answer: C Topic: Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 6) When graphing a demand curve for corn, we are showing the relationship between the quantity demanded of corn and the A) money price of corn. B) relative price of corn. C) income effect. D) substitution effect. Answer: B Topic: Law of Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 7) The "law of demand" states that changes in A) demand are related directly to changes in supply. B) the quantity demanded of a good are not related to changes in the quantity supplied. C) the quantity demanded of a good are inversely related to changes in its price. D) demand are inversely related to changes in supply. Answer: C Topic: Law of Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

8) The "law of demand" is illustrated by a A) rightward shift of the demand curve. B) leftward shift of the demand curve. C) movement along the demand curve. D) Both answers A and B are correct. Answer: C Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 9) The law of demand states that, other things remaining the same, the higher the price of a good, the A) smaller is the demand for the good. B) larger is the demand for the good. C) smaller is the quantity of the good demanded. D) larger is the quantity of the good demanded. Answer: C Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 10) The law of demand states that the quantity of a good demanded varies A) inversely with its price. B) inversely with the price of substitute goods. C) directly with income. D) directly with population. Answer: A Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 11) The "law of demand" refers to the fact that, all 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. Answer: D Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

12) The "law of demand" states that, other things remaining the same, the quantity demanded of any good is A) inversely related to its price. B) directly related to its price. C) positively related to its price. D) directly related to the supply of the good. Answer: A Topic: Law of Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 13) The "law of demand" states that, other thing remaining the same, the higher A) the price of a good, the lower is the demand for this good. B) consumers' incomes, the greater is the demand. C) the price of a good, the higher is the quantity demanded. D) the price of a good, the smaller is the quantity demanded. Answer: D Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 14) The law of demand implies that, other things remaining the same, A) as the price of a cheeseburger rises, the quantity of cheeseburgers demanded will increase. B) as the price of a cheeseburger rises, the quantity of cheeseburgers demanded will decrease. C) as income increases, the quantity of cheeseburgers demanded will increase. D) as the demand for cheeseburgers increases, the price of a cheeseburger will fall. Answer: B Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 15) The "law of demand" predicts that, other things being equal, A) an increase in the price of downloaded music decreases the demand for downloaded music. B) a decrease in the price of gasoline decreases the quantity of gasoline demanded. C) an increase in the price of pizza decreases the quantity of pizza demanded. D) an increase in the price of coffee decreases the quantity of tea demanded. Answer: C Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

16) The law of demand implies that demand curves A) slope down. B) slope up. C) shift rightward whenever the price rises. D) shift leftward whenever the price rises. Answer: A Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 17) Which of the following is consistent with the law of demand? A) An increase in the price of a DVD causes an increase in the quantity of DVDs demanded. B) An increase in the price of a soda causes a decrease in the quantity of soda demanded. C) A decrease in the price of a gallon of milk causes a decrease in the quantity of milk demanded. D) A decrease in the price of juice causes no change in the quantity of juice demanded. Answer: B Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication 18) The law of demand implies that if nothing else changes, there is A) a positive relationship between the price of a good and the quantity demanded. B) a negative relationship between the price of a good and the quantity demanded. C) a linear relationship between price of a good and the quantity demanded. D) an exponential relationship between price of a good and the quantity demanded. Answer: B Topic: Law of Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 19) As the relative price of a good falls, the substitution effect implies that people buy A) less of that good and more of its substitutes. B) more of that good and less of its substitutes. C) less of that good and less of its substitutes. D) more of that good and more of its substitutes. Answer: B Topic: Demand; Substitution Effect Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

20) When the price of a pizza decreases from $12 to $10, it is definitely the case that the A) income effect means people buy less pizza. B) substitution effect means people buy more pizza. C) quantity demanded of pizza will not change. D) None of the above answers is correct. Answer: B Topic: Demand; Substitution Effect Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication 21) The price of cereal rises. As a result, people have cereal for breakfast on fewer days and eat eggs instead. This behavior is an example of A) a decrease in the quantity demanded of cereal because of the substitution effect. B) an increase in the quantity demanded of eggs because of the income effect. C) a decrease in the quantity supplied of cereal because of the substitution effect. D) an increase in the quantity supplied of eggs because of the income effect. Answer: A Topic: Demand; Substitution Effect Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication 22) In the market for magazines, the "income effect" means that A) magazines are usually purchased by people with higher than average incomes. B) a decrease in the price of a substitute product like books will make magazine readers feel a little poorer than they were before. C) an increase in the price of magazines will reduce the total purchasing power of magazine readers, making them able to afford fewer magazines. D) an increase in the price of magazines will raise the relative price of magazines to books, causing magazine readers to read more books and fewer magazines. Answer: C Topic: Demand; Income Effect Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

23) The "income effect" in the market for aspirin means that A) aspirin are generally taken by people with higher than average incomes. B) a decrease in the price of a substitute good like acetaminophen will make aspirin takers feel a little poorer than they were before. C) an increase in the price of aspirin will reduce the total purchasing power of aspirin takers, making them able to afford fewer aspirin. D) an increase in the price of aspirin will cause headache sufferers to look for a lower priced remedy. Answer: C Topic: Demand; Income Effect Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 24) When the price of a pizza decreases from $14 to $12, A) the income effect means people buy less pizza. B) the income effect points out that the total purchasing power of people who buy pizza increases. C) the income effect means that the demand for pizza will not change. D) None of the above answers is correct. Answer: B Topic: Demand; Income Effect Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 25) When the price of a good falls, the income effect for a normal good implies that people buy A) less of that good because the relative price of the good has fallen. B) more of that good because the relative price of the good has risen. C) less of that good because they cannot afford to buy all the things they previously bought. D) more of that good because they can afford to buy more of all the things they previously bought. Answer: D Topic: Demand; Income Effect Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

26) For normal goods which of the following explains why demand curves slope downward? A) prices and income B) substitutes and complements C) resources and technology D) substitution effect and income effect Answer: D Topic: Demand; Income and Substitution Effects Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 27) Apples are a normal good, so if the price of an apple increases from 50¢ to 60¢, the quantity of apples demanded decrease because of A) the substitution effect only. B) the income effect only. C) a change in income. D) the substitution and income effects. Answer: D Topic: Demand; Income and Substitution Effects Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills 28) When the price of an inferior good falls, the substitution effect leads to ________ in the quantity purchased and the income effect leads to ________ in the quantity purchased. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: B Topic: Demand; Income and Substitution Effects Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 29) When the price of a normal good falls, the substitution effect leads to ________ in the quantity purchased and the income effect leads to ________ in the quantity purchased. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: A Topic: Demand; Income and Substitution Effects Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 13 Copyright © 2014 Pearson Education, Inc.

30) Which of the following influences people's buying plans and does not shift the demand curve? A) the price of the good B) the prices of related goods C) income D) preferences Answer: A Topic: Demand Curve and Demand Schedule Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 31) Each point on the demand curve reflects A) all the wants of a given household. B) the highest price consumers are willing and able to pay for that particular unit of a good. C) the highest price sellers will accept for all units they are producing. D) the lowest-cost technology available to produce a good. Answer: B Topic: Willingness and Ability to Pay Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 32) The quantity of iPods that people plan to buy this month depends on all of the following EXCEPT the A) price of CD players. B) price of an iPod. C) the technology used to produce an iPod. D) price of a music download from iTunes. Answer: C Topic: Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 33) A substitute is a good A) that can be used in place of another good. B) that is not used in place of another good. C) of lower quality than another good. D) of higher quality than another good. Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

34) People buy more of good 1 when the price of good 2 rises. These goods are A) complements. B) substitutes. C) normal goods. D) inferior goods. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 35) Which of the following pairs of goods are most likely substitutes? A) DVDs and DVD players B) cola and lemon lime soda C) lettuce and salad dressing D) peanut butter and gasoline Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 36) A complement is a good A) of lower quality than another good. B) used in conjunction with another good. C) used instead of another good. D) of higher quality than another good. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 37) Suppose people buy more of good 1 when the price of good 2 falls. These goods are A) complements. B) substitutes. C) normal. D) inferior. Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

38) Ham and eggs are complements. If the price of ham rises, the demand for eggs will A) increase or decrease but the demand curve for ham will not change. B) decrease and the demand curve for ham will shift rightward. C) not change but there will be a movement along the demand curve for eggs. D) decrease and the demand curve for eggs will shift leftward. Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 39) A changes in which of the following shifts the demand curve for hamburgers? A) an increase in the price of the meat used to produce hamburgers B) an increase in the price of a hamburger C) a fall in the price of french fries, a complement for hamburgers D) an increase in the number of hamburger restaurants Answer: C Topic: Change in Demand, Prices of Related Goods Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills 40) Which of the following shifts the demand curve for oranges? A) disastrous weather that destroys about half of this year's orange crop B) a decrease in the price of a pound of bananas, a substitute in consumption for oranges C) an increase in the price of the fuel used to transport oranges to supermarkets D) great weather that produces a bumper orange crop this year Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 41) What happens to the demand for Xbox games if the price of an Xbox falls? A) The demand for Xboxes decreases because the price of a substitute falls. B) The demand for Xboxes increases because the price of a complement falls. C) The demand for Xboxes decreases because the price of a complement falls. D) The demand for Xboxes remains unchanged. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

42) Oatmeal is a normal good and cold cereal is a substitute for oatmeal. Raisins are a complement for oatmeal. Which of the following increases the demand for oatmeal? A) an increase in the price of raisins B) a decrease in income C) a decrease in population D) an increase in the price of cold cereal Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 43) Which of the following shifts the demand curve for hot dogs leftward? A) an increase in the price of a hot dog bun B) a decrease in the price of a hot dog bun C) an increase in the price of a hot dog D) an increase in the price of a hamburger Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 44) If the price of product X falls and this change increases the demand for product Y, then A) X and Y are complements. B) X and Y are substitutes. C) X is an inferior good. D) Y is an inferior good. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 45) You observe that an increase in the price of salsa decreases the demand for tortilla chips and increases the demand for potato chips. You can conclude that A) salsa and tortilla chips are substitutes. B) salsa and potato chips are complements. C) tortilla chips and potato chips are complements. D) salsa and tortilla chips are complements. Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

46) Cupcakes and granola bars are substitutes in consumption. The price of a granola bar increases so the demand for A) granola bars will increase, that is, the demand curve will shift rightward. B) cupcakes will increase, that is, the demand curve will shift rightward. C) granola bars will decrease, that is, the demand curve will shift leftward. D) cupcakes will decrease, that is, the demand curve will shift leftward. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 47) Sweatshirts and tee-shirts are complements in consumption and the price of a sweatshirt increases. As a result, the demand for A) sweatshirts will increase that is, the demand curve will shift rightward. B) tee-shirts will increase that is, the demand curve will shift rightward. C) sweatshirts will decrease that is, the demand curve will shift leftward. D) tee-shirts will decrease that is, the demand curve will shift leftward. Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 48) If the price of an Xbox player falls, then in the market for Xbox games, A) the demand curve for Xbox games shifts rightward. B) the demand curve for Xbox games shifts leftward. C) there is a movement downward along the demand curve for Xbox games. D) there is a movement upward along the demand curve for Xbox games. Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 49) The observation that the demand curve for grape jelly shifts rightward every time the price of peanut butter falls means that grape jelly and peanut butter are A) complements. B) substitutes. C) inferior goods. D) normal goods. Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 18 Copyright © 2014 Pearson Education, Inc.

50) A decrease in the price of bowling shifts the A) demand curve for bowling balls leftward. B) demand curve for bowling balls rightward. C) supply curve of bowling balls leftward. D) supply curve of bowling balls rightward. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 51) The price of a tomato increases and people buy more lettuce. You infer that lettuce and tomatoes are ________. A) complements B) normal goods C) substitutes D) inferior goods Answer: C Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 52) Students can rent a Blu-ray movie at Campus Video for $4. As the price of Blu-ray players fall, the A) quantity supplied of Blu-ray movies will decrease. B) demand for Blu-ray movies will increase. C) supply of Blu-ray movies will decrease. D) quantity demanded of Blu-ray movies will increase. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 53) If the price of chicken falls, then in the market for beef, A) the demand curve for beef shifts rightward. B) the demand curve for beef shifts leftward. C) there is a movement downward along the demand curve for beef. D) there is a movement upward along the demand curve for beef. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

54) The demand for a good increases when the price of a substitute ________ and also increases when the price of a complement ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 55) An increase the expected future price of a good A) increases its demand. B) decreases its demand. C) increases its supply. D) has no effect on either its demand or its supply. Answer: A Topic: Change in Demand, Expected Future Prices Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 56) Which of the following increases the demand for a normal good? A) a decrease in income B) an decrease in the price of a substitute C) an increase in the price of a complement D) the price of the good is expected to increase in the future Answer: D Topic: Change in Demand, Expected Future Prices Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

57) A decrease in the expected future price of cars A) increases the current quantity demanded of cars, that is, there is a movement downward along the demand curve for cars. B) increases the current demand for cars, that is, there is a rightward shift of the demand curve for cars. C) decreases the current quantity demanded of cars, that is, there is a movement upward along the demand curve for cars. D) decreases the current demand for cars, that is, there is a leftward shift of the demand curve for cars. Answer: D Topic: Change in Demand, Expected Future Prices Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 58) If consumers but not producers expect that the price of soda will rise in November, the A) supply of soda in October will increase. B) demand for soda in October will decrease. C) demand for soda in October will increase. D) supply of soda in October will decrease. Answer: C Topic: Change in Demand, Expected Future Prices Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 59) Consumers 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. Answer: B Topic: Change in Demand, Expected Future Prices Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

60) The demand curve for a normal good shifts leftward if income ________ or the expected future price ________. A) decreases; falls B) decreases; rises C) increases; falls D) increases; rises Answer: A Topic: Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 61) If income increases or the price of a complement falls, the A) demand curve for a normal good shifts leftward. B) demand curve for a normal good shifts rightward. C) supply curve of a normal good shifts leftward. D) supply curve of a normal good shifts rightward. Answer: B Topic: Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 62) If income decreases or the price of a complement rises, A) the demand curve for a normal good shifts leftward. B) the demand curve for a normal good shifts rightward. C) there is an upward movement along the demand curve for the good. D) there is a downward movement along the demand curve for the good. Answer: A Topic: Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 63) A consumer might consider in-line skates and elbow-pads to be A) products with upward sloping demand curves. B) unrelated goods. C) complements. D) substitutes. Answer: C Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

64) When people's incomes increase, the demand for a good increases. The good is called A) an inferior good. B) a complement. C) a substitute. D) a normal good. Answer: D Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 65) Normal goods are those for which demand decreases as A) the price of a complement falls. B) the price of a substitute falls. C) income decreases. D) the good's own price rises. Answer: C Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 66) Which of the following decreases the demand for an inferior good? A) an increase in income B) a decrease in the price of a complement C) a decrease in income D) an increase in the price of a substitute Answer: A Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 67) If consumers' incomes increase 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) none of the above Answer: C Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

68) Which of the following is true? A) For an inferior good, when income increases, the demand curve shifts leftward. B) The demand curve for a good shifts leftward when the price of a substitute rises. C) If consumers 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 for most goods leftward. Answer: A Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 69) A normal good is a good for which demand A) decreases when income increases. B) increases when income increases. C) decreases when population increases. D) increases when population increases. Answer: B Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 70) Inferior goods are those for which demand increases as A) the price of a substitute falls. B) the price of a substitute rises. C) income decreases. D) income increases. Answer: C Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 71) By definition, an inferior good is a A) want that is not expressed by demand. B) normal substitute good. C) good for which demand decreases when its price rises. D) good for which demand decreases when income increases. Answer: D Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

72) An inferior good is a good for which demand A) decreases when income increases. B) increases when income increases. C) decreases when population increases. D) increases when population increases. Answer: A Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 73) Kelly graduates and her income increases by $25,000 a year. Other things remaining the same, she increases the quantity of clothes she buys. For Kelly, clothes are ________. A) an inferior good B) a normal good C) a substitute good D) a complement good Answer: B Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 74) Which of the following shifts the demand curve for movie downloads rightward? A) A decrease in the price of downloading a movie. B) A 10 percent increase in people's income if movie downloads are a normal good. C) A decrease in the price of cable television service. D) An increase in the quantity and quality of programming included in the basic cable television service package. Answer: B Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 75) If macaroni and cheese is an inferior good, an increase in income will A) not affect the demand for macaroni and cheese. B) decrease the demand for macaroni and cheese. C) increase the demand for macaroni and cheese. D) create no income effect. Answer: B Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

76) If macaroni and cheese is an inferior good, then a decrease in income will result 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. Answer: A Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 77) Jeep Cherokees are a normal good. If people's incomes increase, the direct result will be A) an increase in the supply of the vehicles. B) a decrease in the demand for the vehicles. C) an increase in the demand for the vehicles. D) Both answers A and C are correct. Answer: C Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 78) Homer changes jobs and his new job pays him a higher income. Before he changed jobs, Homer purchased 3 pounds of tuna and 2 pounds of chicken. After he changed jobs, Homer now purchases 2 pounds of tuna and 3 pounds of chicken. For Homer, A) tuna is a normal good and chicken is an inferior good. B) tuna is an inferior good and chicken is a normal good. C) both tuna and chicken are normal goods. D) both tuna and chicken are inferior goods. Answer: B Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 79) If the demand for digital cameras increases when consumers' income rise, then digital cameras are A) a normal good. B) an inferior good. C) a substitute good for video cameras. D) a complement to video cameras. Answer: A Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 26 Copyright © 2014 Pearson Education, Inc.

80) When income increases, the demand curve for X shifts rightward and the demand curve for Y shifts leftward. These shifts mean that A) X and Y are complements. B) X and Y both normal goods. C) X is an inferior good and Y is a normal good. D) X is a normal good and Y is an inferior good. Answer: D Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 81) Georgine buys more sweaters when her income increases. For Georgine, sweaters are A) a substitute. B) a complement. C) an inferior good. D) a normal good. Answer: D Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 82) Gruel is an inferior good. Hence, a decrease in people's incomes A) shifts the supply curve of gruel leftward. B) decreases the quantity of gruel supplied. C) shifts the demand curve for gruel rightward. D) shifts the demand curve for gruel leftward. Answer: C Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 83) An increase in the number of consumers A) results only in a movement along the demand curve. B) shifts the supply curve leftward. C) shifts the demand curve rightward. D) Both answers B and C are correct. Answer: C Topic: Change in Demand, Population Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

84) When economists speak of preferences as influencing demand, they are referring to A) directly observable changes in prices and income. B) an individual's attitudes toward goods and services. C) the excess of wants over the available supplies. D) the availability of a good to all income classes. Answer: B Topic: Change in Demand, Preferences Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 85) A change in which of the following shifts the demand curve? A) the number of sellers in the market B) the price of the resources used to produce the product C) the technology with which the product is produced D) the tastes and preferences of consumers Answer: D Topic: Change in Demand, Preferences Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 86) An unusually warm winter shifts the A) supply curve of gloves rightward. B) supply curve of gloves leftward. C) demand curve for gloves rightward. D) demand curve for gloves leftward. Answer: D Topic: Change in Demand, Preferences Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 87) Which of the following does NOT shift the demand curve for broccoli? A) an increase in the cost of fertilizer used to grow broccoli B) a warning by the U.S. Surgeon General that broccoli causes schizophrenia C) an increase in the price of spinach, a substitute for broccoli, because rodents gobbled up much of this year's spinach crop D) a decrease in the price of spinach, a substitute for broccoli, because of a bumper crop of spinach this year Answer: A Topic: Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

88) Which of the following lists has variables that all shift a good's demand curve? A) price of the good, preferences, prices of substitution goods, income B) income, preferences, number of buyers, price of complementary good C) expectation of future price, price of the good, number of buyers, income D) Both answers A and B are correct. Answer: B Topic: Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 89) The price of the steel used to produce car engines increases. How does this price hike affect the demand curve for cars? A) The demand curve shifts leftward. B) The demand curve shifts rightward. C) The demand curve does not shift. D) There is not enough information to tell how the change shifts the demand curve for cars. Answer: C Topic: Change in Demand Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 90) The quantity demanded of a good or service is the quantity that a consumer A) is willing to buy at a particular price during a given time period. B) actually buys at a particular price during a given time period. C) needs to buy at a particular price during a given time period. D) should buy at a particular price during a given time period. Answer: A Topic: Change in the Quantity Demanded Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 91) If the price of chocolate chip cookies rises, then A) the demand curve for chocolate chip cookies shifts rightward. B) the demand curve for chocolate chip cookies shifts leftward. C) there is a movement downward along the demand curve for chocolate chip cookies. D) there is a movement upward along the demand curve for chocolate chip cookies. Answer: D Topic: Change in the Quantity Demanded Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

92) Which of the following leads to a movement along the demand curve for spinach but does not shift the demand curve for spinach? A) A rise in the price of spinach. B) A newly discovered health benefit from eating spinach. C) An increase in the price of broccoli, a substitute for spinach. D) An increase in income for all spinach lovers. Answer: A Topic: Change in the Quantity Demanded Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 93) A change in the price of a good A) shifts the good's demand curve and also causes a movement along it. B) shifts the good's demand curve but does not cause a movement along it. C) does not shift the good's demand curve but does cause a movement along it. D) neither shifts the good's demand curve nor causes a movement along it. Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 94) If shoes rise in price, the demand curve for shoes ________ and the quantity of shoes demanded ________. A) shifts leftward; decreases B) shifts leftward; does not change C) does not shift; decreases D) does not shift; does not change Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 95) A decrease in quantity demanded because of an increase in price is represented by a A) rightward shift of the demand curve. B) leftward shift of the demand curve. C) movement up and to the left along the demand curve. D) movement down and to the right along the demand curve. Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

96) A change in which of the following alters buying plans for cars but does NOT shift the demand curve for cars? A) A 5 percent increase in people's income. B) A 10 percent decrease in the price of car insurance. C) A 20 percent increase in the price of a car. D) An increased preference for walking rather than driving. Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 97) Which of the following would NOT shift the demand curve for turkey? A) an increase in income B) a decrease in the price of ham C) a change in people's preferences for turkey D) a change in the price of a turkey Answer: D Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 98) The statement that "demand increases" means that there is a A) movement to the right along a demand curve. B) movement to the left along a demand curve. C) rightward shift of the demand curve. D) leftward shift of the demand curve. Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 99) Cable television companies must pay increased charges by the networks for the programs the cable companies carry. As a result, the price of cable television rises. Thus A) the demand curve for cable television service shifts rightward. B) the demand curve for cable television service shifts leftward. C) there is a movement down the demand curve for cable television to a higher quantity demanded. D) there is a movement up the demand curve for cable television to a smaller quantity demanded. Answer: D Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 31 Copyright © 2014 Pearson Education, Inc.

100) As the price of a pound of peanuts falls, the A) demand for peanuts increases. B) demand for peanuts decreases. C) quantity of peanuts demanded increases. D) Both answers A and C are correct. Answer: C Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 101) For "an increase in the quantity demanded" but not "an increase in demand" to occur, there must be a A) rightward shift of the demand curve. B) movement along the demand curve. C) rightward shift of the demand curve and a movement along the demand curve. D) Both answers B and C are correct. Answer: B Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 102) If the price per bushel of apples increased from $7.00 to $8.00 because of a poor harvest, the A) demand for apples decreases. B) quantity of apples demanded decreases. C) quantity of apples supplied decreases. D) Both answers A and B are correct. Answer: B Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 103) Which of the following statements is correct? A) A change in the quantity demanded means a shift in the demand curve. B) A change in demand means a movement along the demand curve. C) A change in demand and change in quantity demanded means the same thing. D) A change in demand means a shift in the demand curve while change in the quantity demanded means a movement along the demand curve. Answer: D Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 32 Copyright © 2014 Pearson Education, Inc.

104) Which of the following best reflects an increase in quantity demanded and not an increase in demand? A) A college expects enrollment to increase, despite no change in the tuition. B) Skiing becomes a fashionable winter sports activity. C) The price of hair styling falls. D) Consumers expect lower prices next month for computers. Answer: C Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

105) In the above figure, an increase in the quantity demanded is represented by a movement from point d to A) point b only. B) point c only. C) point a. D) both points b and c. Answer: C Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

106) The figure above shows the demand for fruit snacks. Which movement reflects an increase in demand? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: D Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 107) The figure above shows the demand for fruit snacks. Which movement reflects a decrease in demand? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

108) The figure above shows the demand for fruit snacks. Which movement reflects a decrease in quantity demanded but NOT a decrease in demand? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: A Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 109) The figure above shows the demand for fruit snacks. Which movement reflects how consumers would react to an increase in the price of a non-fruit snack? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 110) The figure above shows the demand for fruit snacks. Which movement reflects an increase in the price of a substitute for fruit snacks? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 111) The figure above shows the demand for fruit snacks. Which movement reflects an increase in the price of a complement for fruit snacks? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: C Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 35 Copyright © 2014 Pearson Education, Inc.

112) The figure above shows the demand for fruit snacks. Which movement reflects how consumers would react to an increase in the price of a fruit snack that is expected to occur in the future? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: D Topic: Change in Demand, Expected Future Prices Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 113) The figure above shows the demand for fruit snacks. Which movement reflects an increase in income if fruit snacks are an inferior good? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: C Topic: Change in Demand, Income Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 114) The figure above shows the demand for fruit snacks. Which movement reflects an increase in income if fruit snacks are a normal good? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: D Topic: Change in Demand, Income Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

115) The figure above shows the demand for fruit snacks. Which movement reflects a decrease in population? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: C Topic: Change in Demand, Population Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

116) Consider the demand curves for soft drinks shown in the figure above. Moving from point a to point c means that A) the marginal benefit of each additional soft drink falls. B) the opportunity cost of another soft drink increases. C) people's incomes have decreased. D) the price of a soft drink has increased. Answer: A Topic: Change in the Quantity Demanded Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

117) Consider the demand curves for soft drinks shown in the figure above. Suppose the economy is at point a. An increase in the price of a soda results in a movement to a point such as A) none of the points illustrated. B) b. C) c. D) d. Answer: D Topic: Change in the Quantity Demanded Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 118) Consider the demand curves for soft drinks shown in the figure above. Suppose the economy is at point a. Which of the following could result in a movement to point c? A) a decrease in income B) an increase in the relative price of a soft drink C) a decrease in the relative price of a soft drink D) a decrease in the price of bottled water Answer: C Topic: Change in the Quantity Demanded Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 119) Consider the demand curves for soft drinks shown in the figure above. Suppose the economy is at point a. Which of the following could result in a movement to point d? A) a decrease in income B) an increase in the relative price of a soft drink C) a decrease in the relative price of a soft drink D) a decrease in the price of bottled water Answer: B Topic: Change in the Quantity Demanded Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 120) Consider the demand curves for soft drinks shown in the figure above. Suppose the economy is at point a. What of the following could result in a movement to point b? A) an increase in the price of bottled water B) a decrease in the price of bottled water C) an increase in the opportunity cost of soft drinks D) a decrease in the relative price of a soft drink Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 38 Copyright © 2014 Pearson Education, Inc.

121) Consider the demand curves for soft drinks shown in the figure above. Initially the economy is at point a. If people come to expect that the price of a soft drink will increase in the future, there will be a movement to a point such as A) none of the points illustrated. B) b. C) c. D) d. Answer: B Topic: Change in Demand, Expected Future Prices Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 122) Consider the demand curves for soft drinks shown in the figure above. A movement from point a to point c represents A) a decrease in quantity demanded. B) an increase in demand. C) an increase in quantity demanded. D) a decrease in demand. Answer: C Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 123) Consider the demand curves for soft drinks shown in the figure above. A movement from point a to point b represents A) a decrease in quantity demanded. B) an increase in demand. C) an increase in quantity demanded. D) a decrease in demand. Answer: B Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

124) The law of demand concludes that a rise in the price of a golf ball ________ the quantity demanded and ________. A) increases; shifts the demand curve for golf balls rightward B) decreases; shifts the demand curve for golf balls leftward C) decreases; creates a movement up along the demand curve for golf balls D) increases; creates a movement down along the demand curve for golf balls Answer: C Topic: Study Guide Question, Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 125) If a decrease in the price of gasoline increases the demand for large cars, then A) gasoline and large cars are substitutes in consumption. B) gasoline and large cars are complements in consumption. C) gasoline is an inferior good. D) large cars are an inferior good. Answer: B Topic: Study Guide Question-Change in Demand-Prices of Related Good Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 126) A normal good is one 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) none of the above Answer: C Topic: Study Guide Question, Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 127) Some sales managers are talking shop. Which of the following quotations refers to a movement along the demand curve? A) "Since our competitors raised their prices our sales have doubled." B) "It has been an unusually mild winter; our sales of wool scarves are down from last year." C) "We decided to cut our prices, and the increase in our sales has been remarkable." D) none of the above Answer: C Topic: Study Guide Question, Change in Quantity Demanded Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

128) A recession occurs and people's incomes decrease. Knowing that an iPad is a normal good, you predict that the demand for an iPad A) increases. B) decreases. C) might increase or decrease. D) remains unchanged. Answer: B Topic: Parallel MyEconLab Questions, Change in Demand, Income Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking 3 Supply 1) Which of the following is NOT one of the factors that influences the supply of a product? A) technology B) income C) number of suppliers D) expected future prices Answer: B Topic: What Determines Selling Plans? Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 2) The quantity of CDs that firms plan to sell this month depends on all of the following EXCEPT the A) number of producers of CDs. B) quantity of CDs that people plan to buy. C) wage rate of workers who produce CDs. D) price of a CD. Answer: B Topic: What Determines Selling Plans? Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

3) The quantity supplied of a good is A) the same thing as the quantity demanded at each price. B) the amount that the producers are planning to sell at a particular price during a given time period. C) equal to the difference between the quantity available and the quantity desired by all consumers and producers. D) the amount the firm would sell if it faced no resource constraints. Answer: B Topic: Quantity Supplied Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 4) The quantity supplied of a good or service is the amount that A) producers wish they could sell at a higher price. B) is actually bought during a given time period at a given price. C) people are willing to buy during a given time period at a given price. D) producers plan to sell during a given time period at a given price. Answer: D Topic: Quantity Supplied Skill: Definition Status: New 10th edition AACSB: Reflective Thinking 5) The quantity supplied of a good or service is the quantity that a producer ________ at a particular price during a given time period. A) is willing to sell B) actually sells C) needs to sell D) should sell Answer: A Topic: Quantity Supplied Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 6) The "law of supply" states that, other things remaining the same, firms produce A) more of a good the less it costs to produce it. B) less of a good the more it costs to produce it. C) more of a good the higher its price. D) less of a good as the required resources become scarcer. Answer: C Topic: The Law of Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 42 Copyright © 2014 Pearson Education, Inc.

7) The "law of supply" refers to the fact that, all other things remaining the same, when the price of a good rises A) the supply curve shifts leftward. B) the supply curve shifts rightward. C) there is a movement up along the supply curve to a larger quantity supplied. D) there is a movement down along the supply curve to a smaller quantity supplied. Answer: C Topic: The Law of Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 8) Which of the following explains why supply curves slope upward? A) prices and income B) increasing marginal cost C) resources and technology D) substitutes in production and complements in production Answer: B Topic: The Law of Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 9) The supply curve slopes upward when graphed against ________, because of ________. A) the price of the good; increasing marginal cost B) the price of the good; decreasing marginal cost C) income; increasing marginal cost D) income; decreasing marginal cost Answer: A Topic: The Law of Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 10) A fall in the price of a good causes producers to reduce the quantity of the good they are willing to produce. This fact illustrates A) the law of supply. B) the law of demand. C) a change in supply. D) the nature of an inferior good. Answer: A Topic: The Law of Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

11) Because of increasing marginal cost, most supply curves A) are horizontal. B) are vertical. C) have a negative slope. D) have a positive slope. Answer: D Topic: Supply Curve and Supply Schedule Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 12) A supply curve shows the relation between the quantity of a good supplied and A) income. Usually a supply curve has negative slope. B) income. Usually a supply curve has positive slope. C) the price of the good. Usually a supply curve has negative slope. D) the price of the good. Usually a supply curve has positive slope. Answer: D Topic: Supply Curve and Supply Schedule Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 13) Which of the following is NOT held constant while moving along a supply curve? A) expected future prices B) the number of sellers C) the price of the good itself D) prices of factors of production Answer: C Topic: Supply Curve and Supply Schedule Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 14) Each point on a supply curve represents A) the highest price buyers will pay for the good. B) the lowest price for which a supplier can profitably sell another unit. C) the lowest price buyers will accept per unit of the good. D) the highest price sellers can get for each unit over time. Answer: B Topic: Minimum Supply Price Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

15) In the above figure, what is the minimum supply price for the fourth gallon of ice cream? A) $2.00 B) $3.00 C) $4.00 D) $5.00 Answer: D Topic: Minimum Supply Price Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 16) Which of the following shifts the supply curve for gasoline rightward? A) a situation in which the quantity 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) an increase in the demand for gas-guzzling, sport utility vehicles Answer: C Topic: Change in Supply, Prices of Factors of Production Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

17) Changes in which of the following shifts the supply curve of hamburgers? A) a rise in the price of soda, a complement for hamburgers B) new research that establishes a link between hamburgers and heart problems C) an increase in the price of meat used to produce hamburgers D) an economy-wide decrease in income because of a long recession Answer: C Topic: Change in Supply, Prices of Factors of Production Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 18) Which of the following decreases the supply of restaurant meals? A) Waiters get a pay raise. B) Consumers' incomes increase and restaurant meals are a normal good. C) Consumers' incomes decrease and restaurant meals are a normal good. D) The price of movies, a complement to restaurant meals, falls. Answer: A Topic: Change in Supply, Prices of Factors of Production Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 19) Which of the following shifts the supply curve rightward? A) an increase in the population B) a positive change in preferences for the good C) a decrease in the price of the good D) a decrease in the price of a factor of production used to produce the good Answer: D Topic: Change in Supply, Prices of Factors of Production Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 20) Auto workers negotiate a wage increase. How does this wage hike affect the supply of cars? A) It decreases the supply. B) It increase the supply. C) It has no effect. D) There is not enough information to tell if the change increases, decreases, or has no effect on the supply of cars. Answer: A Topic: Change in Supply, Prices of Factors of Production Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

21) If a producer can use resources to produce either good A or good B, then A and B are A) complements in production. B) substitutes in production. C) substitutes in consumption. D) complements in consumption. Answer: B Topic: Change in Supply, Prices of Related Goods Produced Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 22) Good A and good B are substitutes in production. The demand for good A increases so that the price of good A rises. The increase in the price of good A shifts the A) demand curve for good B leftward. B) demand curve for good B rightward. C) supply curve of good B leftward. D) supply curve of good B rightward. Answer: C Topic: Change in Supply, Prices of Related Goods Produced Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 23) Blank DVDs and prerecorded DVDs are substitutes in production. An increase in the price of a blank DVD will lead to A) an increase in the supply of prerecorded DVDs. B) a decrease in the supply of prerecorded DVDs. C) an increase in the quantity supplied of prerecorded DVDs but not in the supply of prerecorded DVDs. D) a decrease in the quantity supplied of prerecorded DVDs but not in the supply of prerecorded DVDs. Answer: B Topic: Change in Supply, Prices of Related Goods Produced Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 24) If the price of lumber rises, then, in the market for sawdust, A) the supply curve of sawdust shifts leftward. B) the supply curve of sawdust shifts rightward. C) there is a movement downward along the supply curve for sawdust. D) there is a movement upward along the supply curve for sawdust. Answer: B Topic: Change in Supply, Prices of Related Goods Produced Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 47 Copyright © 2014 Pearson Education, Inc.

25) A bakery can produce either cakes or cookies. If the price of cookies rises, then A) the supply curve of cake shifts leftward. B) the supply curve of cake shifts rightward. C) there is a movement downward along the supply curve of cakes. D) there is a movement upward along the supply curve of cakes. Answer: A Topic: Change in Supply, Prices of Related Goods Produced Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 26) Good A and good B are substitutes in production. The demand for good A decreases, which lowers the price of good A. The decrease in the price of good A A) decreases the supply of good B. B) increases the supply of good B. C) decreases the demand for good B. D) increases the demand for good B. Answer: B Topic: Change in Supply, Prices of Related Goods Produced Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 27) Growers expect that the price of a bushel of wheat will increase in one month. This belief results in A) an increase in current supply of wheat. B) a decrease in current supply of wheat. C) a decrease in future supply of wheat. D) no change in current or future supply of wheat. Answer: B Topic: Change in Supply, Expected Future Price Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 28) An increase in the number of suppliers in a market results in a A) movement up along the supply curve. B) rightward shift in the supply curve. C) leftward shift in the supply curve. D) Both answers A and C are correct. Answer: B Topic: Change in Supply, Number of Suppliers Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

29) 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. Answer: C Topic: Change in Supply, Number of Suppliers Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 30) Which of the following increases the supply of a product? A) a fall in the price of the product B) a smaller number of sellers producing the product C) an increase in foreign imports of the product D) higher taxes imposed upon producers of the product Answer: C Topic: Change in Supply, Number of Suppliers Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 31) Which of the following decreases the supply of popcorn? A) a decrease in the price of popcorn B) an increase in the price of popcorn C) a technological advance in the production of popcorn D) a decrease in the number of popcorn producers Answer: D Topic: Change in Supply, Number of Suppliers Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 32) Over the past decade technological improvements that have lowered the cost of producing an automobile have increased A) both the supply and the demand for automobiles. B) the supply but not the demand for automobiles. C) the demand but not the supply of automobiles. D) neither the supply nor the demand for automobiles. Answer: B Topic: Change in Supply, Technology Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

33) An increase in technology for producing personal computers leads to A) an increase in the demand for personal computers. B) a decrease in the demand for personal computers. C) an increase in the supply of personal computers. D) a decrease in the supply of personal computers. Answer: C Topic: Change in Supply, Technology Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 34) Which of the following shifts the supply curve of broccoli? A) an increase in income B) a newly discovered increase in the nutritional value of broccoli C) a newly discovered link between broccoli consumption and tooth decay D) the destruction of much of this year's broccoli crop by hurricanes Answer: D Topic: Change in Supply, State of Nature Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 35) A severe drought has damaged this year's lettuce crop. The initial effect on the lettuce market is a A) decrease in the demand for lettuce. B) decrease in the supply of lettuce. C) decrease in both the demand and supply of lettuce. D) rightward movement along the demand curve for lettuce. Answer: B Topic: Change in Supply, State of Nature Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

36) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. A movement to point c could be the result of A) a decrease in technology. B) a decrease in the relative price of a soft drink. C) an increase in the relative price of a soft drink. D) an increase in the money price of a soft drink. Answer: B Topic: Change in the Quantity Supplied Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 37) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. An increase in the price of a soft drink is shown as a movement from point a to A) none of the points that are illustrated. B) point b. C) point c. D) point d. Answer: D Topic: Change in the Quantity Supplied Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

38) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. A movement to point d would be the result of A) an increase in technology. B) a decrease in the relative price of a soft drink. C) an increase in the relative price of a soft drink. D) an increase in the number of soft drink suppliers. Answer: C Topic: Change in the Quantity Supplied Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 39) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. A decrease in the price of sugar used to make soft drinks is shown as a movement from point a to a point such as A) none of the points that are illustrated. B) point b. C) point c. D) point d. Answer: B Topic: Change in Supply, Prices of Factors of Production Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 40) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. An increase in the number of suppliers would be shown as a movement from point a to a point such as A) none of the points that are illustrated. B) point b. C) point c. D) point d. Answer: B Topic: Change in Supply, Number of Suppliers Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

41) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. A movement to point b could be the result of A) an increase in technology. B) a decrease in the relative price of a soft drink. C) an increase in the relative price of a soft drink. D) an increase in the money price of a soft drink. Answer: A Topic: Change in Supply, Technology Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 42) Which of the following shifts the supply curve for good X leftward? A) a situation in which quantity demanded exceeds quantity supplied B) an increase in the cost of the machinery used to produce X C) a technological advance in the production of X D) a decrease in the wages of workers employed to produce X Answer: B Topic: Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 43) Which of the following will NOT shift the supply curve for pick-up trucks? A) a technological advance B) an increase in the price of a resource used to produce pick-up trucks C) a change in the number of firms supplying pick-up trucks D) a change in the price of pick-up trucks Answer: D Topic: Change in Supply Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills 44) A change in which of the following would NOT shift the supply curve for sneakers? A) an increase in technology for making sneakers B) an increase in the price of rubber, used to make sneakers C) an increase in the price of sneakers D) None of the above, that is, each change shifts the supply curve Answer: C Topic: Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

45) 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 Answer: A Topic: Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 46) Which of the following leads to a movement along the supply curve for shredded wheat but does not shift the supply curve for shredded wheat? A) a fall in the price of shredded wheat B) an increase in the cost of machinery used to shred wheat C) perfect weather conditions that resulted in a large wheat crop D) a decrease in the number of shredded wheat producers Answer: A Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills 47) Which of the following results in a movement along the supply curve of spinach but does not shift the supply curve of spinach? A) disastrous weather that destroys half of this year's spinach crop B) a rise in the price of spinach C) an increase in wages for workers in spinach fields D) great weather that produces a bumper spinach crop this year Answer: B Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 48) Which of the following does NOT shift the supply curve? A) a technological advance B) a decrease in the wages of labor used in production of the good C) a fall in the price of a substitute in production D) an increase in the price of the good Answer: D Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

49) If the price of chocolate chip cookies falls, then A) the supply curve of chocolate chip cookies shifts rightward. B) the supply curve of chocolate chip cookies shifts leftward. C) there is a movement downward along the supply curve of chocolate chip cookies. D) there is a movement upward along the supply curve of chocolate chip cookies. Answer: C Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 50) As the price of a pound of peanuts falls, the A) supply of peanuts increases. B) supply of peanuts decreases. C) quantity of peanuts supplied increases. D) quantity of peanuts supplied decreases. Answer: D Topic: A Change in the Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 51) For a "change in the quantity supplied" but not "a change in supply" to occur, there must be a A) rightward shift of the supply curve. B) rightward shift of the demand curve. C) leftward shift of the demand curve. D) Both answers B and C are correct. Answer: D Topic: A Change in the Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 52) If the price of a good changes but everything else influencing suppliers' planned sales remains constant, there is a A) new supply curve that is to the right of the initial supply curve. B) new supply curve that is to the left of the initial supply curve. C) movement along the supply curve. D) rotation of the initial supply curve around the initial price. Answer: C Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

53) A decrease in the quantity supplied is represented by a A) movement down the supply curve. B) movement up the supply curve. C) rightward shift in the supply curve. D) leftward shift in the supply curve. Answer: A Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 54) Which of the following increases the quantity supplied of good X but does NOT increase the supply of good X? A) a fall in the price of a factor production used to produce X B) an advance in the technology for producing X C) an increase in the price of good Y, a complement in the production of X D) an increase in the price of X Answer: D Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 55) Consider the market for broccoli. If the price of a pound of broccoli increases, what happens to the supply of broccoli? A) The supply of broccoli decreases. B) The supply of broccoli increases. C) There will be no change in the supply of broccoli, but instead there is an increase in the quantity supplied of broccoli. D) There will be no change in the supply of broccoli, but instead there is a decrease in the quantity supplied of broccoli. Answer: C Topic: A Change in the Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 56) Which of the following statements is TRUE? A) An increase in the price of gasoline will decrease the demand for gasoline. B) An increase in the price of gasoline will increase the quantity demanded of gasoline. C) An increase in the price of gasoline will increase the supply of gasoline. D) An increase in the price of gasoline will increase the quantity supplied of gasoline. Answer: D Topic: A Change in the Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 56 Copyright © 2014 Pearson Education, Inc.

57) In the figure above, an increase in the supply of oil would result in a movement from A) point a to point e. B) point a to point b. C) point a to point c. D) point a to point d. Answer: B Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 58) In the figure above, an increase in the quantity of oil supplied but NOT an increase in the supply of oil is shown by a movement from A) point a to point e. B) point a to point b. C) point a to point c. D) point a to point d. Answer: A Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

59) In the figure above, a decrease in the quantity of oil supplied but NOT a decrease in the supply of oil is shown by a movement from A) point a to point e. B) point a to point b. C) point a to point c. D) point a to point d. Answer: C Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 60) In the figure above, which movement could be the result of an increase in the wages paid to oil workers? A) point a to point e B) point a to point b C) point a to point c D) point a to point d Answer: D Topic: Change in Supply, Prices of Factors of Production Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 61) In the figure above, which movement could be the result of the development of a new, more efficient refining technology? A) point a to point e B) point a to point b C) point a to point c D) point a to point d Answer: B Topic: Change in Supply, Technology Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

62) The figure above shows the market for candy. People become more concerned that eating candy causes them to gain weight, which they do not like. As a result, the A) demand curve shifts from D2 to D1 and the supply curve does not shift. B) demand curve shifts from D1 to D2 and the supply curve shifts from S1 to S2. C) demand curve shifts from D2 to D1 and the supply curve shifts from S2 to S1. D) demand curve does not shift, and the supply curve shifts from S1 to S2. Answer: A Topic: Changes in Demand, Preferences Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 63) The above figure shows the market for oil. Because of the development of a new deep sea drilling technology the A) demand curve shifts from D1 to D2 and the supply curve does not shift. B) demand curve shifts from D1 to D2 and the supply curve shifts from S1 to S2. C) demand curve does not shift, and the supply curve shifts from S2 to S1. D) demand curve does not shift, and the supply curve shifts from S1 to S2. Answer: D Topic: Change in Supply, Technology Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

64) The above figure shows the market for gasoline. When a hurricane destroys a major refinery that refines oil into gasoline, the A) demand curve for gasoline shifts from D1 to D2 and the supply curve of gasoline does not shift. B) demand curve for gasoline shifts from D1 to D2 and the supply curve of gasoline shifts from S2 to S1. C) demand curve for gasoline does not shift, and the supply curve of gasoline shifts from S2 to S1. D) demand curve for gasoline does not shift, and the supply curve of gasoline shifts from S1 to S2. Answer: C Topic: Changes in Supply Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 65) The above figure shows the market for bicycles. When there is a physical fitness craze so that everyone wants to exercise the A) demand curve for bicycles shifts from D1 to D2. B) demand curve for bicycles shifts from D2 to D1. C) demand curve and the supply curve of bicycles do not shift. D) supply curve of bicycles shifts from S1 to S2. Answer: A Topic: Changes in Demand, Preferences Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 66) The above figure shows the market for french fries at fast food joints. If the price of potatoes rises and simultaneously people become concerned that french fries can cause heart attacks the A) demand curve for french fries shifts from D2 to D1 and the supply curve of french fries does not shift. B) demand curve for french fries shifts from D2 to D1 and the supply curve of french fries shifts from S2 to S1. C) demand curve for french fries shifts from D2 to D1 and the supply curve of french fries shifts from S1 to S2. D) demand curve for french fries does not shift, and the supply curve of french fries shifts from S1 to S2. Answer: B Topic: Change in Demand/Supply; Preferences/Prices of Resources Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

67) A rise in the price of a good causes producers to supply more of the good. This statement illustrates A) the law of supply. B) the law of demand. C) a change in supply. D) the nature of an inferior good. Answer: A Topic: Study Guide Question, The Law of Supply Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 68) Which of the following influences does NOT shift the supply curve? A) a rise in the wages paid workers who produce the good B) the development of new technology C) people deciding that they want to buy more of the product D) a decrease in the number of suppliers Answer: C Topic: Study Guide Question, Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 69) To say that "supply increases" for any reason, means there is a A) movement rightward along a supply curve. B) movement leftward along a supply curve. C) shift rightward in the supply curve. D) shift leftward in the supply curve. Answer: C Topic: Study Guide Question, Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 70) The price of jet fuel falls. This fall shifts the A) demand curve for airplane trips rightward. B) demand curve for airplane trips leftward. C) supply curve of airplane trips rightward. D) supply curve of airplane trips leftward. Answer: C Topic: Study Guide Question, Change in Supply, Prices of Resources Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

71) An increase in the cost of producing video tape shifts the supply curve of video tape ________ and shifts the demand curve for video tape ________. A) rightward; leftward B) leftward; leftward C) leftward; not at all D) not at all; leftward Answer: C Topic: Study Guide Question, Change in Supply, Prices of Resources Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 72) An increase in the number of producers of gruel ________ the supply of gruel and shifts the supply curve of gruel ________. A) increases; rightward B) increases; leftward C) decreases; rightward D) decreases; leftward Answer: A Topic: Study Guide Question, Change in Supply, Number of Suppliers Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 73) Wages for workers producing iPods and similar products will rise next year. Walkman Watch asks you to predict the effect of this change in next year's market for iPods. You predict that the major effect will be that the A) demand curve for an iPod will shift rightward. B) demand curve for an iPod will shift leftward. C) supply curve for an iPod will shift leftward. D) supply curve for an iPod will shift rightward. Answer: C Topic: Parallel MyEconLab Question-Change in Supply, Resource Price Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

74) Producers of DVDs are able to lower the wage rate that they pay to their workers. You predict that the A) price will rise. B) quantity supplied will decrease. C) supply curve will shift leftward. D) supply curve will shift rightward. Answer: D Topic: Parallel MyEconLab Question-Change in Supply, Resource Price Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 75) The wage rate paid by Walkman producers falls and at the same time the price of raw materials used in the production of Walkmans rises. You predict that the supply curve of Walkmans will A) shift either leftward or rightward. B) surely shift rightward. C) surely shift leftward. D) surely become steeper. Answer: A Topic: Parallel MyEconLab Question-Change in Supply, Resource Price Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

4 Market Equilibrium 1) In a supply and demand figure, the equilibrium price and quantity are found at the A) point where quantity supplied equals quantity demanded. B) horizontal intercept of the demand curve. C) vertical intercept of the supply curve. D) horizontal intercept of the supply and the demand curves. Answer: A Topic: Market Equilibrium Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 2) When a market is in equilibrium, A) everyone has all they want of the commodity in question. B) there is no shortage and no surplus at the equilibrium price. C) the number of buyers is exactly equal to the number of sellers. D) the supply curve has the same slope as the demand curve. Answer: B Topic: Market Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 3) The equilibrium price is the price at which the quantity A) sold equals the quantity bought. B) demanded equals the quantity sold. C) demanded equals the quantity supplied. D) supplied equals the quantity bought. Answer: C Topic: Market Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 4) Which of the following is the best way to describe equilibrium in a market? At equilibrium, the A) price is the lowest possible. B) price is usually affordable to most people. C) supply and demand curves can never shift again. D) quantity supplied equals the quantity demanded. Answer: D Topic: Market Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 64 Copyright © 2014 Pearson Education, Inc.

5) The interaction of supply and demand explains A) the prices of goods and services but not their quantities. B) the quantities of goods and services but not their prices. C) both the prices and the quantities of goods and services. D) neither the prices nor the quantities of goods and services. Answer: C Topic: Market Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

6) The figure illustrates the market for pens. The equilibrium quantity is A) between 400 and 600 pens, but it is impossible to be precise. B) 5 pens a month. C) 2 pens a month. D) 500 pens a month. Answer: D Topic: Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

7) In the above figure, if the demand curve is D2, then A) the equilibrium price will be P1 and the equilibrium quantity will be Q2. B) the equilibrium price will be P1 and the equilibrium quantity will be Q1. C) there will be a shortage equal to Q2 - Q1. D) an increase in price will shift the demand curve to D3. Answer: A Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 8) If the price of a CD is equal to the equilibrium price, there will be ________ of CDs and the price will ________. A) surplus; rise B) surplus; fall C) shortage; fall D) neither a shortage nor surplus; not change Answer: D Topic: Market Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

9) When the price is below the equilibrium price, the quantity demanded A) is less than the equilibrium quantity and the quantity supplied also is less than the equilibrium quantity. B) is less than the equilibrium quantity but the quantity supplied exceeds the equilibrium quantity. C) exceeds the equilibrium quantity and the quantity supplied also exceeds the equilibrium quantity. D) exceeds the equilibrium quantity but the quantity supplied is less than the equilibrium quantity. Answer: D Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 10) If a market is NOT in equilibrium, then which of the following is likely to occur? A) The demand curve will shift to bring the market to equilibrium. B) The supply curve will shift to bring the market to equilibrium. C) The price will adjust to bring the market to equilibrium. D) Both A and B are correct. Answer: C Topic: Price Adjustments Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 11) If the price of a video download is below its equilibrium price, the quantity supplied is ________ than the quantity demanded. If the price of a video download is above its equilibrium price, the quantity supplied is ________ than the quantity demanded. A) less; greater B) greater; less C) less; less D) greater; greater Answer: A Topic: Shortage and Surplus Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

12) A price below the equilibrium price results in A) a surplus. B) a shortage. C) excess supply. D) a further price fall. Answer: B Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 13) If the price of a video rental is below its equilibrium price, there will be a ________ of video rentals and the price will ________. A) shortage; rise B) shortage; fall C) surplus; rise D) surplus; fall Answer: A Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 14) Which of the following correctly describes how price adjustments eliminate a shortage? A) As the price rises, the quantity demanded decreases while the quantity supplied increases. B) As the price rises, the quantity demanded increases while the quantity supplied decreases. C) As the price falls, the quantity demanded decreases while the quantity supplied increases. D) As the price falls, the quantity demanded increases while the quantity supplied decreases. Answer: A Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 15) Ticket scalpers at the NCAA basketball tournament last year charged prices high above the printed ticket price. This observation is evidence of A) a surplus at printed ticket prices. B) a shortage at printed ticket prices. C) the tournament not being televised. D) the tournament getting too much television exposure. Answer: B Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

16) If the quantity of textbooks supplied is 10,000 per year and the quantity of textbooks demanded is 12,000 per year, there is a ________ in the market and the price will ________. A) shortage; rise B) shortage; fall C) surplus; rise D) surplus; fall Answer: A Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 17) When there is a shortage in the market, the quantity sold is A) greater than the quantity supplied. B) equal to the quantity supplied. C) less than the quantity supplied. D) less than the quantity bought. Answer: B Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 18) When the price is less than the equilibrium price, A) there will be a shortage. B) some consumers will be willing to pay a price higher than the prevailing price. C) the price will be forced higher. D) All of the above answers are correct. Answer: D Topic: Price Adjustments; Shortage Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 19) If there exists a shortage in the market for snowmobiles, then the price of a snowmobile will A) rise. B) fall. C) neither rise nor fall. D) at first fall then rise. Answer: A Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

20) The existence of a shortage A) means resources are being allocated efficiently. B) is impossible in a market economy. C) pushes the price up. D) pushes the price down. Answer: C Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 21) A shortage causes the A) demand curve to shift leftward. B) supply curve to shift rightward. C) price to fall. D) price to rise. Answer: D Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 22) If the quantity demanded exceeds the quantity supplied, then there is A) a shortage and the price is below the equilibrium price. B) a shortage and the price is above the equilibrium price. C) a surplus and the price is below the equilibrium price. D) a surplus and the price is above the equilibrium price. Answer: A Topic: Price Adjustments; Shortage Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

Price (dollars per pound) 3 4 5 6 7

Quantity supplied (pounds) 1 2 4 5 6

Quantity demanded (pounds) 7 5 4 2 1

23) The above table shows the demand schedule and supply schedule for chocolate chip cookies. What is the equilibrium quantity and equilibrium price for chocolate chip cookies? A) 7 pounds, $3.00 per pound B) 2 pounds, $3.00 per pound C) 2 pounds, $6.00 per pound D) 4 pounds, $5.00 per pound Answer: D Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 24) The above table shows the demand schedule and supply schedule for chocolate chip cookies. If the price is $4.00 per pound, there is a A) shortage of 2 pounds of chocolate chip cookies. B) shortage of 3 pounds of chocolate chip cookies. C) shortage of 5 pounds of chocolate chip cookies. D) surplus of 3 pounds of chocolate chip cookies. Answer: B Topic: Price Adjustments; Shortage Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 25) The above table shows the demand schedule and supply schedule for chocolate chip cookies. An increase in income results in an increase in the demand for chocolate cookies by an amount of 3 pounds at every price. What are the new equilibrium quantity and equilibrium price? A) 5 pounds, $4.00 per pound B) 5 pounds, $6.00 per pound C) 5 pounds, $5.00 per pound D) 4 pounds, $5.00 per pound Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 71 Copyright © 2014 Pearson Education, Inc.

26) If the quantity supplied exceeds the quantity demanded, then there is A) a shortage and the price is below the equilibrium price. B) a shortage and the price is above the equilibrium price. C) a surplus and the price is below the equilibrium price. D) a surplus and the price is above the equilibrium price. Answer: D Topic: Price Adjustments; Surplus Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 27) The price of a good will fall if A) there is a surplus at the current price. B) the current price is less than the equilibrium price. C) the quantity demanded exceeds the quantity supplied. D) the price of a complement in consumption falls. Answer: A Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 28) When there is a surplus in the market, the quantity sold is A) equal to the quantity supplied. B) equal to the quantity demanded. C) less than the quantity demanded. D) greater than the quantity bought. Answer: B Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 29) Suppose the equilibrium price for soft drinks is $1.00. If the current price in the soft drink market is $1.25 each, A) there will be a surplus of soft drinks. B) there will be a shortage of soft drinks. C) the supply curve of soft drinks will shift leftward. D) the demand curve for soft drinks will shift leftward. Answer: A Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

30) If the quantity of textbooks supplied is 10,000 per year and the quantity of textbooks demanded is 8,000 per year, there is a ________ in the market and the price will ________. A) shortage; rise B) shortage; fall C) surplus; rise D) surplus; fall Answer: D Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 31) A surplus occurs when the price is A) less than the equilibrium price. B) equal to the equilibrium price. C) greater than the equilibrium price. D) None of the above because the existence of a surplus is independent of the price of the good. Answer: C Topic: Price Adjustments; Surplus Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 32) If the price is above the equilibrium price, then there is a A) surplus, and market forces will operate to lower price. B) surplus, and market forces will operate to raise price. C) shortage, and market forces will operate to lower price. D) shortage, and market forces will operate to raise price. Answer: A Topic: Price Adjustments; Surplus Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 33) When the price of a good is A) below the equilibrium price, quantity supplied exceeds quantity demanded and price rises. B) below the equilibrium price, quantity demanded exceeds quantity supplied and price falls. C) above the equilibrium price, quantity supplied exceeds quantity demanded and price falls. D) above the equilibrium price, quantity demanded exceeds quantity supplied and price rises. Answer: C Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

34) Suppose a market begins in equilibrium. If supply increases, then at the original equilibrium price the quantity demanded is A) is less than the quantity supplied and a surplus results. B) is less than the quantity supplied and a shortage results. C) exceeds the quantity supplied and a surplus results. D) exceeds the quantity supplied and a shortage results. Answer: A Topic: Price Adjustments; Surplus Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking Price (dollars per pair) 30 40 50 60 70 80 90

Quantity demanded (pairs per week) 130 120 110 100 90 80 70

Quantity supplied (pairs per week) 70 80 90 100 110 120 130

35) The table shows the demand and supply schedules for jeans. A) At $60 a pair, there is a shortage of jeans and the price will fall. B) At $60 a pair, there is a surplus of jeans and the price will rise. C) At $40 a pair, there is a shortage of jeans and the price will rise. D) At $40 a pair, there is a shortage of jeans and the price will fall. Answer: C Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Price (dollars per disc) 4 8 12 16 20 24 28 32 36

Quantity demanded 36,000 32,000 28,000 24,000 20,000 16,000 12,000 8,000 4,000

Price (dollars per disc) 4 8 12 16 20 24 28 32 36

Quantity supplied 4,000 8,000 12,000 16,000 20,000 24,000 28,000 32,000 36,000

36) The above table gives the demand and supply schedules for Blu-ray discs. If the price of a Blu-ray disc is $8, there is a ________ and the price of a compact disc will ________. A) shortage; rise B) shortage; fall C) surplus; rise D) surplus; fall Answer: A Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 37) The above table gives the demand and supply schedules for Blu-ray discs. Suppose that the price of a Blu-ray disc player increases, resulting in the demand for Blu-ray discs decreasing by 8,000 units at all prices. What are the new equilibrium quantity and equilibrium price of Blu-ray discs? A) 8,000 and $8 B) 16,000 and $16 C) 20,000 and $20 D) 28,000 and $28 Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

38) The above table gives the demand and supply schedules for Blu-ray discs. Based on the table, the equilibrium quantity and price of a Blu-ray discs is A) 28,000 and $12. B) 20,000 and $20. C) 16,000 and $24. D) 16,000 and $16. Answer: B Topic: Market Equilibrium Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills Price (dollars per cellular phone) 100 80 50 20

Quantity demanded (thousands)

Quantity supplied (thousands)

50 55 60 100

100 80 60 40

39) Using the data in the above table, the equilibrium quantity and equilibrium price for a cellular telephone is A) 50 thousand and $100. B) 80 thousand and $80. C) 60 thousand and $50. D) 40 thousand and $20. Answer: C Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 40) Using the data in the above table, at the price of $80 a phone, a A) shortage of 25 thousand cellular telephones occurs. B) surplus of 80 thousand cellular telephones occurs. C) surplus of 25 thousand cellular telephones occurs. D) shortage of 55 thousand cellular telephones occurs. Answer: C Topic: Price Adjustments; Surplus Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

41) The equilibrium price in the above figure is A) $2. B) $4. C) $6. D) $8. Answer: C Topic: Market Equilibrium Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 42) The equilibrium quantity in the above figure is A) 200 units. B) 300 units. C) 400 units. D) 600 units. Answer: B Topic: Market Equilibrium Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

43) At a price of $10 in the above figure, there is A) a surplus of 200 units. B) a shortage of 200 units. C) a surplus of 400 units. D) a shortage of 400 units. Answer: C Topic: Surplus Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 44) At a price of $4 in the above figure, A) the equilibrium quantity is 400 units. B) there is a surplus of 200 units. C) the quantity supplied is 400 units. D) there is a shortage of 200 units. Answer: D Topic: Shortage Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 45) If the good in the above figure is a normal good and income rises, then the new equilibrium quantity A) is less than 300 units. B) is 300 units. C) is more than 300 units. D) could be less than, equal to, or more than 300 units. Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 46) The initial supply and demand curves for a good are illustrated in the above figure. If there are technological advances in the production of the good, then the new equilibrium price for the good A) is less than $6. B) is $6. C) is more than $6. D) could be less than, equal to, or more than $6. Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 78 Copyright © 2014 Pearson Education, Inc.

47) The initial supply and demand curves for a good are illustrated in the above figure. If there is a rise in the price of a factor of production used to produce the good, then the new equilibrium price A) is less than $6. B) is $6. C) is more than $6. D) could be less than, equal to, or more than $6. Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

48) In the above figure, a price of $15 per dozen for roses would result in A) equilibrium. B) a shortage. C) a surplus. D) downward pressure on prices. Answer: B Topic: Price Adjustments Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

49) In the above figure, a price of $15 per dozen roses would result in a ________ so that the price of roses will ________. A) surplus; rise B) surplus; fall C) shortage; rise D) shortage; fall Answer: C Topic: Price Adjustments Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 50) In the above figure, a price of $35 per dozen would result in A) a shortage. B) equilibrium. C) a surplus. D) upward pressure on prices. Answer: C Topic: Price Adjustments Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

51) In the above figure, if the price is $8 then there is a A) surplus of 100. B) surplus of 200. C) shortage of 100. D) shortage of 200. Answer: B Topic: Price Adjustments Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 52) Based on the above figure, which of the following is true? A) At a price of $6, quantity demanded is equal to quantity supplied. B) At a price of $4, quantity demanded is greater than quantity supplied. C) At a price of $8, quantity demanded is less than quantity supplied. D) All of the above answers are correct. Answer: D Topic: Price Adjustments Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

53) If the market for Twinkies is in equilibrium, then A) Twinkies must be a normal good. B) producers would like to sell more at the current price. C) consumers would like to buy more at the current price. D) the quantity supplied equals the quantity demanded. Answer: D Topic: Study Guide Question, Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 54) In a market, at the equilibrium price, A) neither buyers nor sellers can do business at a better price. B) buyers are willing to pay a higher price, but sellers do not ask for a higher price. C) buyers are paying the minimum price they are willing to pay for any amount of output and sellers are charging the maximum price they are willing to charge for any amount of production. D) None of the above is true. Answer: A Topic: Study Guide Question, Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 55) If there is surplus of a good, then the quantity demanded ________ the quantity supplied and the price will ________. A) is less than; rise B) is less than; fall C) is greater than; rise D) is greater than; fall Answer: B Topic: Study Guide Question, Price Adjustments, Surplus Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

5 Predicting Changes in Price and Quantity 1) 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 Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 2) When demand increases, the equilibrium price ________ and the equilibrium quantity ________. A) rises; decreases B) falls; decreases C) rises; increases D) falls; increases Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 3) Which of the following statements is correct? A) When demand increases, both the price and the quantity increase. B) When demand decreases, the price rises and the quantity decreases. C) When supply increases, the quantity decreases and the price rises. D) When supply decreases, both the price and the quantity decrease. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

4) If the U.S. Surgeon General announces that increased wheat consumption could cause heightened anxiety levels among children and adults, what happens to the equilibrium price and quantity of shredded wheat? A) The equilibrium price rises and the equilibrium quantity increases. B) The equilibrium price falls and the equilibrium quantity decreases. C) The equilibrium price rises and the equilibrium quantity decreases. D) The equilibrium price falls and the equilibrium quantity increases. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 5) In March, the quantity of orange juice sold in the town of Jackson was 3000 cartons and the price $3. In May, the quantity of orange juice sold in the town of Jackson was 3500 cartons and the price was $3.20. This change in the price and quantity sold could have been the result of A) the release of a medical study suggesting that consuming orange juice helps prevent cancer. B) a reduction in the number of orange juice coupons provided by local markets. C) the after effects of a cold winter in Florida that killed half of the orange crop. D) the after effects of a warm winter in Florida that increased the orange crop yield by 50 percent. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 6) Suppose the equilibrium price of bottled water has risen from $1.00 per bottle to $2.00 per bottle and the equilibrium quantity has increased. These changes are a result of a ________ shift of the ________ curve for bottled water. A) rightward; demand B) rightward; supply C) leftward; supply D) leftward; demand Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

7) If good A is a normal good and income increases, the equilibrium price of A ________ and the equilibrium quantity of A ________. A) rises; increases B) rises; decreases C) falls; decreases D) falls; increases Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 8) The price of a gallon of milk falls. Which of the following is a possible cause? A) A decrease in the price of oatmeal, a complement to milk. B) A discovery that milk cause diabetes. C) Milk is a normal good and people's incomes rise. D) A drought that reduces supplies of feed grains fed to cows that produce milk. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 9) An increase in demand combined with no change in supply A) raises the equilibrium price. B) lowers the equilibrium price. C) results in only a movement rightward along the demand curve. D) decreases demand because the supply curve does not shift. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 10) For consumers, goods A and B are complementary goods. The cost of a resource used in the production of A decreases. As a result, A) the equilibrium price of B will fall and the equilibrium price of A will rise. B) the equilibrium price of B will rise and the equilibrium price of A will fall. C) the equilibrium prices of both A and B will rise. D) the equilibrium prices of both A and B will fall. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

11) Which of the following raises the equilibrium price and increases the equilibrium quantity of used cars? A) a fall in income if used cars are an inferior good B) an increase in the wage rate paid to used car salespeople C) Neither of the above because the question suggests a violation of the "law of demand." D) Neither of the above because the question suggests a violation of the "law of supply." Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 12) Coffee and sugar are complements. If a poor sugar harvest leads to an increase in the price of sugar, there will also be A) an increase in the price of coffee. B) a decrease in the price of coffee. C) a rightward shift in the demand curve for coffee. D) a leftward shift of the supply curve of coffee. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 13) Long-distance travel by bus is an inferior good. As people's incomes increase and other things remain the same, you predict that the A) price of long-distance travel by bus will fall and the demand for long-distance travel by bus will increase. B) price of long-distance travel by bus will fall. C) demand for long-distance travel by bus will decrease and the price will rise. D) demand for long-distance travel by bus will increase as the price of long-distance travel by bus falls. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

14) If the demand for hamburgers decreases, the equilibrium price A) rises and the equilibrium quantity increases. B) falls and the equilibrium quantity increases. C) rises and the equilibrium quantity decreases. D) falls and the equilibrium quantity decreases. Answer: D Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 15) Suppose that people find out that eating more fish improves their health, leading them to increase their demand for fish. As a result, the equilibrium price of fish ________ and the equilibrium quantity ________. A) rises; decreases B) rises; increases C) falls; decreases D) falls; increases Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 16) Doctors find that one aspirin per day reduces the risk of heart attacks. Demand for aspirin will A) increase, so that equilibrium price and equilibrium quantity will increase. B) decrease, so that equilibrium price and equilibrium quantity will increase. C) increase, so that equilibrium price will decrease and equilibrium quantity will increase. D) increase, but the new equilibrium price and quantity are indeterminate. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 17) Until 2007, the price of sport utility vehicles (SUVs) rose and each year more were purchased. This experience suggests that A) there must have been technological advances in the way SUVs are produced. B) the "law of demand" does not hold true in this market. C) there must have movement leftward along the supply curve for SUVs. D) there must have been a rightward shift of the demand curve for SUVs. Answer: D Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 87 Copyright © 2014 Pearson Education, Inc.

18) Between 2001 and 2010, equilibrium college tuition rose from $15,000 to $21,000 and equilibrium enrollment increased from 16 million to 21 million students. These changes could be the result of A) an increase in demand. B) an increase in supply. C) a decrease in demand. D) a decrease in supply. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: New AACSB: Analytical Skills 19) If the U.S. Surgeon General announced that increased grapefruit juice consumption could help prevent heart attacks, what would happen to the equilibrium price and quantity of grapefruit juice? A) Price and quantity both increase. B) Price and quantity both decrease. C) Price increases but quantity decreases. D) Price decreases but quantity increases. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 20) If the price of a movie download falls, the rental rate of DVDs ________ and the equilibrium quantity of DVDs rented ________. A) rises; decreases B) rises; increases C) falls; decreases D) falls; increases Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

21) What will happen to the equilibrium price and equilibrium quantity of ice cream cones when consumers' incomes decrease? A) If ice cream cones are a normal good, then the equilibrium price and quantity of ice cream cones will decrease. B) If ice cream cones are a normal good, then the equilibrium price and equilibrium quantity of ice cream cones will increase. C) If ice cream cones are an inferior good, then the equilibrium price for an ice cream cone will increase and the equilibrium quantity of ice cream cones will decrease. D) If ice cream cones are an inferior good, then the equilibrium price and quantity of ice cream cones will decrease. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 22) Which of the following raises the price of a used car and increases the equilibrium quantity sold? A) a new 8 percent federal excise tax placed on all new car purchases B) an increase in wages for used car salespeople C) a special rebate program on all new cars D) None of the above answers is correct Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 23) Coffee and sugar are complements. If the supply curve of coffee shifts leftward because of poor weather, then there will be A) an increase in the price of sugar. B) a decrease in the price of sugar. C) a leftward shift of the demand curve for coffee. D) a leftward shift of the supply curve for sugar. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

24) Peanut butter and jelly are complements for consumers. In 2011, the price of peanut butter increased. As a result, the ________ which lead to ________ in the price of jelly and ________ in the quantity of jelly. A) demand for jelly; a decrease; a decrease B) supply of jelly; a decrease; an increase C) supply of jelly; an increase; a decrease D) demand for jelly; an increase; an increase Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: New AACSB: Analytical Skills 25) A decrease in the demand for beef because of concerns over cholesterol results in A) lower beef prices. B) higher beef prices. C) an increase in the supply of beef. D) an offsetting increase in the demand for beef if the price of beef falls. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 26) If more people buy hybrid cars that have high gas mileage, the equilibrium price of gasoline will ________ and the equilibrium quantity will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease Answer: D Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 27) During the last decade, the price of shoes rose substantially yet people bought more pairs of new shoes each year. This experience suggests that the A) supply curve of shoes shifted leftward. B) demand curve for shoes shifted leftward. C) supply curve of shoes shifted rightward. D) demand curve for shoes shifted rightward. Answer: D Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 90 Copyright © 2014 Pearson Education, Inc.

28) Suppose we observe that both the equilibrium price of digital cameras and the equilibrium quantity of digital cameras have increased. Which of the following events could be responsible for this? A) technological advances in digital camera production B) consumers' preferences changed in favor of digital cameras C) the price of film cameras fell D) workers who make digital cameras received a pay raise Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 29) Suppose we observe that both the equilibrium price of film cameras and the equilibrium quantity of film cameras have fallen. Which of the following could be responsible for this? A) Consumers' preferences changed in favor of digital cameras. B) Technological advances in film camera production. C) Workers who make cameras received a pay raise. D) The price of digital cameras increased. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 30) During the past twenty years, the prices of prescription drugs, relative to the prices of other goods, have risen, yet Americans buy more prescription drugs than ever. This might be because A) with higher incomes and more older Americans, we have moved rightward along our demand curve for drugs. B) with higher incomes and more older Americans, the demand curve for prescription drugs has shifted rightward. C) more new firms entered the pharmaceutical industry each year, which caused a rightward shift in the supply curve of prescription drugs. D) Both answers A and C are correct. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

31) You observe that in the market for coffee that both the equilibrium price of coffee and the equilibrium quantity have increased. You predict that the demand for coffee A) has increased with no change in the supply of coffee. B) has increased but it is not as large as the increase in supply. C) has not changed but that the supply of coffee has decreased. D) has increased less than supply of coffee has decreased. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 32) Every spring, motorists do more driving than during the winter months. Every spring, the price of gasoline increases and the motorists buy more gasoline. This experience suggests that the A) "law of supply" does not always hold for necessities like gasoline. B) "law of demand" does not always hold for necessities like gasoline. C) laws of supply and demand are both contradicted for gasoline, though only during the spring driving season. D) None of the above answers are correct. Answer: D Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 33) After the sugar substitute saccharin was found to cause cancer in laboratory mice, its price dropped dramatically. This change in the price was because A) the supply of saccharin decreased. B) the demand for saccharin decreased. C) the government ordered the price reduction. D) saccharin producers felt sorry for their past customers and were making an honest attempt to compensate them. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

34) When supply decreases and demand does not change, the equilibrium quantity ________ and the equilibrium price ________. A) increases; rises B) decreases; falls C) increases; falls D) decreases; rises Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 35) As a result of an increase in the supply of a good, the equilibrium quantity ________ and the equilibrium price ________. A) increases; falls B) increases; rises C) decreases; falls D) decreases; rises Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 36) Beef and leather belts are complements in production. If people's concern about health shifts the demand curve for beef leftward, the result in the market for leather belts will be a A) lower equilibrium price for a leather belt because there is an increase in the supply of leather belts. B) lower equilibrium price for a leather belt because there is a decrease in the supply of leather belts. C) higher equilibrium price for a leather belt because there is a decrease in the supply of leather belts. D) higher equilibrium price for a leather belt because there is an increase in the supply of leather belts. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

37) In 2011, the price of peanuts was rising, which lead peanut butter buyers to expect the price of peanut butter would rise in the future. Consequently, in the current market for peanut butter there was ________ which resulted in ________ in the price of peanut butter and ________ in the quantity of peanut butter. A) an increase in demand for peanut butter; an increase; an increase B) an increase in supply of peanut butter; a decrease; an increase C) a decrease in demand for peanut butter; a decrease; a decrease D) a decrease in supply of peanut butter; an increase; a decrease Answer: A Topic: Predicting Changes in Price and Quantity; Demand Increases Skill: Analytical Status: New AACSB: Analytical Skills 38) You observe that the price of a good rises and the quantity decreases. These observations can be the result of the A) demand curve shifting rightward. B) demand curve shifting leftward. C) supply curve shifting rightward. D) supply curve shifting leftward. Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 39) Leather belts and leather shoes are substitutes in production. If style changes increase the demand for leather belts, the supply curve of leather shoes will shift A) leftward and the equilibrium price of leather shoes will fall. B) leftward and the equilibrium price of leather shoes will rise. C) rightward and the equilibrium price of leather shoes will fall. D) rightward and the equilibrium price of leather shoes will rise. Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

40) If technological advances lower the cost of computer chips, in the market for computers the equilibrium price will ________ and the equilibrium quantity will ________. A) fall; increase B) fall; decrease C) rise; increase D) rise; decrease Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 41) If the price of crude oil falls, the equilibrium price of gasoline ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 42) Which of the following statements is correct? A) When demand decreases, both the price and the quantity increase. B) When demand increases, both the price and the quantity decrease. C) When supply increases, the quantity increases and the price falls. D) When supply decreases, both the price and the quantity decrease. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 43) Bicycles are made out of steel. If the price of steel increases, there is a shift in the supply curve of bicycles that leads to A) a shift in the demand curve for bicycles. B) a temporary surplus of bicycles. C) a permanent surplus of bicycles. D) an increase in the price of a bicycle. Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 95 Copyright © 2014 Pearson Education, Inc.

44) If workers who make DVDs get a pay raise, the equilibrium price of a DVD ________ and the equilibrium quantity of DVDs ________. A) rises; increases B) rises; decreases C) falls; decreases D) falls; increases Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 45) "The recent hurricanes in Florida are bringing financial gain to California citrus growers. Due to extensive damage to the Florida citrus crop, California citrus products are commanding their highest prices ever." Which of the following statements best explains the economics of this quotation? A) The supply of Florida oranges decreased, causing their price to increase, which then increased the demand for substitute California oranges. B) The supply of Florida oranges decreased, causing the supply of California oranges to increase and the price of California oranges to rise. C) The demand for Florida oranges decreased because of the hurricanes, causing a greater demand for California oranges and an increase in the price of California oranges. D) The demand for Florida oranges decreased, causing their prices to rise, therefore increasing the demand for California oranges. Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 46) In the market for bananas, the price is $2.00 a bunch. An increase in the supply of bananas decreases the price of bananas and ________. A) the quantity supplied increases because the price falls B) increases the demand for bananas C) increases the quantity of bananas demanded D) creates a shortage of bananas Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

47) Crude oil can be refined into home heating oil or gasoline. If very cold weather caused the price of home heating oil to increase then, the A) supply of gasoline would increase. B) demand for gasoline would increase. C) equilibrium price of gasoline would rise. D) Both answers A and C are correct. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 48) A fall in the price of wheat fertilizer ________ the equilibrium price of wheat and ________ the equilibrium quantity of wheat. A) raise; increase B) raise; decrease C) lower; increase D) lower; decrease Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 49) There is a technological advance in the production of ice cream. As a result, the supply curve of ice cream shifts ________ and ________. A) leftward; both the equilibrium price and equilibrium quantity fall B) rightward; both the equilibrium price and equilibrium quantity fall C) rightward; the equilibrium price falls while the equilibrium quantity increases D) rightward; both the equilibrium price and equilibrium quantity rise Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 50) If the price of aluminum used to make bicycles increases, the price of a bicycle rises because of a A) rightward shift of the demand curve for bicycles. B) rightward shift of the supply curve of bicycles. C) leftward shift of the demand curve for bicycles. D) leftward shift of the supply curve of bicycles. Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 97 Copyright © 2014 Pearson Education, Inc.

51) An increase in the price of jet fuel will ________ air flights and the equilibrium quantity of air flights will ________. A) decrease the supply of; decrease B) increase the demand for; increase C) decrease the supply of; increase D) decrease the demand for; decrease Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 52) There is a technological advance in the production of a good and simultaneously also an increase in the expected future price. Which of the following will happen? A) The equilibrium price will rise because the supply curve shifts rightward. B) The equilibrium price falls because the supply curve shifts leftward. C) The technological improvement shifts the supply curve rightward while the increase in the expected future price shifts the supply curve leftward. The net effect is not known. D) The demand curve shifts rightward and the supply curve does not shift. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 53) If a technological advance takes place in the computer industry, then the equilibrium price of a computer will ________ and the equilibrium quantity will ________. A) fall; increase B) fall; decrease C) rise; increase D) rise; decrease Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

54) What is the effect on the price and quantity of wooden desks of a rise in the price of wood? A) The equilibrium quantity of wooden desks increases and the equilibrium price falls. B) The equilibrium quantity of wooden desks increases and the equilibrium price rises. C) The equilibrium quantity of wooden desks decreases and the equilibrium price falls. D) The equilibrium quantity of wooden desks decreases and the equilibrium price rises. Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 55) Which of the following increases the equilibrium price of a used car and decreases the equilibrium quantity? A) an announcement by the U.S. Attorney General that the windows on older cars were made with cheaper glass that can explode at high speeds B) new federal legislation that raises the legal driving age to twenty-four in all states C) a new fee that used car dealers must pay to the government on all sales of used cars D) All of the above because each is consistent with the "law of demand." Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 56) We observe that the equilibrium price of digital cameras has fallen and the equilibrium quantity of digital cameras has increased. Which of the following events could be responsible for this? A) Technological advances in digital camera production. B) Consumers' preferences changed in favor of digital cameras. C) The price of film cameras rose. D) Workers who make digital cameras received a pay raise. Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

57) During the last decade, the price of a computer fell every year and the quantity sold increased every year. This experience suggests that the A) "law of demand" was definitely contradicted. B) "law of supply" was definitely contradicted. C) demand curve shifted rightward. D) supply curve shifted rightward. Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 58) After 2009, the price of tablets fell each year and manufacturers of tablets produced and sold more tablets each year. This result is because the A) "law of supply" does not apply to companies in the "high-tech" sector of the economy. B) "law of demand" does not apply to customers in the "high-tech" sector of the economy. C) supply curve of tablets shifted rightward. D) demand curve for tablets shifted leftward. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 59) Suppose the equilibrium price of a gallon of gasoline drops from $4.00 to $3.85 and the equilibrium quantity increases from 365 millions of gallons per week to 372 millions of gallons per week. These changes can be the result of A) an increase in supply. B) an increase in demand. C) a decrease in supply. D) a decrease in demand. Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: New AACSB: Analytical Skills

60) Many Southern farmers face a choice between planting peanuts or cotton. In 2011, farmers anticipated higher prices for cotton. In the market for peanuts in 2011, there would be ________ in the supply of peanuts, which leads to ________ in the price of peanuts and ________ in the quantity of peanuts. A) a decrease; an increase; a decrease B) an increase; a decrease; a decrease C) a decrease; an increase; an increase D) an increase; an increase; a decrease Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: New AACSB: Analytical Skills 61) In 2011, the price of peanuts increased. In the market for peanut butter, this change lead to ________ and which therefore ________ the price of peanut butter and ________ the quantity of peanut butter. A) a decrease in the supply; increased; decreased B) an increase in supply; decreased; increased C) a decrease in demand; decreased; decreased D) an increase in demand; increased; increased Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: New AACSB: Analytical Skills 62) In 2011, the price of peanuts was rising, which lead peanut butter sellers to expect the price of peanut butter would rise in the future. Consequently, in the current market for peanut butter there was ________ which resulted in ________ in the price of peanut butter and ________ in the quantity of peanut butter. A) an increase in demand for peanut butter; an increase; an increase B) an increase in supply of peanut butter; a decrease; an increase C) a decrease in demand for peanut butter; a decrease; a decrease D) a decrease in supply of peanut butter; an increase; a decrease Answer: B Topic: Predicting Changes in Price and Quantity; Demand Increases Skill: Analytical Status: New AACSB: Analytical Skills

63) If both demand and supply increase, what will be the effect on the equilibrium price and quantity? A) Both the price and the quantity will increase. B) The quantity will increase but the price could either rise, fall, or remain the same. C) The price will fall but the quantity will increase. D) The price will rise but the quantity could either increase, decrease, or remain the same. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 64) If both the demand and supply increase, the equilibrium quantity ________ and the equilibrium price ________. A) increases; falls B) decreases; might rise, fall, or not change C) decreases; rises D) increases; might rise, fall, or not change Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 65) The equilibrium quantity of a good will increase and its equilibrium price might rise, fall, or stay the same when A) its demand and supply both increase. B) its demand increases and supply decreases. C) its demand decreases and supply increases. D) its demand and supply both decrease. Answer: A Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 66) If good growing conditions increase the supply of strawberries and hot weather increases the demand for strawberries, the quantity of strawberries bought ________. A) increases and the price might rise, fall or not change B) increases and the price rises C) doesn't change and the price falls D) doesn't change and the price rises Answer: A Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 102 Copyright © 2014 Pearson Education, Inc.

67) 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 price of beef will A) fall. B) perhaps rise, fall, or stay the same, but more information is needed to determine which it does. C) stay the same. D) rise. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 68) Beef is a normal good and people's incomes fall. At the same time a bumper corn crop reduces the cost of feeding steers. These changes result in A) an increase in the equilibrium quantity of beef. B) an increase in the equilibrium quantity of beef if the shift in the demand curve is smaller than the shift in the supply curve. C) an increase in the equilibrium quantity of beef if the shift in the demand curve is larger than the shift in the supply curve. D) no change in the equilibrium quantity of beef. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 69) When supply and demand both increase, the A) quantity definitely decreases. B) quantity definitely increases. C) price definitely increases. D) price definitely decreases. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

70) Between 2000 and 2010, advances in PC production technology increased the supply of PCs sharply. The demand for PCs also increased, but not nearly as much as the supply did. As a result, the price of a PC ________ and the quantity of PCs sold ________. A) rose; decreased B) rose; increased C) fell; decreased D) fell; increased Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 71) Between 2000 and 2010, the price of a PC fell and the quantity of PCs sold increased. Which of the explanations below is consistent with these facts? A) The demand for PCs increased by more then the supply of PCs increased. B) The supply of PCs increased by more than the demand for PCs increased. C) The demand for PCs decreased by more than the supply of PCs increased. D) Both the supply of PCs and the demand for PCs decreased. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 72) If the demand curve for bottled water shifts rightward and the supply curve of bottled water shifts rightward, the equilibrium A) price of bottled water definitely increases. B) price of bottled water definitely decreases. C) quantity of bottled water definitely increases. D) quantity of bottled water definitely decreases. Answer: C Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

73) Which of the following statements is correct? A) When both demand and supply increase, the quantity decreases and the price might rise, fall, or remain the same. B) When both demand and supply increase, the price rises and the quantity might increase, decrease, or remain the same. C) When both demand and supply decrease, the quantity increases and the price might rise, fall, or remain the same. D) When both demand and supply decrease, the quantity decreases and the price might rise, fall, or remain the same. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 74) If the demand for bathing suits and supply of bathing suits both decrease, then definitely the equilibrium A) price will decrease. B) price will increase. C) quantity will increase. D) quantity will decrease. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 75) The equilibrium quantity will decrease and the price might rise, fall, or stay the same when the A) demand and the supply of a good both increase. B) demand for a good increases and the supply of it decreases. C) demand for a good decreases and the supply of it increases. D) demand and the supply of a good both decrease. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

76) If the demand curve for bottled water shifts leftward and the supply curve of bottled water shifts leftward, the equilibrium A) price of bottled water definitely increases. B) price of bottled water definitely decreases. C) quantity of bottled water definitely increases. D) quantity of bottled water definitely decreases. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 77) Flights to Paris are a normal good and people's incomes rise. At the same time, the price of jet fuel rises. The equilibrium price of a flight to Paris ________ and the equilibrium quantity of flights to Paris ________. A) might rise, fall, or not change; increases B) falls; decreases. C) rises; increases D) rises; might increase, decrease, or not change Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: New 10th edition AACSB: Analytical Skills 78) In the market for oranges, the demand and supply of oranges decrease by the same amount. The equilibrium quantity will ________ and the equilibrium price will ________. A) decrease; not change B) decrease; fall C) remain the same; either rise or fall D) remain the same; rise Answer: A Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

79) What will happen to the equilibrium price and quantity of coffee if it is discovered to help prevent colds and, at the same time, Brazil and Vietnam emerge in the global market as massive producers of coffee? A) The price will fall and the effect on the quantity is uncertain. B) The quantity will increase and the effect on the price is uncertain. C) The quantity will decrease and the price will rise. D) The quantity will increase and the price will remain unchanged. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 80) Which of the following always raises the equilibrium price? 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 Answer: C Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 81) The equilibrium price will rise and the equilibrium quantity might increase, decrease, or stay the same when the A) demand and the supply of a good both increase. B) demand for a good increases and the supply of it decreases. C) demand for a good decreases and the supply of it increases. D) demand and the supply of a good both decrease. Answer: B Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 82) If demand increases and supply decreases, what is the effect on equilibrium price and equilibrium quantity? A) The price falls and the quantity might increase, decrease, or remain the same. B) The price rises and the quantity might increase, decrease or remain the same. C) The quantity decreases and the price might rise, fall, or remain the same. D) The quantity increases and the price might rise, fall, or remain the same. Answer: B Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 107 Copyright © 2014 Pearson Education, Inc.

83) If the supply of bottled water decreases and at the same time the demand for bottled water increases, the equilibrium price ________ and the equilibrium quantity ________. A) might rise, fall, or stay the same; decreases B) might rise, fall, or stay the same; increases C) falls; increases D) rises; might increase, decrease, or stay the same Answer: D Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 84) When the demand curve shifts rightward and the supply curve shifts leftward, then the equilibrium price ________ and the equilibrium quantity ________. A) rises; decreases B) falls; increases C) rises; probably changes but the direction of the change cannot be determined D) probably changes but the direction of the change cannot be determined; increases Answer: C Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 85) In 2011, the price of peanuts was rising, which lead peanut butter sellers and peanut butter buyers to expect the price of peanut butter would rise in the future. Consequently, in the current market for peanut butter there was ________ which resulted in a ________ in the price of peanut butter and ________ in the quantity of peanut butter. A) a decrease in supply of peanut butter and an increase in demand for peanut butter; rise; an increase, decrease or possibly no change B) a decrease in supply of peanut butter and a decrease in demand for peanut butter; rise, fall, or possibly no change; a decrease C) an increase in supply of peanut butter and a decrease in demand for peanut butter; fall; an increase, decrease or possibly no change D) a decrease in supply of peanut butter and an increase in demand for peanut butter; fall; an increase, decrease or possibly no change Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: New AACSB: Analytical Skills

86) In 2011, the price of peanuts was rising, which lead peanut butter sellers and peanut butter buyers to expect the price of peanut butter would rise in the future. Suppose the effect on the buyers was larger than the effect on the sellers. Consequently, in the current market for peanut butter there is a ________ in the price of peanut butter and ________ in the quantity of peanut butter. A) rise; an increase B) rise; a decrease C) fall; a decrease D) fall; an increase Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: New AACSB: Analytical Skills 87) In 2011, the price of peanuts was rising, which lead peanut butter sellers and peanut butter buyers to expect the price of peanut butter would rise in the future. Suppose the effect on the sellers was larger than the effect on the buyers. Consequently, in the current market for peanut butter there is a ________ in the price of peanut butter and ________ in the quantity of peanut butter. A) rise; an increase B) rise; a decrease C) fall; a decrease D) fall; an increase Answer: B Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: New AACSB: Analytical Skills 88) In 2011, the price of peanuts was rising, which lead peanut butter sellers and peanut butter buyers to expect the price of peanut butter would rise in the future. In the current market for peanut butter, the price falls and the quantity decreases. This set of results means that A) supply decreased by more than demand increased. B) demand increased by more than supply decreased. C) demand increased by more than supply increased. D) supply decreased by more than demand decreased. Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: New AACSB: Analytical Skills

89) In 2011, the price of peanuts was rising, which lead peanut butter sellers and peanut butter buyers to expect the price of peanut butter would rise in the future. In the current market for peanut butter, the price rises and the quantity increases. This set of results means that A) demand increased by more than supply decreased. B) supply decreased by more than demand increased. C) demand increased by more than supply increased. D) supply decreased by more than demand decreased. Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: New AACSB: Analytical Skills 90) All shredded wheat producers have decided to add a new ingredient to shredded wheat, the "crunch enhancer." Crunch enhancer keeps cereals crisper longer in milk and, as a result, consumers decide they like shredded wheat more than before. What happens to the supply and demand curves for shredded wheat now that is costs more to produce and consumers like it better? A) The supply and demand curves both shift rightward. B) The supply curve shifts rightward and the demand curve doesn't shift. C) The supply curve shifts leftward and the demand curve shifts rightward. D) The supply curve shifts leftward and the demand curve doesn't shift. Answer: C Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 91) An increase in the demand for computers and a decrease in the number of sellers of computers will definitely ________. A) increase the number of computers bought B) increase the price of a computer C) increase the price of a computer and the number of computers bought D) not change the price of a computer and increase the number of computers bought Answer: B Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

92) Consider gardening books. What will happen to the market for these books as gardening becomes more popular and simultaneously printing costs increase? A) The price of gardening books definitely increases. B) The quantity of gardening books definitely increases. C) The price of gardening books might increase or decrease. D) The quantity of gardening books definitely stays the same. Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 93) If the demand curve for bottled water shifts rightward and the supply curve of bottled water shifts leftward, the equilibrium A) price of bottled water definitely increases. B) price of bottled water definitely decreases. C) quantity of bottled water definitely increases. D) quantity of bottled water definitely decreases. Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 94) The cost of producing aspirin increases simultaneously as doctors find that one aspirin per day reduces the risk of heart attacks. The supply of aspirin ________ and the demand for aspirin ________ so that the equilibrium price of aspirin ________. A) increases; increases; rises B) decreases; increases; rises C) increases; decreases; might rise, fall, or stay the same D) decreases; increases; might rise, fall, or stay the same Answer: B Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

95) All grapefruit juice producers have decided to blend tangerine juice with the grapefruit juice. This blend results in a higher cost of production, but studies show that consumers prefer the taste of the blend to straight grapefruit juice. What will happen to the equilibrium price and quantity of the new "blended" grapefruit juice now that it costs more to produce but consumers like it better? A) The price rises and the quantity increases. B) The price falls and the quantity increases. C) The effect on the price is uncertain but the quantity increases. D) The price rises, but the effect on the quantity is uncertain. Answer: D Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 96) Which of the following always lowers the equilibrium price? 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 Answer: D Topic: Predicting Changes: Demand Decreases, Supply Increases Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 97) The equilibrium price will fall and the equilibrium quantity might increase, decrease, or stay the same when the A) demand and the supply of a good both increase. B) demand for a good increases and the supply of it decreases. C) demand for a good decreases and the supply of it increases. D) demand and the supply of a good both decrease. Answer: C Topic: Predicting Changes: Demand Decreases, Supply Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

98) If the demand curve for bikes shifts leftward and the supply curve for bikes shifts rightward, the equilibrium A) price of bikes definitely increases. B) price of bikes definitely decreases. C) quantity of bikes definitely increases. D) quantity of bikes definitely decreases. Answer: B Topic: Predicting Changes: Demand Decreases, Supply Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills Price (dollars per ride) 2 4 6 8 10 12

Quantity Quantity demanded supplied (rides per day) (rides per day) 100 40 90 50 80 60 70 70 60 80 50 90

99) The table gives the demand and supply schedules for boat rides. If the supply of boat rides increases by 20 rides a day, the price will ________. A) remain unchanged B) fall to $6 a ride C) rise to $6 a ride D) rise to $10 a ride Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

100) The figure illustrates the demand for and supply for jeans. Suppose jeans are a normal good and people's incomes increase. At the initial price of $50 for a pair of jeans, after the increase in income the quantity demanded is ________ than the equilibrium quantity and there is a ________ of jeans. A) greater; surplus B) greater; shortage C) less; surplus D) less; shortage Answer: D Topic: Predicting Changes in Price and Quantity; Demand Increases Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

101) The figure illustrates the market for chairs. If the supply of chairs increases, the price of a chair ________ $40 and the quantity ________. A) will rise above; demanded will decrease B) will rise above; supplied will increase C) will fall below; demanded will increase D) will fall below; demanded will decrease Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

102) The above figure shows the market for pizza. Which figure shows the effect of a decrease in the price of a hamburger, which for consumers is a substitute for pizza? A) Figure A B) Figure B C) Figure D D) Figures B and C Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 103) The above figure shows the market for pizza. Which figure shows the effect of an increase in the price of a complement such as soda? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

104) The above figure shows the market for pizza. Which figure shows the effect of an increase in the price of sandwiches, which for consumers are substitutes for pizza? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 105) The above figure shows the market for pizza. Which figure shows the effect of an increase in the price of the tomato sauce used to produce pizza? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 106) The above figure shows the market for pizza. Which figure shows the effect of a new report by the U.S. Surgeon General that eating pizza lowers cholesterol levels, an outcome many people want? A) Figure A B) Figure B. C) Figure C D) Figure D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

107) The above figure shows the market for hamburger. Which figure shows the effect of an announcement by the U.S. Food and Drug Administration (FDA)that eating hamburger causes early death? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 108) The above figure shows the market for hamburger. Which panel shows the effect of a drought in "cattle country"? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 118 Copyright © 2014 Pearson Education, Inc.

109) The above figure shows the market for hamburger. Which panel shows the effect of a new excise tax on all beef products? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

110) The above figures show the market for hamburger meat. Which figure(s) shows the effect of a new report by the U.S. Surgeon General that beef consumption is healthier than previously believed? A) Figure A B) Figure B C) Figure D D) Figure A and B Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 119 Copyright © 2014 Pearson Education, Inc.

111) The above figures show the market for hamburger meat. Which figure(s) shows the effect of an increase in the price of a hamburger bun, a complement for hamburger meat? A) Figure B B) Figure C C) Figure D D) Figures A and B Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 112) The above figures show the market for hamburger meat. Which figure(s) shows the effect of an increase in the number of people who eat hamburger meat? A) Figure A B) Figure B C) Figure C D) Figures A and C Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 113) The above figures show the market for hamburger meat. Which figure(s) shows the effect of a decrease in the price of a hamburger complement such as hamburger buns? A) Figure A B) Figure B C) Figure D D) Figures A and B Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 114) The above figures show the market for hamburger meat. Which figure(s) shows the effect of an increase in the price of a substitute like hot dogs? A) Figure A B) Figure C C) Figure D D) Figures A and C Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 120 Copyright © 2014 Pearson Education, Inc.

115) The above figures show the market for hamburger meat. Which figure shows the effect of a decrease in the price of a substitute like hot dogs? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 116) The above figures show the market for hamburger meat. Which figure(s) shows the effect of a nation-wide strike by butchers and meat-packers? A) Figure B B) Figure C C) Figure D D) Figures B and C Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 117) The above figures show the market for hamburger meat. Which figure shows the effect of a newly invented machine which grinds beef at twice the speed previously possible? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 118) The above figures show the market for hamburger meat. Which figure shows the effect when more farmers decide to raise cows that are processed into hamburger meat? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 121 Copyright © 2014 Pearson Education, Inc.

119) The above figures show the market for gasoline. Which figure shows the effect of a nationwide strike by municipal bus drivers, which causes more people to drive their cars to work? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 120) The above figures show the market for gasoline. Which figure shows the effect of an increased preference for cars that are smaller and more fuel efficient? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

121) The above figures show the market for gasoline. Which figure shows the effect of motorists increasing the number of times they take the bus to work rather than driving their own cars? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 122) The above figures show the market for gasoline. Which figure(s) shows the effect of a decision by the OPEC countries in the Middle East to export less oil to the rest of the world? A) Figure B B) Figure C C) Figure D D) Figures B and C Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 123) The above figures show the market for gasoline. Which figure(s) shows the effect of a freezing cold winter which drives up the price of home heating oil (a substitute in production for gasoline because each is made from crude oil)? A) Figure B B) Figure C C) Figure D D) Figures B and C Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

124) The above figures show the market for gasoline. Which figure(s) shows the effect of a new U.S. tax on oil that suppliers must pay? A) Figures A and C B) Figures B and D C) Figure A only D) Figure C only Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 125) The above figures show the market for gasoline. Which figure shows the effect of the end of a nine month strike by workers at all U.S. oil refineries? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

126) The above figures show the market for oranges. Which figure shows the effect of changing consumer preferences for more orange juice and less coffee in the morning? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 127) The above figures show the market for oranges. Which figure(s) shows the effect of a new government program that provides each public school child with an orange to start the day? A) Figure A B) Figure D C) Figures A and C D) Figures A and D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

128) The above figures show the market for oranges. Which figure(s) shows the effect of an increase in the price of bananas, a substitute for oranges? A) Figure A B) Figure C C) Figure D D) Figure A and C Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 129) The above figures show the market for oranges. Which figure(s) shows the effect of new successful advertising campaigns to eat more oranges? A) Figure A B) Figure B C) Figure D D) Figures A and D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 130) The above figures show the market for oranges. Which figure(s) shows the effect of a nation-wide consumer boycott of eating oranges? A) Figure B B) Figure C C) Figures B and C D) Figures A and D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 131) The above figures show the market for oranges. Which figure shows the effect of great growing conditions that produce an above-average sized crop? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 126 Copyright © 2014 Pearson Education, Inc.

132) The above figures show the market for oranges. Which figure shows the effect of a new technology called "the orange picker," which harvests oranges less expensively than ever before? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 133) The above figures show the market for oranges. Which figure(s) shows the effect of existing orange growers increasing the size of their orange groves? A) Figures A and C B) Figures B and D C) Figure A D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

The Market for Wapanzo Beans Quantity Demanded Price Quantity Supplied (millions of pounds (dollars per (millions of pounds per year) pound) per year) Case Case Case Case A Case B Case C 1 2 3 15 10 15 $1 1 2 3 12 8 4 $2 2 4 6 9 6 3 $3 3 6 9 6 3 2 $4 4 8 12 3 2 1 $5 5 10 15 134) Refer to the table above. Suppose that in normal years demand is represented by Case 2 and supply is represented by Case B. In a normal year the price of wapanzo beans will be A) $1 per pound. B) $2 per pound. C) $3 per pound. D) $4 per pound. Answer: C Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 135) Refer to the table above. Suppose that in normal years demand is represented by Case 2 and supply is represented by Case B. In a normal year the equilibrium quantity of wapanzo beans will be A) 2 million pounds. B) 4 million pounds. C) 6 million pounds. D) 8 million pounds. Answer: C Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

136) Refer to the table above. Suppose that in normal years demand is represented by Case 2 and supply is represented by Case B. If there is a drought in the wapanzo bean growing region then supply will ________ and demand will ________. A) become case A; become case 1 B) become case A; stay at case 2 C) stay at case B; become case 3 D) stay at case B; become case 1 Answer: B Topic: Change in Supply Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 137) Refer to the table above. Suppose that in normal years demand is represented by Case 2 and supply is represented by Case B. If there is exceptionally good growing weather in the wapanzo bean growing region then supply will ________ and demand will ________. A) become case C; become case 1 B) become case C; stay at case 2 C) become case C; become case 3 D) stay at case B; become case 1 Answer: B Topic: Change in Supply Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 138) Refer to the table above. Suppose that in normal years demand is represented by Case 2 and supply is represented by Case B. If it is discovered that wapanzo beans help prevent cancer, then supply will ________ and demand will ________. A) become case C; become case 1 B) become case C; stay at case 2 C) stay at case B; become case 1 D) become case A; become case 1 Answer: C Topic: Change in Demand, Preferences Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

139) In the above figure, a change in quantity demanded with unchanged demand is represented by a movement from A) point a to point e. B) point a to point b. C) point a to point c. D) None of the above represent a change in the quantity demanded with an unchanged demand. Answer: A Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 140) In the above figure, a change in quantity supplied with unchanged supply is represented by a movement from A) point a to point e. B) point b to point a. C) point e to point c. D) point b to point e. Answer: B Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

141) In the above figure, if D2 is the demand curve, then a price of P3 would result in A) a shortage of Q3 - Q1. B) a shortage of Q4 - Q3. C) a surplus of Q3 - Q1. D) a surplus of Q4 - Q0. Answer: C Topic: Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 142) In the above figure, if D2 is the original demand curve for a normal good and income decreases, which price and quantity might result? A) point a, with price P2 and quantity Q2 B) point b, with price P1 and quantity Q1 C) point c, with price P3 and quantity Q3 D) point d, with price P1 and quantity Q3 Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 143) In the above figure, if D2 is the original demand curve and the price of a substitute in consumption rises, which price and quantity might result? A) point a, with price P2 and quantity Q2 B) point b, with price P1 and quantity Q1 C) point c, with price P3 and quantity Q3 D) point d, with price P1 and quantity Q3 Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

144) In the above figure, if D2 is the original demand curve and consumers come to expect that the price of the good will rise in the future, which price and quantity might result? A) point a, with price P2 and quantity Q2 B) point b, with price P1 and quantity Q1 C) point c, with price P3 and quantity Q3 D) point d, with price P1 and quantity Q3 Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 145) In the above figure, if D2 is the original demand curve and the population falls, which price and quantity might result? A) point a, with price P2 and quantity Q2 B) point b, with price P1 and quantity Q1 C) point c, with price P3 and quantity Q3 D) point d, with price P1 and quantity Q3 Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

146) In the figure, the equilibrium price is initially $3 per bushel of wheat. If suppliers come to expect that the price of a bushel of wheat will rise in the future, but buyers do not, the current equilibrium price will A) rise. B) not change. C) fall. D) Perhaps rise, fall, or stay the same, depending on whether there are more demanders or suppliers in the market. Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 147) In the figure, the equilibrium price is initially $3 per bushel of wheat. If buyers come to expect that the price of a bushel of wheat will rise in the future, but sellers do not, the current equilibrium price will A) rise. B) not change. C) fall. D) Perhaps rise, fall, or stay the same, depending on whether there are more demanders or suppliers in the market. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

148) Using the above figure, suppose that roses are a normal good. If there is an increase in income, A) the equilibrium price will rise above $25 per dozen roses. B) the equilibrium quantity will decrease below 10 dozen roses. C) we cannot predict what will happen to the equilibrium price. D) we cannot predict what will happen to the equilibrium quantity. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 149) Using the above figure, suppose there is a decrease in the number of suppliers. Then A) the equilibrium price will decrease below $25 per dozen roses. B) we cannot predict what will happen to equilibrium quantity. C) the equilibrium quantity will decrease below 10 dozen roses. D) both the equilibrium price and quantity will increase. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

150) In the above figure, in order for the equilibrium price to remain constant while the equilibrium quantity increases, the A) supply and demand curves both would have to shift leftward. B) supply curve would have to shift leftward and the demand curve would have to shift rightward. C) supply curve would have to shift rightward and the demand curve would have to shift leftward. D) supply and demand curves both would have to shift rightward. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 151) Using the above figure, suppose that roses are a normal good. If incomes decrease while simultaneously there is an increase in the price of the resources used to produce roses, then A) the price will definitely increase above $25 per dozen roses. B) the quantity will definitely decrease below 10 dozen roses. C) the price will definitely decrease below $25 per dozen roses. D) we cannot tell what will happen to equilibrium quantity. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 152) Pizza and hamburgers are substitutes for consumers. A fall in the price of a pizza ________ the price of a hamburger and ________ the quantity of hamburgers. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases Answer: D Topic: SGQ, Predicting Changes in Price & Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

153) How does an unusually warm winter affect the equilibrium price and quantity of gloves? A) It raises both the price and the quantity. B) It raises the price and decreases the quantity. C) It lowers the price and increases the quantity. D) It lowers both the price and the quantity. Answer: D Topic: SGQ, Predicting Changes in Price & Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 154) You notice that the price and quantity of wheat both decrease. This observation can be the result of the A) demand curve for wheat shifting rightward. B) demand curve for wheat shifting leftward. C) supply curve of wheat shifting rightward. D) supply curve of wheat shifting leftward. Answer: B Topic: SGQ, Predicting Changes in Price & Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 155) The number of firms producing computer memory chips decreases. As a result, the price of a memory chip ________ and the quantity of memory chips ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: C Topic: SGQ, Predicting Changes in Price & Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 156) A technological improvement lowers the cost of producing coffee. At the same time, consumers' preferences for coffee increase. The equilibrium price of coffee will A) rise. B) fall. C) remain the same. D) rise, fall, or stay the same, depending on the relative size of the shifts in the demand and supply curves. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 136 Copyright © 2014 Pearson Education, Inc.

157) Producers of tablet computers will be able to lower the wage rate that they pay to their workers. You are asked to predict the effects on the supply of tablet computers, and the price of a tablet computer. You predict that the supply curve shifts A) rightward, and the price is constant. B) leftward, and the price is constant. C) rightward, and the price falls. D) leftward, and the price rises. Answer: C Topic: Parallel MyEconLab Q., Predicting Change in Price & Quantity Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 6 News Based Questions 1) A ticket to see the Radio City Rockettes costs $90. You buy a ticket for $30 to see the New York Jets play football. The money price for A) the Rockettes ticket is $90 and the relative price is 3 Jets tickets per Rockette ticket. B) the Rockettes ticket is 3 Jets tickets per Rockette ticket and the relative price is $90. C) a Jets ticket is $30 and the relative price is 3 Rockettes tickets per Jets ticket. D) a Jets ticket is $30 and $3 for a Rockettes ticket. Answer: A Topic: Price and Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 2) You can buy a season ticket to the Metropolitan Opera for $800. A season ticket plan to see the New York Knicks is $1600. Which of the following is a correct statement? A) The money price of opera tickets is 1/2 of a Knicks ticket per opera ticket. B) The opportunity cost of a Knicks ticket is 2 opera tickets per Knicks ticket. C) The relative price of an opera ticket is $800. D) the money price of a Knicks ticket is 2 opera tickets per Knicks ticket. Answer: B Topic: Price and Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

3) There are 72,922 seats in Lambeau Field where the Green Bay Packers play football. The Packers have sold out their season tickets since 1960. There are about 80,000 people on the waiting list to buy season tickets in 2010. This means that at the price in 2010, the A) quantity demanded of Packer season tickets is 72,922. B) quantity demanded of Packer season tickets is about 80,000. C) quantity demanded of Packer season tickets is about 153,000. D) demand for Packer season tickets is 72,922. Answer: C Topic: Quantity Demanded Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 4) There are 72,922 seats in Lambeau Field where the Green Bay Packers play football. The Packers have sold out their season tickets since 1960. There are about 80,000 people on the waiting list to buy season tickets in 2010. If the Packers raised ticket prices, the A) demand for Packers tickets decreases. B) demand curve for Packers tickets shifts leftward. C) demand curve for Packers tickets shifts rightward. D) the quantity demanded of Packers tickets decreases. Answer: D Topic: Law of Demand Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking 5) There are 72,922 seats in Lambeau Field where the Green Bay Packers play football. The Packers have sold out their season tickets since 1960. There are about 80,000 people on the waiting list to buy season tickets in 2010. Packers tickets are a normal good. As a result of the economic recession in 2010 during which people's incomes decreased, the A) demand for Packers tickets decreased. B) demand curve for Packers tickets shifted rightward. C) quantity demanded of Packers tickets decreased. D) substitution effect changed the quantity demanded. Answer: A Topic: Change in Demand, Income Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

6) In 2007 Nike reduced the price of its running shoes by 20 percent. As a result, the substitution effect caused A) the demand for Nike shoes to increase. B) people to switch from Adidas shoes and buy more Nikes. C) the relative price of Nikes to increase. D) the demand curve for Nikes to shift rightward. Answer: B Topic: Demand; Substitution Effect Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

7) In mid-2008 Delta increased the price of a New York to LA ticket by 10 percent. As a result of this price hike, there was a ________ shift in the demand curve for a ticket on Continental because the price of a ________ had risen. A) rightward; complement B) leftward; substitute C) leftward; complement D) rightward; substitute Answer: D Topic: Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

8) The figure above shows the market for airline tickets. If airline tickets are a normal good, then the recession in 2008 that caused people's incomes to decrease lead to a shift from A) D0 to D1. B) D1 to D0. C) S0 to S1. D) S1 to S0. Answer: A Topic: Change in Demand, Income Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 9) The figure above shows the market for airline tickets. In early 2008 the price of jet fuel rose. This change is shown in the figure as a shift from A) D0 to D1. B) D1 to D0. C) S0 to S1. D) S1 to S0. Answer: C Topic: Change in Supply, Prices of Factors of Production Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 10) The figure above shows the market for airline tickets. In early 2008 firms negotiated lower wages with their workers. This change is shown in the figure as a shift from A) D0 to D1. B) D1 to D0. C) S0 to S1. D) S1 to S0. Answer: C Topic: Change in Supply, Prices of Factors of Production Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

11) The Miami Dolphins play football in Joe Robbie Stadium which holds 76,500 seats. In 2009, attendance averaged about 70,000 fans per game. This means that the quantity supplied of seats is A) 76,500. B) 70,000. C) 6,500. D) 126,500. Answer: A Topic: Quantity Supplied Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 12) General Electric (GE) produces wind turbines that generate wind power. Over the past 10 years, the advances in technology used to produce wind turbines has resulted in A) a movement up along the supply curve for wind-generated power. B) a rightward shift in the supply curve for wind-generated power. C) a decrease in the supply of wind-generated power. D) GE increasing the quantity supplied of wind turbines. Answer: B Topic: Change in Supply, Technology Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 13) Farmers can use their land to grow soy beans or corn. If the price of corn rises, A) the supply of soybeans decreases and the soybean supply curve shifts leftward. B) the supply of soybeans increases. C) the supply of corn increases and the corn supply curve shifts rightward. D) the supply of corn increases. Answer: A Topic: Change in Supply, Prices of Related Goods Produced Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 14) In 2006, the base price of a Hummer SUV was about $30,000. By 2008 as gasoline prices increased, A) the demand curve for Hummers shifted leftward and Hummer prices decreased. B) the demand curve for Hummers shifted rightward and Hummer prices increased. C) there was a movement down along the Hummer demand curve. D) there was a movement up along the Hummer supply curve. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 141 Copyright © 2014 Pearson Education, Inc.

7 Essay Questions 1) Explain why a relative price is an opportunity cost. Answer: A relative price is the ratio of the price of one good or service to the price of another good or service. It tells us how much of one good or service must be given up in order to obtain more of the other good. Topic: Price and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication 2) What is the difference between a money price and a relative price? When the demand and supply model predicts that the price of coffee will rise, is the model predicting that the money price rises or the relative price rises? Answer: The money price of a good is the number of dollars that must be given up in exchange for it. A relative price is the opportunity cost of a good in terms of another good. A relative price of good X is the quantity good Y that we forgo to get a unit of good X. When the supply-anddemand model predicts that the price of coffee will rise, it is the relative price, that is the model predicts that the price of coffee will rise relative to the average price of other goods. The money price might or might not rise. Topic: Price and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication 3) 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: Recognition Status: Previous edition, Chapter 3 AACSB: Communication 4) 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: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

5) An economist says: "The demand curve has two interpretations." What does the economist mean? Answer: The first interpretation is that the demand curve shows the quantities of a good or service that consumers are willing and able to buy at each price, other things being equal. The second interpretation is that the demand curve is a willingness-and-ability-to-pay curve, so that for each quantity it shows the highest price that someone is willing and able to pay for one more unit. Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication 6) List the factors 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 population, and preferences also change demand. If people expect their income to increase, or if they expect the price of the good to be higher in the future, or if the population increases (so that the number of buyers increases), or if people's preferences for the good increase, demand increases and the demand curve shifts rightward. Topic: Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 7) 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: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication

8) 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: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication 9) Consumers' income declines and, as a result, the demand for margarine increases. Is margarine a normal or an inferior good? Explain. Answer: Margarine is an inferior good. An inferior good is one for which demand increases as income decreases, which describes the situation outlined for margarine in the question. Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication 10) 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: A Change in the Quantity Demanded Versus a Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

11) Your friend Tony opened a pizzeria. You helped him to advertise his pizza, which is in fact the best pizza in town. As a result, the demand for Tony's pizza increases and your friend, noticing lines of customers, raises the price of his pizza. But then he fears that the higher price will cause demand to decline, which will cause the price to drop. Is Tony right in his analysis of the situation? Explain. Answer: Tony is confusing a change in demand (a shift of the demand curve) with a change in quantity demanded (a movement along the demand curve). An increase in the price of his pizza cannot cause the demand for his pizza to decline, that is, it cannot shift the demand curve for his pizza leftward. The rise in the price results in a decrease in the quantity of pizza demanded. So Tony need not fear that the demand for his pizza will decrease as a result of a higher price. Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication 12) An economist says: "The supply curve has two interpretations." What does the economist mean? Answer: The first interpretation is that the supply curve shows the quantities of a good or service that producers are willing and able to sell at each price, other things being equal. The second interpretation is that the supply curve is a minimum-supply-price curve, so that for each quantity it shows the lowest price at which someone is willing to sell another unit. Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication 13) 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 technology, the number of sellers, expected future prices, prices of factors of production, and prices of related goods. An advance in technology, an increase in the price of a complement in production, an increase in expected 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 factors of production leads to a decrease in supply and a leftward shift in the supply curve. Topic: Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication 14) What are substitutes in production? Answer: Goods are substitutes in production when one good can be produced in place of the other, that is, when the goods are produced using the same resources. Topic: Change in Supply, Prices of Related Goods Produced Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication 145 Copyright © 2014 Pearson Education, Inc.

15) 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: Change in Supply, Number of Suppliers Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication 16) Suppose that the technology used to produce computers advances. How does this change affect the supply of computers and the supply curve of computers? Answer: An advance in technology increases the supply of computers. Hence increases in technology shift the supply curve of computers rightward. Topic: Change in Supply, Technology Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication 17) 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 product decreases. Topic: A Change in the Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication 18) 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: A Change in the Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

19) Explain how price can be a regulator, that is, how it can coordinate the plans of buyers and sellers. Answer: If the price is too high, the quantity supplied exceeds the quantity demanded so there is a surplus. The surplus forces the price lower. The lower price increases the quantity demanded and decreases the quantity supplied bringing the market to equilibrium, where the quantity demanded equals the quantity supplied and where the plans of buyers and sellers are coordinated. If the price is too low, the quantity demanded exceeds the quantity supplied so there is a shortage. The shortage forces the price higher. The higher price decreases the quantity demanded and increases the quantity supplied bringing the market to equilibrium, again coordinating the plans of buyers and sellers. Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication 20) 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: Price Adjustments; Shortage Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication 21) 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: Price Adjustments; Surplus Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication 22) 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 markets 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: Price Adjustments; Shortage Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

23) 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 supply and demand will force 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: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication 24) Why does an increase in the supply of computers lead to a lower price for a computer? 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. With this change, a surplus of computers results. The surplus forces the price to fall, which, when the price falls enough, eliminates the surplus. Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication 25) "If the price of crude oil falls, the demand for gasoline will increase, so people will by more gas and the price of gas will go up." Is this statement true or false? Explain. Answer: The analysis is false. If the price of crude oil falls, the supply of gasoline increases, because crude oil is a resource used to produce gasoline. The prices of resources used to produce the good influence its supply, not demand. So, if the price of oil falls, the supply of gasoline increases and the supply curve shifts rightward. The equilibrium price of gasoline falls. It is true that people will buy more gasoline, but this happens not because the demand increases, but because a lower price results in a movement down the demand curve so that the quantity demanded increases. Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication 26) Personal computers 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 computers. Answer: Advances in technology increase the supply of computers and the supply curve of computers shifts rightward. The price of a computer thus falls. 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 quantity of computers increases. Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication 148 Copyright © 2014 Pearson Education, Inc.

27) In the market for bicycles, explain what happens to the supply and demand curves when there is an increase in the price of steel used to make bikes. Answer: An increase in the price of steel is an increase in the price of a resource used to make the good. As a result, the supply of bicycles decreases and the supply curve shifts leftward. There is no change to the demand, so the demand curve does not shift. The equilibrium price of a bicycle rises and the equilibrium quantity decreases. Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 28) 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: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication 29) 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: Predicting Changes: Demand Decreases, Supply Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication 30) 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: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication 149 Copyright © 2014 Pearson Education, Inc.

31) In early 2009 the price of computer memory chips rose. In a demand and supply model, shifts in what curve(s) 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: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication 32) If the equilibrium relative price for a two-liter bottle of Coca-Cola is $1.50 today, just like it was ten years ago, can we safely say that all supply and demand conditions in the market for Coke have remained very stable all these years? Answer: Not necessarily. The demand curve might have shifted rightward continuously due to population growth in the United States and growing demand for Coke in other countries worldwide. Although that alone would have driven up the price, there could have been other factors shifting the supply curve rightward, such as improved technology for producing and transporting Coke, or declining sugar prices because of some great sugar harvests. Regardless of the reason, if the supply increased, so that the supply curve shifted rightward, then the increase in supply, which leads to a fall in the equilibrium price, can offset any increase in the demand. So, even if the price has remained constant, the only accurate statement is that any change in demand was accompanied by an equal sized change in the supply in the same direction. Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication

8 Numeric and Graphing Questions 1) The price of a computer is $1,000 and the price of a car is $12,000. What is the relative price of a car? What is the relative price of a computer? Answer: The relative price of a car is $12,000 per car ÷ $1,000 per computer = 12 computers per car. The relative price of a computer is $1,000 per computer ÷ $12,000 per car = 0.083 of a car per computer. Topic: Price and Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 2) 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:

The increase in the price of milk increases the demand for soft drinks, as illustrated in the figure above. Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

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

The increase in the income increases the demand for soft drinks, as illustrated in the figure above. Topic: Change in Demand, Income Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Price Quantity Quantity (dollars per demanded supplied pound of cat (tons of cat (tons of cat food) food per year) food per year) 1.00 52 15 1.50 46 26 2.00 43 34 2.50 40 30 3.00 35 44 4) 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: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 5) 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: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 6) 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 Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

7) 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: Predicting Changes: Demand Decreases, Supply Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

8) 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: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

9) 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? What is the equilibrium price and quantity? 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. The equilibrium price is $4 a unit and the equilibrium quantity is 3 units per month. Topic: Shortage Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

10) 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:

The demand for kerosene heaters increased, so the demand curve shifted rightward, as illustrated above. As a result, the price rises and quantity increases. Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

11) 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:

Natural gas and home heating oil are substitutes. The increase in the price of natural gas increases the demand for home heating oil, so the demand curve for home heating oil shifts rightward, as illustrated above. As a result, the price rises and quantity increases. Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Quantity Quantity supplied Price demanded (millions of disks (dollars per disk) (millions of disks per month) per month) 0.50 50 0 1.00 40 15 1.50 30 30 2.00 20 45 2.50 10 60 3.00 0 75 12) Suppose the market for CD-Rs has the demand and supply schedules shown in the table above. What is the equilibrium price and the equilibrium quantity in this market? Suppose the current price is $2.00. What is the quantity of CD-Rs sold? Explain. Is there a shortage or a surplus? How big is it? Explain. Answer: The equilibrium price is $1.50. The equilibrium quantity is 30 million disks per month. The quantity sold is 20 million disks per month. Although at $2.00 suppliers want to sell 45 million disks, the buyers want to buy only 20 million and so 25 million disks won't be sold. Since the quantity supplied, 45 million disks, is greater than the quantity demanded, 20 million, there is a surplus, 25 million disks. Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 13) Suppose the market for CD-Rs has the demand and supply schedules shown in the table above. Suppose a technological advance increases the quantity of disks supplied at each price by 25 million. What is the new equilibrium price and the new equilibrium quantity of CD-Rs? Answer: The initial equilibrium price is $1.50 and the initial equilibrium quantity is 30 million disks per month. The technological advance increases the supply by 25 million disks. As a result, the equilibrium price falls to $1.00 and the equilibrium quantity increases to 40 million disks. Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

14) Suppose the market for CD-Rs has the demand and supply schedules shown in the table above. Suppose a decrease in the price of a CD burner increases the quantity of disks demanded at each price by 20 million. What are the new equilibrium price and equilibrium quantity of CDRs? Answer: The initial equilibrium price is $1.50 and the initial equilibrium quantity is 30 million disks per month. The decrease in the price of a CD increases the demand by 25 million disks. As a result, the equilibrium price rises to $2.00 and the equilibrium quantity increases to 45 million disks. Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 9 True or False 1) A relative price is the product of two money prices. Answer: FALSE Topic: Markets and Prices Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 2) The relative price of a good is greater than the money price of a good. Answer: FALSE Topic: Markets and Prices Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 3) A demand curve is also a willingness-and-ability-to-pay curve. Answer: TRUE Topic: Demand Curve Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 4) A movement along the demand curve shows a change in demand. Answer: FALSE Topic: Demand Curve Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

5) An increase in the incomes of baseball fans in New York leads to a rightward movement along the demand curve but does not shift the demand curve for Yankees tickets. Answer: FALSE Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 6) For consumers, chocolate chip cookies and doughnuts are substitutes. So, an increase in the price of chocolate chip cookies will lead to a rightward shift in the demand curve for doughnuts. Answer: TRUE Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 7) Young drivers often buy used cars. An increase in the legal driving age to twenty-one would result in a leftward movement along the demand curve for used cars, whereas lowering the age to fifteen would result in a rightward movement along the demand curve. Answer: FALSE Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 8) Young drivers often buy used cars. An increase in the legal driving age to twenty-one shifts the demand curve for used cars leftward, whereas lowering the age to fifteen shifts the demand curve rightward. Answer: TRUE Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 9) The supply curve indicates the minimum quantity that a producer would be willing to supply at alternative prices. Answer: FALSE Topic: Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

10) A supply curve is also a maximum-supply-price curve. Answer: FALSE Topic: Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 11) An increase in price results in increase in supply but not an increase in the quantity supplied. Answer: FALSE Topic: Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 12) An increase in technology will shift the good's supply curve rightward. Answer: TRUE Topic: Supply Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 13) If house purchases and renting an apartment are substitutes, then an increase in the price of a new house results in a rise in the rent charged for apartments. Answer: TRUE Topic: Predicting Changes in Price and Quantity Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 14) During the mid-2000s, the average price of a used car fell by nearly $500 and the quantity sold nation-wide decreased by several thousands each year. This set of results is a contradiction of the law of demand. Answer: FALSE Topic: Predicting Changes in Price and Quantity Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 15) When both the demand for a good increases and the supply of the good increases, the equilibrium quantity definitely increases. Answer: TRUE Topic: Predicting Changes in Price and Quantity Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

16) In the market for chocolate chip cookies, if the demand decreases while the supply increases, the price definitely falls but the quantity might increase, decrease, or remain the same. Answer: TRUE Topic: Predicting Changes in Price and Quantity Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 17) If the demand and supply curves are described by the following equations P = a - bQ and P = c + dQ, respectively, the equilibrium quantity is Q* = (a - c) / (b + d). Answer: TRUE Topic: Mathematical Note Skill: Analytical Status: New 10th edition AACSB: Reflective Thinking 18) If the demand and supply curves are described by the following equations P = a - bQ and P = c + dQ, respectively, the equilibrium price is P* = (ad + bc) / (b + d). Answer: TRUE Topic: Mathematical Note Skill: Analytical Status: New 10th edition AACSB: Reflective Thinking

10 Extended Problems 1) Using supply-and-demand diagrams, show and explain the effects of the following events on the price of CD-Rs and the quantity of CD-Rs sold. For each event, identify which of the determinants of demand or supply is affected, how it influences demand or supply, and what happens to the equilibrium price and quantity. a) The price of a CD burner falls. b) Workers who make CD-Rs get a pay raise. c) Producers introduce new cost-saving technologies in their CD-R production plants. d) Consumers' incomes increase and CD-Rs are a normal good. e) Free peer-to-peer music exchange through the Internet becomes legal. Answer:

a) The figure above shows the effect of fall in the price of CD burner. CD burners and CD-Rs are complementary goods in consumption. So when the price of a CD burner falls, the demand for CD-Rs increases and the demand curve shifts rightward. As a result, the equilibrium price rises, from P0 to P1 and the equilibrium quantity increases from Q0 to Q1.

b) The figure above shows the effect of rise in the wage page workers who make CD-Rs. In this case, the price of a factor of production (labor) used to produce CD-Rs rises. So the supply of CD-Rs decreases and the supply curve shifts leftward. As a result, the equilibrium price rises from P0 to P1 and the equilibrium quantity decreases from Q0 to Q1.

c) The figure above shows the effect of a technological advancement in the production of CDRs. The new technology increases the supply of CD-Rs, shifting the supply curve rightward. As a result, the equilibrium price falls from P0 to P1 and the equilibrium quantity increases from Q0 to Q1.

d) The figure above shows the effect of an increase in income. Because CD-Rs are a normal good, an increase in income increases the demand for CD-Rs and the demand curve shifts rightward. As a result, the equilibrium price rises, from P0 to P1 and the equilibrium quantity increases from Q0 to Q1.

e) The figure above shows the effect of making free peer-to-peer downloading of music legal. Making free peer-to-peer music downloading legal leads to more downloads and more people copying music files to CDs. Therefore, the demand for CD-Rs increases and the demand curve shifts rightward. As a result, the equilibrium price rises, from P0 to P1 and the equilibrium quantity increases from Q0 to Q1.

Topic: Predicting Changes in Price and Quantity Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Price (cents per gallon) 290 300 310 320 330 340 350

Quantity demanded Quantity supplied (thousands of (thousands of gallons per week) gallons per week) 80 20 70 30 60 40 50 50 40 60 30 70 20 80

2) A market research team has come up with the demand and supply schedules for gasoline in Motorville in the table above. Use these data to analyze the situation in the market for gas in Motorville. a) Draw a figure showing the demand curve for gasoline and the supply curve of gasoline. What are the equilibrium price and quantity? b) Suppose the price is $3.30. Describe the situation in the market and explain how the market adjusts. Now suppose the price is $3.00. Describe the situation in the market and explain how the market adjusts. c) The market research report also predicts that a rise in the price of crude oil will decrease the quantity of gas supplied by 20,000 gallons a week at each price. Suppose the price of crude oil does rise. Use your figure to show how this will affect the market for gas. How will the market adjust? What will be the new equilibrium price and quantity? Answer:

a) See the figure above. The equilibrium price is $3.20 and the equilibrium quantity is 50,000 gallons per week.

b) If the price is $3.30, there is a surplus of 20,000 gallons. The surplus leads to a fall in the price. The lower price increases the quantity demanded and decreases the quantity supplied bringing the market to equilibrium at $3.20. If the price is $3.00, there is a shortage of 40,000 gallons. The shortage leads to a rise in the price. The higher price decreases the quantity demanded and increases the quantity supplied bringing the market to equilibrium at $3.20.

c) The figure above shows the effect of the rise in crude oil prices. This rise decreases the supply and the supply curve shifts leftward by 20,000 gallons at each price from S0 to S1. As a result, at the old price, $3.20, there is a shortage of 20,000 gallons of gasoline. Therefore the price rises, bringing the market to equilibrium at $3.30 with 40,000 gallons of gas sold. Topic: Predicting Changes in Price and Quantity; Supply Decreases Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Price (dollars per pizza) 5 6 7 8 9 10 11 12

Quantity demanded Quantity supplied (pizzas per week) (pizzas per week) 750 700 650 600 550 500 450 400

300 400 500 600 700 800 900 1,000

3) A market research team has come up with the demand and supply schedules for pizza in Cheeseboro. These schedules are given in the table above. Use these data to analyze the situation in the market for pizza. a) Draw a figure showing the demand curve for pizza and the supply curve of pizza. What are the equilibrium price and quantity? b) Suppose the price is $10. Describe the situation in the market and explain how the price of pizza adjusts. Now suppose the price is $6. Describe the situation in the market and explain how the price of pizza adjusts. c) The market research report also includes a prediction about the effect on the market for pizza in Cheeseboro of a recent news published in Cheeseboro Herald. The Herald reported that pizza has been discovered to help prevent heart diseases. Unfortunately, your dog chewed up the report and all you can read about the prediction is "quantity... by 150 at each price." What does the prediction say? Use your graph to show the predicted effects on the market for pizza. What are the predicted equilibrium price and quantity? How will the market adjust?

Answer:

a) See the figure above. The equilibrium price is $8 and the equilibrium quantity is 600 pizzas. b) If the price is $10, there is a surplus of 300 pizzas. The surplus leads to a fall in the price. The lower price increases the quantity demanded and decreases the quantity supplied bringing the market to equilibrium at $8, where the quantity demanded equals the quantity supplied. If the price is $6, there is a shortage of 300 pizzas. The shortage leads to a rise in the price. The higher price decreases the quantity demanded and increases the quantity supplied bringing the market to equilibrium at $8.

c) The report predicts that the news will change consumer preferences in favor of pizza, which will "increase the quantity of pizza demanded by 150 at each price." The increase in demand means the demand curve shifts rightward by 150 pizza at every price, as illustrated in the above figure by the shift from D0 to D1. The equilibrium price is $9 and quantity is 700. When the demand curve shifts, at the old price, $8, there is a shortage of 150 pizzas and therefore the price rises bringing the market to equilibrium at $9. Topic: Predicting Changes in Price and Quantity; Demand Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 4 Measuring GDP and Economic Growth 1 Gross Domestic Product 1) Gross domestic product is the total ________ produced within a country in a given time period. A) market value of all final and intermediate goods and services B) market value of all goods and services C) amount of final and intermediate goods and services D) market value of all final goods and services Answer: D Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) Gross domestic product A) includes all the goods and none of the services produced in an economy in a given time period. B) measures the value of the aggregate production of goods and services in a country during a given time period. C) measures the value of labor payments generated in an economy in a given time period. D) is generally less than federal expenditure in any time period. Answer: B Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 3) Gross domestic product is a measure of the total value of all A) sales in an economy over a period of time. B) consumer income in an economy over a period of time. C) capital accumulation in an economy over a period of time. D) final goods and services produced in an economy over a period of time. Answer: D Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

4) Gross domestic product (GDP) is the ________ in a given time period. A) value of personal consumption expenditures, gross private domestic investment, and federal government expenditures B) sum of wage and salary compensation of employees and corporate profits C) value of all final and intermediate goods and services produced by the economy excluding those goods exported to foreign nations D) market value of final goods and services produced by the economy Answer: D Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) Gross domestic product (GDP) measures the A) number of final goods and services produced in the economy in a given time period. B) number of final goods and services sold in the economy in a given time period. C) market value of old and new final goods and services sold in the economy in a given time period. D) market value of final goods and services produced in the economy in a given time period. Answer: D Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 6) GDP is defined as the market value of all ________ in a given time period. A) final goods produced in a country B) final goods and services produced by citizens of a particular country regardless of where in the world they are located C) final goods and services produced in a country by only the citizens of the country D) final goods and services produced in a country Answer: D Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7) In the definition of GDP, "market value" refers to A) valuing production in production units. B) not counting intermediate products. C) valuing production according to the market price. D) when the production took place. Answer: C Topic: Market Value Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2 Copyright © 2014 Pearson Education, Inc.

8) In the United States, GDP is typically measured A) monthly. B) quarterly. C) daily. D) weekly. Answer: B Topic: Time Period Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 9) If Nike, an American corporation, produces sneakers in Thailand this would A) count as part of U.S. GDP since it is a U.S. corporation. B) count for both Thailand's GDP and U.S. GDP. C) add to Thailand's GDP but not to U.S. GDP. D) add to neither U.S. GDP nor Thailand's GDP. Answer: C Topic: Production Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 10) If Frito Lay, an American snack company, opens a new manufacturing facility in Mexico and produces snacks which are distributed in South America, then Mexico's GDP ________ and U.S. GDP ________. A) increases; does not change B) does not change; increases C) increases; decreases D) increases; increases Answer: A Topic: Production Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 11) The word "final" in the definition of GDP refers to A) not counting intermediate goods or services. B) the time period when production took place. C) valuing production at market prices. D) counting the intermediate goods and services used to produce GDP. Answer: A Topic: Final Good Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 3 Copyright © 2014 Pearson Education, Inc.

12) A loaf of bread purchased by one of your instructors would be best described as A) an intermediate good. B) a financial asset. C) a used good. D) a final good. Answer: D Topic: Final Good Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 13) Which of the following is a final good? A) the memory chips in your new smart phone B) a share of IBM stock C) flour purchased at the store to bake cookies D) flour used by the bakery to bake cookies Answer: C Topic: Final Good Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 14) In 2013, Ozzie purchased a 2010 Ford Escort from his neighbor for his son, purchased a 2009 "one owner" Camry from Larchmont Toyota for his wife, bought a 2013 new Ford for himself, and sold his 2002 Dodge Caravan to his teenage nephew. Which, if any, of these transactions will be included in GDP in 2013? A) all four transactions B) all three purchases but not the sale C) the purchase of the Ford and the Caravan D) only the purchase of the Ford Answer: D Topic: Final Good Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 15) Which of the following expenditures associated with the production of a new highperformance SUV will be directly included in GDP? A) the sale of bonds to finance the construction of the assembly plant B) the purchase of used welding robots to assemble to vehicles C) the purchase of new tires to be installed on the new vehicles D) the purchase of new machine tools to manufacture the engines Answer: D Topic: Final Good Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 4 Copyright © 2014 Pearson Education, Inc.

16) Intermediate goods are excluded from GDP because A) their inclusion would involve double counting. B) they represent goods that have never been purchased so they cannot be counted. C) their inclusion would understate GDP D) the premise of the question is incorrect because intermediate goods are directly included in calculating GDP. Answer: A Topic: Intermediate Goods and Services Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 17) A ton of coal purchased by your local utility to burn to make electricity would be best described as A) an intermediate good. B) a financial asset. C) a used good. D) a final product. Answer: A Topic: Intermediate Goods and Services Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 18) Which of the following expenditures is for an intermediate good? A) The government buys new tires for its military vehicles. B) A U.S. tire firm sells new tires to Canada. C) General Motors buys new tires to put on the cars it's building. D) You buy new tires for your used car. Answer: C Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 19) GDP does not directly include intermediate goods because A) intermediate goods are not valuable. B) intermediate goods are not useful to consumers. C) that would count the intermediate goods twice. D) that would understate the true size of GDP. Answer: C Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5 Copyright © 2014 Pearson Education, Inc.

20) The calculation of the final goods and services sold in an economy would NOT include A) the purchase of a lawnmower by a household. B) General Motors' purchases of tires for new automobiles. C) Ford Motor Company's purchase of a new industrial robot to be used to produce cars. D) the purchase of a service by a household. Answer: B Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 21) In computing GDP, it is essential to A) avoid double counting. B) include government transfer payments. C) include government tax revenues. D) count all intermediate products directly as they are produced. Answer: A Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 22) Double counting (counting the same thing twice) in GDP accounting is avoided by not including A) net exports. B) intermediate goods. C) illegal activities. D) depreciation. Answer: B Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 23) GDP counts only final goods and services because this A) method avoids including any goods that are produced this year and sold next year. B) method avoids double counting of goods going through several stages of production. C) amount can be more easily determined in the marketplace. D) method avoids understating the value of GDP produced during a given year. Answer: B Topic: Final Goods and Intermediate Goods Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

24) The circular flow model shows that consumer goods and services produced by business firms are sold in the A) goods market. B) factor market. C) labor market. D) financial market. Answer: A Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 25) The factor market can best be described as where A) households buy goods and services. B) firms buy goods and services. C) firms buy the services of labor, land and capital. D) governments sell goods and services. Answer: C Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 26) In the circular flow of income A) households demand goods and services that are supplied by firms, and the firms demand factors that are supplied by intermediate firms. B) households demand goods and services that are supplied by firms, while supplying factors that are demanded by firms. C) households sell goods and services while firms sell factors. D) households buy goods and services while firms sell goods and services. Firms obtain labor from households, capital from government, and raw materials from other firms. Answer: B Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 27) The circular flow shows that the household sector earns its income by A) selling factors of production. B) buying factors of production. C) selling goods and services. D) selling financial assets. Answer: A Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7 Copyright © 2014 Pearson Education, Inc.

28) The circular flow of income shows that A) households transact only in the goods market. B) governments purchase goods and services. C) firms generally are the demanders in the goods markets and suppliers in the factor markets. D) None of the above answers is correct. Answer: B Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 29) Which of the following is true regarding the circular flow diagram? I. "Aggregate income" is the flow of income earned by firms. II. Retained earnings are considered income earned by firms rather than part of households' income. III. The government, households, and firms all have transactions in the goods market. A) I only B) I and II C) I and III D) III only Answer: D Topic: Circular Flow Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 30) If we compare the four sources of spending in the economy we see that A) household consumption is the smallest. B) government expenditure is the largest. C) business investment is the largest. D) household consumption is the largest. Answer: D Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

31) Compared to the other sources of spending, net exports is A) large and negative. B) small and negative. C) large and positive. D) small and positive. Answer: B Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 32) The circular flow diagram shows that A) the flow of payments to the factors used to produce goods and services exceeds the flow of payments for final goods and services. B) goods and factor markets are independent. C) the total amount of income generated by the economy equals the total purchases of final goods and services. D) consumption expenditure equals saving. Answer: C Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 33) The circular flow diagram shows A) how nominal GDP is distinct from real GDP. B) how the prices of factors are determined. C) the effects of inflation in a simple economy. D) the flows between different sectors of the economy. Answer: D Topic: Circular Flows Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 34) The circular flow diagram indicates that A) households sell the services of factors of production to firms. B) firms buy the services of factors of production from the government. C) households sell goods and services to the government. D) firms buy goods and services from households. Answer: A Topic: Circular Flows Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

35) In the circular flow model of an economy, households A) receive income from buyers of goods and services. B) receive income from the sale of factors in the goods markets. C) pay firms for the use of their factors. D) receive income from producers for the use of factors in the factor markets. Answer: D Topic: Circular Flows Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 36) In the circular flow diagram, aggregate expenditure includes the sum of A) saving and investment. B) consumption and investment. C) consumption, investment, and saving. D) income and saving. Answer: B Topic: Circular Flow, Aggregate Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 37) In the circular flow of economic activity A) aggregate expenditure measures the dollar value of purchases of factors. B) aggregate expenditure measures the dollar value of purchases of final goods and services. C) aggregate income measures the dollar value of labor resources only. D) aggregate expenditure is measured as it moves through the financial markets. Answer: B Topic: Circular Flow, Aggregate Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 38) In the circular flow diagram, aggregate expenditure includes A) consumption expenditure, saving, investment and government expenditure B) consumption expenditure, saving, investment and net exports C) consumption expenditure, investment, government expenditure and net exports D) consumption expenditure, saving, government expenditure and net exports Answer: C Topic: Circular Flow, Aggregate Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

39) In the above figure, flow B represents ________. A) household purchases of goods and services B) household borrowing C) household income D) firms' payments for labor services Answer: A Topic: Circular Flow Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 40) In the above figure, flow B represents households' ________. A) income B) consumption expenditures C) saving D) investment Answer: B Topic: Circular Flow Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

41) In the above figure, household income is shown by flow A) A. B) B. C) C. D) F. Answer: A Topic: Circular Flow Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 42) In the above figure, consumption expenditure is shown by flow A) A. B) B. C) C. D) F. Answer: B Topic: Circular Flow Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 43) Which of the following are equal to one another? I. aggregate production II. aggregate expenditure III. aggregate income A) I equals II, but not III. B) I equals III, but not II. C) II equals III, but not I. D) I equals II equals III. Answer: D Topic: Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

44) Choose the best statement. A) GDP equals aggregate expenditure and equals aggregate income. B) An increase in government purchases increases aggregate expenditure but does not change GDP. C) An increase in compensation of employees increases aggregate income but does not change GDP. D) GDP always equals aggregate expenditure and sometimes equals aggregate income. Answer: A Topic: Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 45) According to the circular flow diagram, the dollar value of a nation's output is equal to A) profits. B) total income. C) net income minus taxes. D) wages. Answer: B Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 46) Total output and total income in the circular flow model A) are measures of the economy's level of savings. B) include only intermediate goods. C) are equal to each other. D) are related because national income is less than national product. Answer: C Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 47) The circular flow shows that A) aggregate production equals aggregate expenditure. B) aggregate expenditure is less than aggregate income. C) GDP equals aggregate income. D) Both answers A and C are correct. Answer: D Topic: Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

48) Comparing aggregate expenditure and aggregate incomes shows that A) aggregate expenditure is usually greater than aggregate income. B) aggregate income is usually greater than aggregate expenditure. C) they are equal. D) aggregate income can not equal aggregate expenditure if we have any savings. Answer: C Topic: Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 49) Gross domestic product (GDP) is A) the value of all final goods and services produced in a country during a year. B) the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports. C) the sum of compensation of employees, proprietors' income, net interest, rental income, corporate profits, depreciation, and indirect business taxes minus subsidies. D) all of the above Answer: D Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 50) Gross domestic product can be calculated A) either by valuing the nation's output of goods and services or by valuing the income generated in the production process. B) by adding up the personal consumption of all members of the society. C) by adding up the value of all intermediate goods used in the economy. D) by adding up the income tax returns of all members of the society. Answer: A Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

51) Gross domestic product is the A) value of the final goods and services produced in a country during a specific time. B) total amount that buyers spent on the final goods and services produced in a country during a specific time. C) total amount of income earned in producing the final goods and services in a country during a specific time. D) All of the above answers are correct. Answer: D Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 52) Which of the following is correct? A) Aggregate expenditure equals GDP but is less than aggregate income. B) Aggregate income is greater than GDP but equal to aggregate expenditure. C) Aggregate income is greater than aggregate expenditure but equal to GDP. D) Aggregate income, aggregate expenditure and GDP are all equal. Answer: D Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 53) GDP equals A) C + S + G + (X - M) B) C + I + G + (X + M) C) C + I + G + (X - M) D) C + S + G + (X - M) Answer: C Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 54) Depreciation is defined as the A) decrease in the stock of capital due to wear and tear. B) increase in the stock of capital due to investment by firms. C) increase in the stock of capital due to wear and tear. D) decrease in the stock of capital due to investment by firms. Answer: A Topic: Depreciation Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

55) Suppose Mail Boxes Etc. buys a new copier for its store for $1000. A year later, when the firm wants to upgrade to a new copier, it finds that the old copier is only worth $750. Over the year the copier was used, ________ has occurred. A) replacement investment B) gross investment C) depreciation D) net investment Answer: C Topic: Depreciation Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 56) Net investment equals A) capital stock minus depreciation. B) gross investment minus depreciation. C) the total quantity of plant, equipment and buildings. D) gross investment/depreciation. Answer: B Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 57) Which of the following relationships is correct? A) Net Investment = Gross Investment + Depreciation B) Consumption expenditure = Net Investment - Depreciation C) Gross Investment = Net Investment + Depreciation D) Depreciation = Gross Investment - Consumption expenditure Answer: C Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 58) Gross investment equals net investment plus A) capital. B) capital gains. C) depreciation. D) dividends paid to the owners of the company. Answer: C Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

59) Gross investment is equal to A) depreciation minus net investment. B) net investment plus capital stock. C) depreciation plus net investment. D) net investment minus capital stock. Answer: C Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 60) Gross investment equals A) net investment - depreciation + change in inventories. B) net investment + depreciation. C) net investment + change in inventories. D) depreciation + change in inventories. Answer: B Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 61) ________ is gross investment minus ________. A) The capital stock; net investment B) The capital stock; depreciation C) Depreciation; replacement investment D) Net investment; depreciation Answer: D Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 62) The difference between gross investment and net investment is A) the capital stock. B) depreciation. C) the real interest rate. D) equal to saving. Answer: B Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

63) If depreciation is less than gross investment, then net investment is A) positive. B) negative. C) zero. D) This situation could never occur because it is impossible for depreciation to be less than gross investment. Answer: A Topic: Net Investment and Gross Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 64) Net investment A) equals gross investment plus depreciation. B) is the only measure of investment used to calculate GDP. C) equals gross investment minus depreciation. D) is equivalent to the existing capital stock in the economy. Answer: C Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 65) Net investment equals A) gross investment + depreciation. B) depreciation + addition to inventories. C) savings - depreciation. D) gross investment - depreciation. Answer: D Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 66) Net investment is the A) total amount of gross investment minus depreciation. B) value of software and other network related products. C) profit or loss in the stock market. D) value of the depreciated capital multiplied by the changes in the price level. Answer: A Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

67) Which of the following is NOT a final good? A) a new computer sold to an NYU student B) a new car sold to Avis for use in their fleet of rental cars C) a purse sold to a foreign visitor D) a hot dog sold to a spectator at a Chicago Bears football game Answer: B Topic: Study Guide Question, GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 68) GDP equals A) aggregate expenditure. B) aggregate income. C) the value of the aggregate production in a country during a given time period. D) all of the above Answer: D Topic: Study Guide Question, Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2 Measuring U.S. GDP 1) Two methods of measuring GDP are A) the income approach and the expenditure approach. B) the income approach and the receipts approach. C) the goods approach and the services approach. D) the saving approach and the investment approach. Answer: A Topic: Measuring U.S. GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) GDP can be computed as the sum of A) all sales that have taken place in an economy over a period of time. B) the total expenditures of consumers and business over a period of time. C) the total expenditures of consumption, investment, and government expenditure on goods and services over a period of time. D) the total expenditures of consumption, investment, government expenditure on goods and services, and net exports over a period of time. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 19 Copyright © 2014 Pearson Education, Inc.

3) GDP using the expenditure approach equals the sum of personal consumption expenditures plus A) gross private investment. B) gross private investment plus government expenditure on goods and services. C) gross private investment plus government expenditure on goods and services minus imports of goods and services. D) gross private investment plus government expenditure on goods and services plus net exports of goods and services. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 4) The expenditure approach measures GDP by adding A) compensation of employees, rental income, corporate profits, net interest, and proprietors' income. B) compensation of employees, rental income, corporate profits, net interest, proprietors' income, subsidies paid by the government, indirect taxes paid, and depreciation. C) compensation of employees, rental income, corporate profits, net interest, proprietors' income, indirect taxes paid, and depreciation and subtracting subsidies paid by the government. D) consumption expenditure, gross private domestic investment, net exports of goods and services, and government expenditure on goods and services. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) The four categories of expenditure used by the expenditure approach method to calculate GDP are A) consumption expenditure, taxes, saving and investment. B) consumption expenditure, investment, net imports and saving. C) saving, taxes, government expenditure and investment. D) consumption expenditure, investment, government expenditure and net exports. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

6) In the equation, GDP = C + I + G + X - M, G refers to A) federal government expenditures plus all transfer payments. B) local, state, and federal government spending for all purposes. C) the taxes and expenditures of all government units. D) local, state, and federal government expenditure on goods and services, but does not include transfer payments. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7) The components of the expenditure approach to measuring GDP include all of the following EXCEPT A) net exports. B) government expenditure on goods and services. C) investment. D) the implicit payments for unpaid household work. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 8) All of the following are components of the expenditure approach to measuring GDP EXCEPT A) Shaniq's purchase of a meal at the Olive Garden in Atlanta. B) a Senator from Iowa being paid the monthly salary. C) the army buying new M1 Abram tanks. D) Ford Motor Company buying new Dell computers for use in its marketing department in Dearborn, Michigan. Answer: B Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 9) The largest component of GDP in the expenditure approach is A) personal consumption expenditures. B) gross private domestic investment. C) government expenditure on goods and services. D) net exports. Answer: A Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 21 Copyright © 2014 Pearson Education, Inc.

10) Of the following, the largest component of GDP is A) personal consumption expenditure. B) gross private domestic investment. C) government expenditure on goods and services. D) net exports of goods and services. Answer: A Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 11) Which of the following is NOT part of the expenditure approach to measuring GDP? A) gross private domestic investment B) net exports of goods and services C) net interest D) personal consumption expenditures Answer: C Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 12) To measure GDP using the expenditure approach you must collect data on A) inflation. B) exports. C) wages. D) saving. Answer: B Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 13) Aggregate expenditures include all of the following EXCEPT A) consumption of food. B) purchases of intermediate goods. C) purchases of a piece of capital equipment. D) purchases of guns by the government. Answer: B Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

14) Gross Domestic Product is equal to the sum of consumption expenditure, investment, net exports, and ________. A) government expenditures on goods and services B) saving C) profits D) net taxes Answer: A Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 15) Which of the following items is not a component of the expenditure approach to measuring U.S. GDP? A) purchases of food made by families B) social security payments made by the government C) purchases of U.S.-made movies by Europeans D) purchases of new homes made by families Answer: B Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 16) In the expenditure approach to GDP, the largest component is A) government expenditure on goods and services. B) personal consumption expenditures. C) gross private domestic investment. D) net exports. Answer: B Topic: Expenditure Approach Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 17) Let C represent consumption expenditure, S saving, I gross private domestic investment, G government expenditure on goods and services, and X - M net exports of goods and services. Then GDP equals A) C + S + G + X - M. B) C + S + G - X - M. C) C + I + G + X - M. D) C + I + G - X - M. Answer: C Topic: Expenditure Approach Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 23 Copyright © 2014 Pearson Education, Inc.

18) According to the BEA, in the second quarter of 2012 personal consumption expenditures grew by 1.7 percent, gross private domestic investment grew by 3.0 percent, government expenditure on goods and services decreased by -0.9 percent, imports grew by 2.9%, and exports grew by 6.0%. Given these data, it is most likely that A) GDP growth was positive in the 2nd quarter. B) GDP growth was negative in the 2nd quarter. C) the economy hit a business cycle peak. D) the economy hit a business cycle trough. Answer: A Topic: Expenditure Approach Skill: Analytical Status: New AACSB: Analytical Skills 19) Consumption expenditure is the payment by households for consumption of A) goods but not services. B) services but not goods. C) goods and services. D) services and for saving. Answer: C Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 20) The largest component of GDP is A) gross private domestic investment. B) personal consumption expenditures. C) net exports of goods and services. D) government expenditure on goods and services. Answer: B Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

21) Personal consumption expenditures include A) expenditures by households on goods and services produced only in the United States. B) expenditures by households on goods and services produced in the United States and the rest of the world. C) the purchase of new homes. D) the purchase of used goods and new goods. Answer: B Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 22) Which of the following purchases is included in personal consumption expenditures when determining gross domestic product? A) purchase of a new house because of the arrival of a new baby B) purchase of a new office building C) vacation expenses for a spring trip to Fort Lauderdale D) purchases of jeans to add to a store's inventory Answer: C Topic: Expenditure Approach, Consumption Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 23) Personal consumption expenditures include all of the following EXCEPT spending on A) consumer durable goods. B) consumer nondurable goods. C) consumer services. D) new housing. Answer: D Topic: Expenditure Approach, Consumption Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 24) All of the following household expenditures are included in consumption expenditure EXCEPT A) payment to a dentist for filling a tooth. B) purchase of corporate stock. C) purchase of a new purse. D) purchase of hair styling. Answer: B Topic: Expenditure Approach, Consumption Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 25 Copyright © 2014 Pearson Education, Inc.

25) Gross private domestic investment is all purchases of newly produced business capital goods and buildings A) minus the change in business inventories. B) plus the change in business inventories plus residential construction. C) plus fixed investment minus inventory investment. D) plus purchases of capital goods produced in previous years to replace any depreciated capital goods. Answer: B Topic: Expenditure Approach, Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 26) The difference between gross investment and net investment is A) inflation. B) depreciation. C) initial capital. D) consumption. Answer: B Topic: Expenditure Approach, Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 27) Goods that are produced this year, stored in inventories, and then sold to consumers next year A) count in this year's GDP. B) count in next year's GDP. C) count in both this year's and next year's GDP. D) are not counted as a part of GDP. Answer: A Topic: Expenditure Approach, Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 28) A new 2012 Honda Civic produced in 2012 and purchased in 2013 is A) part of GDP in 2012. B) part of GDP in 2013. C) not part of GDP in either year because it was produced in one year and sold in another year. D) part of GDP in both 2012 and 2013. Answer: A Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

29) Which of the following are examples of the gross private domestic investment component of GDP? I. the purchase of production machinery by IBM II. an increase in the finished goods inventory at Intel A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 30) In the calculation of gross domestic product by the expenditure approach, the "investment" component is A) net investment. B) gross investment minus depreciation. C) gross investment plus depreciation. D) gross investment. Answer: D Topic: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 31) An example of "investment" in computing real GDP using the expenditure approach is the purchase of A) a new set of tools by an auto mechanic, for use in repairing cars. B) 100 shares of IBM stock. C) a 100 year old house by a married couple. D) computer chips by Dell to put in their personal computers. Answer: A Topic: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

32) An example of "investment" in the national income accounts is the purchase of A) a new van by a potter, who packs it with his wares and travels to art shows. B) 100 shares of Intel stock on the New York Stock Exchange. C) a 100-year-old house that was just put on the protected historic sites list in the year in question. D) a U.S. government bond. Answer: A Topic: Expenditure Approach, Investment Skill: Conceptual Status: Revised AACSB: Reflective Thinking 33) According to the BEA, in the second quarter of 2012 business spending on equipment and software rose by 4.7 percent. Using the expenditure approach, this change increases A) gross private domestic investment. B) government expenditure on goods and services. C) net exports of goods and services. D) personal consumption expenditures. Answer: A Topic: Expenditure Approach, Investment Skill: Analytical Status: New AACSB: Analytical Skills 34) According to the BEA, in the second quarter of 2012 purchases of new residential structures rose by 8.9 percent. Using the expenditure approach, this change increases A) gross private domestic investment. B) government expenditure on goods and services. C) net exports of goods and services. D) personal consumption expenditures. Answer: A Topic: Expenditure Approach, Investment Skill: Analytical Status: New AACSB: Analytical Skills 35) In the national income accounts, the purchase of a new house counts as A) consumption expenditure. B) investment. C) a transfer. D) an addition to inventory. Answer: B Topic: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

36) All of the following are included in gross private domestic investment expenditure EXCEPT a A) business's purchase of a fleet of cars. B) household's purchase of a new house. C) business's purchase of another company's stock. D) a retail store's purchase of shoes to add to its inventory. Answer: C Topic: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 37) In the national income accounts, government expenditure on goods and services refer to those purchases made by A) federal and state governments only. B) the federal government only. C) state and local governments only. D) all levels of government. Answer: D Topic: Expenditure Approach, Government Expenditure Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 38) In the national income accounts, government expenditure on goods and services exclude A) transfer payments. B) state and local government purchases. C) local government purchases but include state government purchases. D) spending on national defense. Answer: A Topic: Expenditure Approach, Government Expenditure Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 39) Which of the following is included in the government expenditure component of the expenditure approach to GDP? A) state government expenditure on local schools B) transfer payments C) changes in inventories D) taxes Answer: A Topic: The Expenditure Approach, Government Purchases Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

40) According to the BEA, in the second quarter of 2012 state and local government spending on goods and services changed by -1.4 percent. Using the expenditure approach, this change leads to A) a decrease in government expenditure on goods and services. B) no change in GDP because only federal government expenditures are included in GDP. C) a decrease in gross private domestic investment. D) no change in GDP because state and local government expenditure is always canceled out by federal government expenditure. Answer: A Topic: Expenditure Approach, Government Expenditure Skill: Analytical Status: New AACSB: Analytical Skills 41) Which one of the following transactions in a particular year is included in gross domestic product for that year? A) Social Security payments to retirees B) The government pays a computer services company that assisted in the delivery of Social Security payments to retirees. C) A car is produced in the previous year and remains in inventory for the entire year under consideration. D) A stay-at-home parent performs housework that the family would otherwise have paid a maid $20,000 a year to perform. Answer: B Topic: The Expenditure Approach, Government Purchases Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 42) Which of the following is included in government expenditures when measuring GDP? A) Social Security payments B) unemployment compensation payments C) pension payment made to past presidents D) the current president's salary Answer: D Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

43) Transfer payments A) are included in the government expenditure category in gross domestic product. B) refer to all payments made to households by governments. C) refer to payments made by the government that are not made to purchase a good or service. D) are made by households to firms in exchange for goods and services. Answer: C Topic: Expenditure Approach, Government Expenditure Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 44) In the computation of GDP, social security payments count as A) transfer payments and are included in GDP. B) transfer payments and are not included in GDP. C) government expenditure on goods and services and are included in GDP. D) government expenditure on goods and services and are not included in GDP. Answer: B Topic: The Expenditure Approach, Government Purchases Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 45) Which of the following items is NOT part of government expenditure on goods and services in the GDP accounts? A) gasoline purchases for government car pools B) Social Security expenditures C) new computer hardware for use by the IRS D) drapes to brighten up the president's office Answer: B Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 46) Transfer payments are not included in GDP because A) their market value cannot be accurately determined. B) they do not generate additional income. C) they are not purchases of goods or services. D) their value is included in government expenditure. Answer: C Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

47) Which of the following transfer payments is included in GDP? A) Social Security payments B) welfare payments C) veteran's benefits D) none of the above Answer: D Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 48) Which of the following is NOT part of GDP calculated using the expenditure approach? A) General Motors' purchases of new capital equipment B) expenditures by the federal government for national defense C) social security payments made to the elderly D) the purchase of new homes by consumers Answer: C Topic: The Expenditure Approach, Government Purchases Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 49) Transfer payments are not part of government expenditure on goods and services because transfer payments A) are not predictable given the nature of their appropriation and allocation. B) do not represent the purchase of a final good or service. C) are not always spent on goods produced in the U.S. D) The premise of the question is incorrect because transfer payments are part of government purchases of goods and services. Answer: B Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 50) Government expenditures included in the expenditure approach to GDP include ________. A) social security and education B) net exports C) buying a new bomber D) Both answers A and C are correct Answer: C Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

51) According to the BEA, in the second quarter of 2012 federal government spending on goods and services changed by -0.1 percent. This decrease could have been caused by a decrease in spending on A) national defense. B) Social Security. C) interest payments on the national debt. D) unemployment benefits. Answer: A Topic: Expenditure Approach, Government Expenditure Skill: Analytical Status: New AACSB: Analytical Skills 52) Net exports of goods and services equal the A) exports of goods and services divided by the imports of goods and services. B) exports of goods and services plus the imports of goods and services. C) exports of goods and services minus the imports of goods and services. D) imports of goods and services minus the exports of goods and services. Answer: C Topic: Expenditure Approach, Net Exports Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 53) Net exports is negative if A) the value of exports exceeds the value of imports. B) the value of imports exceeds the value of exports. C) the tariff payments are included in the value of imported and exported items. D) too much production occurs in the exporting country during the year. Answer: B Topic: Expenditure Approach, Net Exports Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 54) In 2012, net exports in the United States were A) zero. B) positive. C) negative. D) greater than personal consumption expenditures. Answer: C Topic: Expenditure Approach, Net Exports Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

55) To calculate GDP using the expenditure approach, in part it is necessary to A) add imports and exports. B) add imports and subtract exports. C) add exports and subtract imports. D) subtract both exports and imports. Answer: C Topic: Expenditure Approach, Net Exports Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 56) An increase in exports of goods or services with no change in imports of goods or services A) decreases GDP. B) increases GDP. C) may increase or decrease GDP depending on whether it is the export of goods or the export of services that increased. D) has no effect on GDP. Answer: B Topic: Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 57) By itself, an increase in exports A) increases GDP. B) decreases GDP. C) means imports decrease by the same amount. D) can either increase or decrease GDP, depending on whether the exports are durable or nondurable. Answer: A Topic: Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 58) If Ford sells 200 Explorers for a total of $400,000 to Germany, while the United States imports 100 BMWs for a total of $500,000 from Germany, A) U.S. GDP increases because it sells more Explorers. B) U.S. GDP decreases because net exports are negative. C) Germany's GDP decreases. D) U.S. net exports is positive. Answer: B Topic: Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 34 Copyright © 2014 Pearson Education, Inc.

59) An U.S. firm buys a new industrial sewing machine from a company located in France. Which of the following is true? I. U.S. net exports decrease. II. U.S. investment increases. A) only I B) only II C) both I and II D) neither I nor II Answer: C Topic: The Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 60) If an American firm produces goods that are sold to a German household, then A) German GDP increases but not U.S. GDP. B) U.S. GDP increases. C) the transaction is considered an export in the German GDP accounts. D) net exports in the United States will not change because an export immediately generates an offsetting import. Answer: B Topic: Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 61) In the calculation of GDP by the expenditure approach, exports from the United States must be A) subtracted because they are included in the consumption of a foreign country. B) ignored because they are not bought by U.S. citizens. C) subtracted if they are bought by foreign firms for investment purposes. D) added. Answer: D Topic: Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

Item Personal consumption expenditure Government expenditure on goods and services Net taxes Gross private domestic investment Imports of goods and services Exports of goods and services

Millions of dollars 80 30 35 20 10 20

62) Using the information in the table above, calculate the value of GDP. A) $185 million B) $145 million C) $195 million D) $140 million Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 63) Use the information in the table above to calculate the value of net exports. A) $10 million B) $0 C) -$10 million D) $30 million Answer: A Topic: Expenditure Approach, Net Exports Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 64) Last year in the country of Nerf imports equaled exports. Nerf's GDP was $500 million, its consumer expenditure was $380 million, and its investment was $20 million. Nerf's government expenditure on goods and services were ________. A) $100 million B) $900 million C) $500 million D) zero Answer: A Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 36 Copyright © 2014 Pearson Education, Inc.

Item Billions of dollars Government expenditure on 250 goods and services Compensation of employees 1,675 Gross private domestic 325 investment Rental income 20 Personal consumption 1425 expenditures Net interest 40 Net exports of goods and 100 services Indirect business taxes and 300 depreciation 65) The above table shows some (but not all) national income accounting data for a hypothetical country. According to these data, the value of GDP is ________ billion. A) $2100 B) $1850 C) $2000 D) $2050 Answer: A Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Item Personal consumption expenditure Gross private domestic investment Government expenditure on goods and services Exports of goods and services Imports of goods and services Depreciation Indirect business taxes

Dollars 1500 355 590 70 50 200 75

66) Based on the data in the above table, gross domestic product equals A) $2,190. B) $2,840. C) $2,465. D) $2,750. Answer: C Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Item Personal consumption expenditure Gross private domestic investment Government expenditure on goods and services Exports of goods and services Imports of goods and services Net taxes

Billions of dollars 100 10 50 30 30 50

67) The above table shows data from the GDP accounts of Hypothetica. Hypothetica's GDP is ________ billion. A) $270 B) $210 C) $190 D) $160 Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 68) If imports are $100 million less than exports, government expenditures are $500 million, consumer expenditures are $1 billion, and gross investment spending is $500 million, then GDP is A) $1 billion. B) $1.9 billion. C) $2 billion. D) $2.1 billion. Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

69) If consumption expenditures are $500 million, net investment is $100 million, depreciation equals $5 million, imports are $50 million, exports are $55 million, government expenditure on goods and services is $220 million, and government transfer payments are $20 million, then GDP is A) $790 million. B) $800 million. C) $830 million. D) $850 million. Answer: C Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Component Net taxes Personal consumption expenditure Depreciation Government expenditure Gross investment Exports Imports Household saving

Amount (billions of dollars) 1,635 5,566 622 1,784 1,234 957 1,138 1,202

70) Using the data in the table above, what is the value of GDP? A) $13,516 billion B) $10,679 billion C) $9,541 billion D) $8,403 billion Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

71) Using the data in the above table, what is the value of net exports? A) -$181 billion B) $181 billion C) $957 billion D) -$957 billion Answer: A Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 72) Using the data in the above table, what is the value of national saving? A) $1,202 billion B) $2,837 billion C) $1,053 billion D) -$85 billion Answer: C Topic: National Saving Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills Component Net taxes Personal consumption expenditure Depreciation Government expenditure Gross investment Net exports Compensation of employees

Amount (dollars) 10 50 8 20 26 -10 65

73) Using the information in the table above, calculate gross domestic product. A) $118 B) $108 C) $86 D) $78 Answer: C Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

74) Using the information in the table above, calculate the government's budget deficit or surplus. A) $2 B) -$4 C) -$10 D) $4 Answer: C Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Component Personal consumption expenditure Government expenditure Gross investment Net investment Exports Imports

Amount (billions of dollars) 3,720 430 610 520 650 720

75) Using the information in the table above, calculate gross domestic product. A) $5,130 billion B) $5,320 billion C) $4,760 billion D) $4,690 billion Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 76) Using the information in the table above, net exports equals A) $1,370 billion. B) $650 billion. C) $20 billion. D) -$70 billion. Answer: D Topic: Net Exports Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

77) Using the information in the table above, depreciation equals A) -$90 billion. B) $90 billion. C) -$70 billion. D) some amount that cannot be determined. Answer: B Topic: Depreciation Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills Government purchases of goods and services Depreciation Gross private domestic investment Personal income taxes Net taxes Net exports of goods and services Personal consumption expenditures Net interest

$240 240 400 140 120 80 640 100

78) From the data in the above table, GDP equals A) $1,120. B) $1,280. C) $1,290. D) $1,360. Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 79) The approach to GDP that sums compensation of employees, rental income, corporate profits, net interest, proprietors' income, depreciation, and indirect taxes and subtracts subsidies is the A) opportunity cost approach. B) expenditure approach. C) added cost approach. D) income approach. Answer: D Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

80) The income approach to measuring GDP sums together A) compensation of employees, rental income, corporate profits, net interest, proprietors' income, subsidies paid by the government, indirect taxes paid, and depreciation. B) compensation of employees, rental income, corporate profits, net interest, proprietors' income, indirect taxes paid, and depreciation and subtracts subsidies paid by the government. C) the sales of each firm in the economy. D) the costs of each firm in the economy and then subtracts indirect business taxes and depreciation. Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 81) Proprietors' income is a component of which approach to measuring GDP? A) incomes approach B) expenditure approach C) cost approach D) output approach Answer: A Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 82) The income approach to measuring GDP A) determines the cost of production, then adjusts it to equal the market value of production. B) sums all incomes earned in the United States and makes no other adjustments because other adjustments are not necessary. C) measures the cost of producing GDP rather than the market value. D) sums the value at each stage of production plus the value of depreciation. Answer: A Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

83) The five categories of income used in the income approach to the measurement of GDP are A) consumption, saving, rental income, corporate profits, and investment. B) employee compensation, net interest, rental income, corporate profits, and proprietor's income. C) employee compensation, consumption, rental income, corporate profits, and proprietor's income. D) employee compensation, saving, rental income, corporate profits, and investment. Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 84) Which of the following expressions equals GDP? A) compensation of employees + consumption + depreciation + net investment B) compensation of employees + net interest + rental income + depreciation + corporate profits + proprietors' income + indirect taxes - subsidies C) compensation of employees + net exports + depreciation + corporate profits D) compensation of employees + gross investment + rental income + depreciation + corporate profits + indirect taxes - subsidies Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 85) Which of the following is a component of the incomes approach to GDP? A) consumption expenditure B) wages and salaries C) investment D) government expenditure on goods and services Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

86) The income approach measures GDP by adding together compensation of employees, proprietors' income, ________. A) net investment, saving, and farmers' income B) net interest, rental income, and corporate profits C) net investment, rental income, and corporate profits D) net saving, investment income, and profits Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 87) Which of the following items is NOT a component of the income approach to measuring U.S. GDP? A) interest earned on savings deposits B) profits made by businesses C) income earned by businesses that export goods D) investment Answer: D Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 88) Which of the following is NOT a part of the income approach to determining GDP? A) rental income B) gross private domestic investment C) net interest D) indirect business taxes Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 89) Which of the following is NOT one of the components for computing GDP based upon the income approach? A) investment B) corporate profits C) compensation of employees D) net interest Answer: A Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 46 Copyright © 2014 Pearson Education, Inc.

90) Which of the following is NOT included in the income approach to measuring GDP? A) net interest B) net exports C) corporate profits D) compensation of employees Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 91) In the country of Darrowby, net domestic income at factor cost is $2.0 million. Gross domestic product is $3.0 million, and depreciation is $0.5 million. Indirect taxes less subsidies ________. A) are $1 million B) are $0.5 million C) cannot be calculated D) are -$0.5 million Answer: B Topic: Income Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills Item Compensation of employees Net interest and rental income Corporate profits Proprietor's income

Billions of dollars 80 30 10 20

92) Use the information in the table above plus the fact that indirect taxes less subsidies are $10 billion and depreciation is $30 billion to calculate the value of GDP. A) $180 billion B) $150 billion C) $140 billion D) $130 billion Answer: A Topic: Income Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

93) The largest component of national income is A) compensation of employees. B) rental income. C) corporate profits. D) proprietors' income. Answer: A Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 94) Looking at the components of the income approach we see that A) compensation of employees is the largest category. B) consumption is the largest category. C) profits are the largest category. D) rental income is the largest category. Answer: A Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 95) Compensation paid to employees represented ________ of GDP for the United States in 2012. A) about 5 percent B) approximately 15 percent C) 35 percent D) more than 50 percent Answer: D Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

96) Which of the following is included in "compensation of employees" part of the income approach to measuring GDP? I. Wages and salaries. II. Pension fund contributions. III. Social security contributions. A) I only B) I and II C) I and III D) I, II and III Answer: D Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 97) When calculating the compensation of employees part of GDP, A) social security contributions must be included. B) fringe benefits are not included. C) taxes withheld on earnings are not included. D) the value of vacation time must be included. Answer: A Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 98) In the national income accounts, net interest is the total interest payments received by households on loans made by them minus A) interest received from households' ownership of government bonds. B) interest payments made by households on their own borrowing. C) interest payments made by households to foreign lenders. D) taxes paid by households on their interest income. Answer: B Topic: Income Approach, Net Interest Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

99) Rental income includes A) the payment for the use of land. B) the payment for the use of all rented inputs. C) no income from rental housing because most houses are occupied by their owners. D) Both answers A and B are correct. Answer: D Topic: Income Approach, Rental Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 100) Which of the following is included in the category of corporate profits when measuring GDP? I. Profits paid as dividends. II. Undistributed profits. III. Income received by owners and operators of businesses. A) I only B) I and II C) I and III D) I, II and III Answer: B Topic: Income Approach, Corporate Profits Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 101) An indirect tax is a tax paid by consumers A) to a state or local government. B) when they purchase goods and services. C) on unearned income (as opposed to wages and salaries). D) that is a percentage of the value of their real property. Answer: B Topic: Indirect Tax Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 102) An indirect tax is exemplified by A) an income tax. B) a sales tax. C) a subsidy. D) None of the above answers is correct. Answer: B Topic: Indirect Tax Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 50 Copyright © 2014 Pearson Education, Inc.

103) Which of the following best represents an indirect tax? A) federal income tax B) state income tax C) local property tax D) sales taxes paid on goods and services Answer: D Topic: Indirect Tax Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 104) The presence of ________ creates a difference in the value between the market price and the factor cost of a product. A) indirect taxes and consumption B) subsidies and direct taxes C) corporate profits and subsidies D) indirect taxes and subsidies Answer: D Topic: Indirect Tax Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 105) The sum of compensation to employees, rental income, corporate profits, net interest, and proprietors' income is A) gross domestic product. B) gross domestic income. C) net domestic income at factor cost. D) net domestic product. Answer: C Topic: Net Domestic Income at Factor Cost Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 106) Two reasons why valuing goods at their market prices is different than valuing them at their factor costs include A) depreciation and investment. B) exports and imports. C) personal taxes and corporate taxes. D) indirect taxes and subsidies. Answer: D Topic: Net Domestic Income at Factor Cost Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 51 Copyright © 2014 Pearson Education, Inc.

Corporate profits Net interest Indirect taxes less subsidies Depreciation Compensation of employees Proprietor's income Rental income Personal consumption expenditures Government expenditure on goods and services Net exports of goods and services

$200 150 230 250 1,350 150 70 1,400 500 40

107) Using the data in the table above, gross domestic product equals A) $1,920. B) $1,940. C) $2,150. D) $2,400. Answer: D Topic: Income Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 108) Using the data in the above table, gross private domestic investment equals A) $250. B) $260. C) $460. D) some amount that cannot be determined without more information. Answer: C Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 109) Using the data in the above table, net private domestic investment equals A) $210. B) $260. C) $510. D) some amount that cannot be determined without more information. Answer: A Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 52 Copyright © 2014 Pearson Education, Inc.

Item Personal income Net domestic income at factor cost Government expenditure on goods and services Depreciation Gross private domestic investment Indirect taxes Subsidies

Billions of dollars 1,200 2,100 400 200 100 600 100

110) The above table shows some national income accounting data for a nation. In this nation, gross domestic product is equal to ________ billion. A) $2,000 B) $2,300 C) $2,500 D) $2,800 Answer: D Topic: Income Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Item Net interest Government expenditure on goods and services Compensation of employees Rental income Proprietors' income Indirect taxes minus subsidies Corporate profits Exports of goods and services Imports of goods and services Depreciation

Dollars 239 136 1,735 37 128 259 194 249 289 333

111) Using the data in the above table, gross domestic product as calculated by the income approach equals ________. A) $2,333 B) $2,592 C) $2,925 D) $2,205 Answer: C Topic: Income Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Component Gross investment Personal consumption expenditure Depreciation Government expenditure on goods and services U.S. imports U.S. exports Compensation of employees

Amount (billions of dollars) 1300 1475 25 1315 260 249 65

112) The above table gives data for a hypothetical nation. Gross domestic product is A) $4,049 billion. B) $4,079 billion. C) $4,054 billion. D) $4,339 billion. Answer: B Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 113) Nominal GDP is A) real GDP adjusted for price changes. B) GDP valued at prices of that year. C) GDP valued at constant prices. D) real GDP valued at base year prices. Answer: B Topic: Nominal GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 114) Nominal GDP is the value of final goods and services A) at the prices of that year. B) at the prices of the immediately previous year. C) at the prices of a base year. D) produced in foreign countries but consumed in the domestic country. Answer: A Topic: Nominal GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 55 Copyright © 2014 Pearson Education, Inc.

115) Normally in the United States the relationship between nominal and real GDP for a given year is A) real GDP is greater than nominal GDP because of price increases. B) nominal GDP is greater than real GDP because of price increases. C) nominal GDP equals real GDP. D) nominal GDP is greater than real GDP because of price decreases. Answer: B Topic: Nominal GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 116) Of the following, which is correct? A) Nominal GDP does not change when the production of goods and services increases. B) Nominal GDP is not affected by changes in prices of goods and services. C) Nominal GDP increases when the prices of goods and services increase. D) Real GDP changes only when the prices of goods and services really change. Answer: C Topic: Real and Nominal GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 117) According to the BEA, in the second quarter of 2012 nominal GDP rose by 3.3 percent and real GDP rose by 1.7 percent. The difference between the change in nominal GDP and the change in real GDP could be explained by A) an increase in prices of final goods and services produced. B) a decrease in prices of final goods and services produced. C) an increase in quantity of final goods and services produced. D) a decrease in quantity of final goods and services produced. Answer: A Topic: Real and Nominal GDP Skill: Analytical Status: New AACSB: Analytical Skills

118) Real GDP is A) an increase in the average level of prices. B) the value of total production when the unemployment rate is 6 percent. C) the value of total production of all the nation's farms, factories, shops and offices measured in the prices of a single year. D) the value of total production of all the nation's farms, factories, shops and offices measured at the prices of the year it was produced. Answer: C Topic: Real GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 119) Real GDP measures the A) total profits earned by all businesses valued using prices from a single year. B) changes in the prices of output measured in dollars. C) general upward drift in prices. D) value of total production linked to prices of a single year. Answer: D Topic: Real GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 120) ________ gross domestic product is the value of ________ linked back to the prices of a single year. A) Real; total production B) Real; production possibilities C) Productivity; the consumer price index D) Nominal; total production Answer: A Topic: Real GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 121) Real Gross Domestic Product is A) the amount of people unemployed divided by the total labor force. B) the productivity of labor. C) the most that can be produced when the economy's resources are fully employed. D) the value of total production linked back to the prices of a single year. Answer: D Topic: Real GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 57 Copyright © 2014 Pearson Education, Inc.

122) Which of the following is TRUE regarding real GDP? I. Real GDP is the value of the total production of the country's farms, factories, shops, and offices. II. Real GDP rises whenever inflation occurs. III. Real GDP does not measure all that is produced. A) I and II B) I and III C) II and III D) I, II and III Answer: B Topic: Real GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 123) According to the BEA, in the second quarter of 2011 nominal GDP was $15 trillion and in the second quarter of 2012 nominal GDP was $15.6 trillion. Based solely on this information, from the second quarter of 2011 to the second quarter of 2012 A) real GDP may have increased, decreased, or stayed the same. B) real GDP definitely increased. C) real GDP definitely decreased. D) prices definitely increased. Answer: A Topic: Real and Nominal GDP Skill: Analytical Status: New AACSB: Analytical Skills 124) In years with inflation, nominal GDP increases ________ real GDP. A) faster than B) slower than C) at the same rate as D) sometimes faster, sometimes slower, and sometimes at the same rate as Answer: A Topic: Real and Nominal GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

125) Suppose an economy has some inflation. Then, after a base year, the value of real GDP will A) be less than nominal GDP. B) not be different from nominal GDP. C) be greater than nominal GDP. D) will be approximately half the value of nominal GDP. Answer: C Topic: Real and Nominal GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 126) Gross private domestic investment is a component of which approach to measuring GDP? A) incomes approach B) expenditure approach C) linking approach D) output approach Answer: B Topic: Study Guide Question, Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 127) Which of the following is NOT a component of the incomes approach to GDP? A) net exports B) wages and salaries C) corporate profits D) proprietors' income Answer: A Topic: Study Guide Question, Incomes Approach Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

3 The Uses and Limitations of Real GDP 1) The maximum amount of production that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation is called A) real GDP. B) nominal GDP. C) actual GDP. D) potential GDP. Answer: D Topic: Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) Potential GDP is A) another name for real GDP. B) always different from real GDP. C) the level of GDP not adjusted for price changes. D) the maximum amount of GDP that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation. Answer: D Topic: Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 3) Potential GDP is A) the maximum GDP that an economy actually achieves throughout its entire history. B) the level of GDP achieved during periods when 100 percent of the labor force is employed. C) a goal that can never be achieved by the economy. D) the maximum amount of GDP that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation. Answer: D Topic: Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

4) Potential GDP is the A) the maximum amount of production that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation. B) current value of production in the economy. C) value of production when the economy is in a recession. D) value of production when the economy is at a peak. Answer: A Topic: Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) Potential GDP A) measures the actual production from year to year. B) measures the maximum amount of production that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation. C) is cyclical. D) Both answers A and C are correct Answer: B Topic: Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 6) In any year, real GDP A) must always be less than potential GDP. B) might be greater or less than potential GDP. C) will always be greater than potential GDP because of the tendency of nations to incur inflation. D) always equals potential GDP. Answer: B Topic: Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7) The relationship between real GDP and potential GDP is that A) real GDP always equals potential GDP. B) real GDP never equals potential GDP. C) real GDP fluctuates about potential GDP. D) real GDP is always below potential GDP. Answer: C Topic: Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

8) In any year, real GDP A) must always be less than potential GDP. B) might be greater or less than potential GDP. C) will be greater than potential GDP if the inflation rate is positive. D) always equals potential GDP. Answer: B Topic: Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 9) ________ refers to a period when the ________ decreases. A) Recession; growth rate of nominal GDP B) Recession; growth rate of output per person C) Productivity growth slowdown; growth rate of real GDP D) Productivity growth slowdown; growth rate of output per person Answer: D Topic: Productivity Growth Slowdown Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 10) The series of ups and downs the economy tends to move in is called A) the business cycle. B) a recession. C) a depression. D) economic growth. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 11) The business cycle refers to A) fluctuations in the level of real GDP around potential GDP. B) changes in the level of nominal GDP. C) changes in the level of the stock market. D) changes in the level of employment. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

12) A business cycle is A) the pattern of short-run upward and downward movements in total output. B) the increase in consumer spending that accompanies an increase in disposable income. C) the cyclical change in the nation's balance of trade. D) the cyclical movement in the interest rates. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 13) The business cycle is the A) regular growth rate of the real GDP. B) regular fluctuations of real GDP below potential GDP. C) irregular fluctuations of prices around real GDP. D) irregular fluctuations of real GDP around potential GDP. Answer: D Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 14) Business cycles are A) irregular, with some having two recessions and no expansion. B) predictable, with a recession following a trough. C) unpredictable, but always have two phases and two turning points. D) unpredictable, and don't always have two phases and two turning points. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 15) Business cycles A) are more volatile during a Republican administration. B) are unpredictable due to political upheavals and global markets. C) follow a pattern of trough, expansion, peak and recession. D) are all identical in duration over the last century. Answer: C Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

16) Which of the following statements is true? A) Real GDP fluctuates around potential GDP. B) Potential GDP fluctuates around real GDP. C) Potential GDP is the same as real GDP. D) When all of the economy's resources are fully employed, the value of production is called real GDP. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 17) Real GDP A) fluctuates from year to year but is always below potential GDP. B) fluctuates around potential GDP. C) grows at a constant 3 to 4 percent per year. D) can be called potential GDP when it is adjusted for price changes. Answer: B Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 18) The term "business cycle" most closely refers to the A) fluctuating profits of firms. B) fiscal year. C) accounting period used by firms. D) alternating periods of expansions and recessions. Answer: D Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 19) Which of the following is not a phase or turning point of the business cycle? A) recession B) expansion C) shutdown D) trough Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

20) The four parts of the business cycle occur in the following order: A) recession, trough, peak, expansion. B) expansion, trough, peak, recession. C) recession, trough, expansion, peak. D) expansion, trough, recession, peak. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 21) Which of the following are parts of the business cycles? A) peak and potential GDP B) real GDP and potential GDP C) recession and expansion D) inflation and recession Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 22) Which of the following is TRUE regarding business cycles? I. Cycles are predictable. II. In each cycle, a peak follows an expansion. III. Potential GDP fluctuates around real GDP. A) I and II B) I and III C) II and III D) II only Answer: D Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 23) A common definition of a recession is a time with A) a decline in the price level. B) a decline in interest rates. C) a decrease in real GDP for two or more successive quarters. D) a decrease in real GDP for two or more successive years. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 65 Copyright © 2014 Pearson Education, Inc.

24) A recession is commonly defined as a period with A) negative growth rate in real GDP that lasts at least one quarter. B) positive growth rate in real GDP that lasts at least one quarter. C) positive growth rate in real GDP that lasts at least two quarters. D) negative growth rate in real GDP that lasts at least two quarters. Answer: D Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 25) A common definition of a recession is a period of time A) of at least 6 months during which real GDP decreases. B) with an increase in real economic output from the previous period. C) with no change in real GDP. D) with no change in the dollar (money) value of economic output. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 26) A recession is commonly defined as occurring when A) real GDP decreases for a period of 12 or more months. B) real GDP decreases for a period of 6 or more months. C) the unemployment rate rises above 7.5 percent for 6 or more months. D) the unemployment rate rises above 5.0 percent for 12 or more months. Answer: B Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 27) By common definition, a recession occurs when A) the international deficit worsens for at least two successive quarters. B) the government budget deficit exceeds the national debt. C) the inflation rate exceeds 3.5 percent. D) real GDP decreases for at least two successive quarters. Answer: D Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

28) Recessions are commonly defined to occur A) whenever unemployment increases. B) when growth in real GDP decreases for two consecutive quarters. C) when growth in real GDP is negative for two consecutive quarters. D) when the unemployment rate exceeds 6 percent. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 29) Real GDP decreases during A) the movement from trough to peak. B) the movement from below potential GDP back to potential GDP. C) the movement from peak to trough. D) a decrease in unemployment. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 30) When a recession ends, the turning point that immediately follows is called a A) trough. B) peak. C) depression. D) None of the above answers is correct. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 31) The low point of economic activity during a business cycle is called the A) trough. B) recession. C) peak. D) failure. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

32) What term is used to describe the lowest point of a business cycle? A) peak B) trough C) expansion D) recession Answer: B Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 33) A trough is the A) lower turning point of a business cycle when an expansion begins. B) lower turning point of a business cycle when a recession begins. C) upper turning point of a business cycle when an expansion begins. D) upper turning point of a business cycle when a recession begins. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 34) An expansion occurs when the level of real GDP is A) increasing. B) decreasing. C) at a cyclical peak. D) at a cyclical trough. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 35) An expansion A) follows a peak. B) is defined as a period of negative real GDP growth. C) comes just before a trough. D) is defined as a period of real GDP increases. Answer: D Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

36) An expansion ends when the economy A) hits a trough and then enters a recession. B) hits a peak and then enters a recession. C) begins to grow following a peak. D) has grown for two quarters in a row. Answer: B Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 37) The times during which real GDP increases are referred to as A) contractions. B) expansions. C) anti-cycles. D) corrections. Answer: B Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 38) Suppose the country of Dingo experienced an economic trough in January 2011. We can conclude that A) real GDP in Dingo was increasing in January 2011. B) an expansion occurred after January 2011. C) Dingo did not experience a recession in 2010. D) Dingo's potential GDP fell in 2011. Answer: B Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 39) An economy recovering from a recession A) moves up from its trough to a period of expansion. B) moves up from its peak to a period of expansion. C) moves down from its trough to a period of depression. D) moves down from its peak to a period of expansion. Answer: A Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

40) An economic expansion rather than a recession occurs A) when the federal budget is balanced. B) when the unemployment rate falls below 5 percent. C) when growth in real GDP is positive. D) when the unemployment rate is not changing. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 41) A peak is the A) lower turning point of a business cycle when an expansion ends. B) lower turning point of a business cycle when a recession ends. C) upper turning point of a business cycle when an expansion ends. D) upper turning point of a business cycle when a recession ends. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

42) In the above figure, the distance between points S and T represents A) an expansion. B) a trough. C) a peak. D) a recession. Answer: D Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 43) In the above figure, the distance between points T and U represents A) an expansion. B) a trough. C) a peak. D) a recession. Answer: A Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

44) In the above figure, a recession begins at point ________ and an expansion begins at point ________. A) a; b B) b; c C) b; a D) d; c Answer: A Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 45) In the above figure, a trough is at point ________ and a peak is at point ________. A) a; b B) b; c C) b; a D) d; c Answer: C Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

46) In the above figure, which point represents the under use of resources? A) point F B) point G C) point H D) point K Answer: B Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 47) In the above figure, which point represents a situation with significant shortages of labor, capital, and other resources? A) point F B) point G C) point I D) point K Answer: A Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills

48) In the above figure, which point represents an economy which is at the peak part of a business cycle? A) point F B) point G C) point I D) point K Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

49) In the above figure, the letters A, B, and C represent which positions in the business cycle? A) peak, expansion, and recession, respectively B) recession, expansion, and peak, respectively C) expansion, peak, and recession, respectively D) peak, recession, and expansion, respectively Answer: D Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

50) Purchasing power parity prices are used to construct GDP data that A) do not omit the underground economy. B) can be used to make more valid comparisons between one country and another. C) is a proper measure of economic welfare. D) adjust for differences in population. Answer: B Topic: Purchasing Power Parity Prices Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 51) If we compare the U.S. GDP and the Chinese GDP, A) real GDP per person is about the same in the two countries. B) U.S. real GDP per person is less than China's real GDP per person once we adjust for currency differences. C) China's real GDP per person is less than real GDP per person in the United States. D) real U.S. GDP per person was much larger than China's real GDP per person when purchasing power parity prices are used but is less than China's real GDP per person when exchange rate prices are used. Answer: C Topic: Purchasing Power Parity Prices Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 52) The use of purchasing power parity prices A) decreases the real GDP per person statistics published by the International Monetary Fund. B) weakens the validity of cross country comparisons of economic welfare. C) increases the amount by which U.S. GDP is larger than that of any other nation. D) accounts for differences in the prices of the same goods in different countries when measuring real GDP. Answer: D Topic: Purchasing Power Parity Prices Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

53) Real GDP is not a perfect indicator of economic welfare because ________. A) it includes the underground economy B) it includes a direct measure of health and life expectancy C) it underestimates inflation D) economic welfare depends on many factors not measured or not measured accurately by real GDP Answer: D Topic: GDP and Economic Welfare Comparisons Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 54) Real GDP does not show the state of economic welfare in a country in part because GDP omits I. household production. II. leisure time available. III. the quality of the environment. A) I only B) I and III C) II and III D) I, II and III Answer: D Topic: GDP and Economic Welfare Comparisons Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 55) Real GDP can be criticized as a measure of economic welfare because it A) does not include the value of products produced in the household. B) does not take account of the degradation of environmental quality. C) does not include leisure time available to a society. D) All of the above answers are correct. Answer: D Topic: Economic Welfare Comparisons Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

56) Which, if any, of the following causes a country's reported GDP to be less than its total economic production? A) the exclusion of household production B) the exclusion of government transfers C) the inclusion of government expenditures D) None of the above cause reported GDP to be less than total production. Answer: A Topic: Household Production Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 57) In calculating GDP, household production is A) included as part of consumption. B) ignored because it is not a large amount. C) not included because there is no market transaction. D) included under employee compensation. Answer: C Topic: Household Production Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 58) Which of the following is NOT included in real GDP? A) production of services, such as the services of doctors B) production of goods that last more than one year, such as television sets C) production of goods that do not last more than one year, such as gasoline D) production in the home Answer: D Topic: Household Production Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 59) If a larger fraction of the adult population is working in the marketplace, household production A) counted in real GDP increases. B) not counted in real GDP increases. C) counted in real GDP decreases. D) not counted in real GDP decreases. Answer: D Topic: Household Production Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

60) Reported GDP increases when, in fact, total production is unchanged when I. there is a shift from household production to market production. II. a previously illegal activity is legalized. A) I only B) II only C) Neither I nor II D) Both I and II. Answer: D Topic: Household Production, Underground Economic Activity Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 61) When calculating GDP, underground economic activity is A) the production of goods and services in the home. B) that portion of the time when we are enjoying leisure activities and not producing marketable goods. C) the part of the economy purposely hidden. D) an aspect of the quality of life, such as health and life expectancy. Answer: C Topic: Underground Economic Activity Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 62) Which of the following is NOT included in real GDP? A) production of services, such as the services of hair dressers B) production of goods that last less than a year, such as production of hot dogs C) production that takes place in the underground economy D) production of goods that last more than a year, such as a pair of roller blades Answer: C Topic: Underground Economic Activity Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 63) Because pollution reduces economic welfare, on this count real GDP as measured A) decreases as pollution increases. B) increases to take into account the expenditures that will be made in the future to clean up the pollution. C) overstates economic welfare. D) understates economic welfare. Answer: C Topic: Environmental Quality Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 78 Copyright © 2014 Pearson Education, Inc.

64) In the post World War II period, considerable growth in total production took place in the United States. But at the same time, businesses were dumping their waste into the Great Lakes with minimal cost to themselves, significantly polluting the bodies of water as a result. This occurrence is an example where A) real GDP gives an overly positive view of economic welfare. B) real GDP gives an overly negative view of economic welfare. C) investment would have been a better measure of total production. D) the pollution counts as a final good. Answer: A Topic: Environmental Quality Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 65) Which of the following would lead GDP to overstate economic welfare? A) the existence of home-cooked meals B) restaurant workers that under-report tip income C) a self-employed CPA who takes a longer than normal vacation D) electric utilities that switch to burning coal because of higher natural gas prices and thereby create more acid rain pollution Answer: D Topic: Environmental Quality Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 66) Pollution is a by-product of some production processes, so on this count real GDP as measured A) is adjusted downward to take into account the pollution. B) is adjusted upward to take into account the expenditures that will be made in the future to clean up the pollution. C) tends to overstate economic welfare. D) tends to understate economic welfare. Answer: C Topic: Study Guide Question, Environmental Quality Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

67) Which of the following is NOT a reason that real GDP is a poor measure of a nation's economic welfare? A) Real GDP omits measures of political freedom. B) Real GDP does not take into account the value of people's leisure time. C) Real GDP does not include the underground economy. D) Real GDP overvalues household production. Answer: D Topic: Study Guide Question, Household Production Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 68) Which of the following statements about the comparison between GDP in China and in the United States is correct? A) Using the exchange rate to value China's GDP in dollars shows that China's GDP per person exceeds the GDP per person in the United States. B) Using purchasing power parity prices to value China's GDP in dollars shows that China's GDP per person exceeds the GDP per person in the United States. C) China's GDP per person is higher using purchasing power parity prices rather than the exchange rate when valuing China's GDP in dollars. D) None of the above answers are correct because they are all false statements. Answer: C Topic: Study Guide Question, International Comparisons Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 69) What we produce during our working time is ________ as part of GDP and the enjoyment we gain from our leisure time is ________ as part of GDP. A) included; not included B) included; included C) not included; included D) not included; not included Answer: A Topic: GDP and Economic Welfare Comparisons Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

4 News Based Questions "As the credit crisis unfolded over the past year, one of the few certainties in the global economy seemed to be China's ability to plough on regardless of double-digit growth rates...The ...crisis has also focused ...on the need to update a growth model that...is still dependent on assembling goods for export without adding much value and on heavy industries that create pollution. Chinese companies have continued to find new foreign markets for their products...several other factors point to a slowing property market...production of steel, cement and air conditioners was down... Retail sales have risen by 23 per cent in each of the last two months". Beijing's Burden, www.FT.com, by Geoff Dyer, Sept. 23, 2008 1) According to the article, ________ are expected to contribute ________ to China's real GDP in 2008. A) exports and consumption; positively B) consumption and government spending; negatively C) exports and investment; negatively D) rental income and investment; negatively Answer: A Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 2) According to the article, ________ can be expected to ________ this year. A) exports; increase B) consumption; decrease C) imports; decrease D) net interest income; decrease Answer: A Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 3) According to the article, ________ is expected to increase and add to China's ________ component of GDP. A) retail sales; consumption B) retail sales; investment C) rental income; investment D) rental income; exports Answer: A Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication

Canada's economy expanded by...0.1 percent in the second quarter...further evidence that the economy has stalled...following a first quarter slip in gross domestic product. The second quarter figures fell well below forecasts of a 0.7 per cent growth in real GDP. Exports....fell for the fourth consecutive quarter. The accumulating gloom is increasingly discouraging business investment. Consumer spending remains strong and corporate profits were at their highest since 2004. "The sources of strength in the second quarter are clearly unsustainable," said Sal Gautieri, senior economist at BMO capital markets. Canada Avoids Fall into Recession, www.FT.com, by Christopher Mason, August 30, 2008 4) According to the article, the best description of Canada's position in the business cycle is A) at a peak B) at a trough C) in an expansion D) in a recession Answer: A Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 5) According to the article, ________ in ________ have contributed to Canada's ________ change in real GDP. A) increases; consumption and exports; expected B) decreases; exports and investment; unexpected C) increases; consumption and investment; unexpected D) decreases; exports and government spending; expected Answer: B Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 6) It is estimated that in 2007, Mexico had a population of 110 million and Brazil had a population of 190 million. At the same time, Mexico's GDP was $1 trillion while Brazil's was $1.31 trillion. These data show that A) Brazil had a healthier economy than did Mexico. B) Mexico's GDP per person was lower than was Brazil's GDP per person in 2007. C) Mexico's GDP per person was $9090 in 2007. D) Brazil's GDP per person was $5300 in 2007. Answer: C Topic: GDP Growth Rate Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

7) It is estimated that in 2007, Mexico had a population of 110 million and GDP of $1 trillion. In 2006, Mexico's population was 104 million and GDP was $839 billion. Per GDP person ________ by ________ between 2006 and 2007 in Mexico. A) increased; $1038 B) increased; 5 percent C) decreased; $2013 D) decreased; 5 percent Answer: A Topic: GDP Growth Rate Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 8) The following data describe Mexico's economy in 2007. Government spending $210 billion Investment $210 billion Exports $272 billion Imports $283 billion GDP 1 trillion Population 110 million From the data, we can conclude that ________ in Mexico in 2007. A) Consumption totaled $591 billion B) Net exports totaled -$11 billion. C) GDP per person equalled $2000 D) Imports were the largest component of GDP Answer: A Topic: GDP Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

9) The following data describe France's economy in 2008. Consumption 234 billion euros Government expenditure 93 billion euros Investment 88 billion euros Exports 128 billion euros Imports 137 billion euros From the data, we can conclude that in France A) net exports totaled -11 billion euros. B) GDP equaled 424 billion euros. C) GDP equaled 680 billion euros. D) Net exports totaled 265 billion euros. Answer: A Topic: GDP Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 10) The following data are estimates describing Ireland's economy in 2006 and 2007 (in millions of euros, in constant prices): 2006 2007 Consumption 84,000 89,000 Government expenditure 24,000 26,000 Investment 48,000 48,000 Exports 142,000 151,000 Imports 123,000 128,000 Subsidies 1,800 1,900 Taxes 500 500 Ireland's real GDP in 2007 was ________ million euros. A) 442,000 B) 186,000 C) 188,400 D) 163,000 Answer: B Topic: GDP Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

11) The following data are estimates describing Ireland's economy in 2006 and 2007 (in millions of euros, in constant prices): 2006 2007 Consumption 84,000 89,000 Government expenditure 24,000 26,000 Investment 48,000 48,000 Exports 142,000 151,000 Imports 123,000 128,000 Subsidies 1,800 1,900 Taxes 500 500 In 2007, Ireland's net exports was ________ million euros. A) 23,000 B) -23,000 C) 279,000 D) 149,100 Answer: A Topic: GDP Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 12) The following data are estimates describing Ireland's economy in 2006 and 2007 (in millions of euros, in constant prices): 2006 2007 Consumption 84,000 89,000 Government expenditure 24,000 26,000 Investment 48,000 48,000 Exports 142,000 151,000 Imports 123,000 128,000 Subsidies 1,800 1,900 Taxes 500 500 Which of the following is true regarding Ireland's economy? A) The change in GDP from 2006 to 2007 represented a peak in the business cycle. B) GDP decreased from 2006 to 2007. C) Net exports decreased from 2006 to 2007. D) Consumption was 48 percent of Ireland's GDP in 2007. Answer: D Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills

"Life expectancy is exceptionally high in Japan. Scores for political freedom and civil liberties approach those of peer countries in Europe...equality of opportunity is extremely weak. The country also possesses one of the longer working weeks." Japan's GDP was estimated to be $4.2 trillion (purchasing power parity) and the population was 127.4 million. "Driven by its attractive climate, Brazil performs substantially better on Life Satisfaction than Material Wealth. High international demand for Brazil's commodities and raw materials has produced a sustained economic expansion since 2004, which in turn has led to job creation, wage growth and relatively low inflation. Brazilians report that they control their own lives to a substantial degree." Brazil's GDP was estimated to be $1.7 trillion (purchasing power parity) and 190 million in 2006. www.prosperity.com 13) According to the article, we can conclude that the standard of living A) is higher in Brazil because its citizens feel more control over their lives and have experienced job and wage growth. B) is higher in Japan because their life expectancy is longer. C) is higher in Japan because its GDP is higher. D) might be higher in Japan because it has a higher per capita real GDP but other factors such as Brazilians' satisfaction with their lives and economic growth should be considered when determining economic well being. Answer: D Topic: GDP and Economic Welfare Comparisons Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 14) According to the information, Japan's real GDP per person A) is higher than Brazil's and therefore we can definitely conclude that economic well-being is higher in Japan. B) is $33,000. C) is lower than Brazil's, but its real GDP is higher which makes standard of living higher in Japan. D) cannot be expected to change much given the other factors affecting GDP growth including political freedom and life expectancy. Answer: B Topic: GDP and Economic Welfare Comparisons Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

15) "German economic growth slowed ... Economic growth slowed to 0.3 percent from 0.5 percent. Expansion was driven by exports... (and) household consumption added ...to growth. As unemployment declines and disposable incomes increase, household spending may also gain momentum. www.bloomberg.com, August 23, 2007 We can conclude that the German economy A) is at the peak of the business cycle. B) has entered the expansion phase of the business cycle. C) has slowed due to a decline in investment or government spending. D) is in the recession phase of the business cycle. Answer: C Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 16) The data show Argentina's GDP (using purchasing power parity) in billions of dollars. Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 GDP($) 182 209 235 255 277 274 294 324 340 333 338 330 300 333 373 420 470

The data show that A) Argentina's economy was in a recession from 2004 through 2006. B) Argentina's economy was in a recession in 2001 and 2002. C) GDP per person more than doubled between 1990 and 2006. D) Argentina's economy reached a peak in 1996. Answer: B Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 17) The data show Argentina's GDP (using purchasing power parity) in billions of dollars. Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 GDP($) 182 209 235 255 277 274 294 324 340 333 338 330 300 333 373 420 470

The data show that A) Argentina's economy reached a peak in 1998. B) GDP per person increased between 1990 and 2006. C) Argentina's potential GDP doubled between 1990 and 2006. D) Argentina's economy entered a recession in 2000. Answer: A Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 87 Copyright © 2014 Pearson Education, Inc.

18) The following data show Uruguay's GDP using purchasing power parity in billions of dollars. Year GDP($)

2000 26.1

2001 25.8

2002 23.3

2003 24.3

2004 27.9

2005 30.1

2006 33.9

2007 37.2

2008 40.2

Using the data, we can conclude that A) Uruguay's economy reached a peak in 2000. B) GDP per person in Uruguay almost doubled between 2000 and 2008. C) potential GDP in Uruguay doubled between 2000 and 2008. D) Uruguay's economy was entered a recession in 2008. Answer: A Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 19) The following data show Uruguay's GDP using purchasing power parity in billions of dollars. Year GDP($)

2000 26.1

2001 25.8

2002 23.3

2003 24.3

2004 27.9

2005 30.1

2006 33.9

2007 37.2

2008 40.2

Using the data, we can conclude that A) the standard of living did not change in Uruguay between 2000 and 2008. B) Uruguay entered a recession in 2001. C) potential GDP decreased in 2001. D) Uruguay's economy reached a peak in 2005. Answer: B Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 20) The following data show Uruguay's GDP using purchasing power parity in billions of dollars. Year GDP($)

2000 26.1

2001 25.8

2002 23.3

2003 24.3

2004 27.9

2005 30.1

2006 33.9

2007 37.2

2008 40.2

Using the data, we can conclude that A) Uruguay's economy entered a recession in 2005. B) Uruguay's standard of living increased steadily between 2000 and 2008. C) potential GDP more than doubled between 2000 and 2008. D) Uruguay's economy reached a trough in 2002. Answer: D Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 88 Copyright © 2014 Pearson Education, Inc.

5 Essay Questions 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: Gross Domestic Product Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Communication 2) How does the production of a U.S. firm located in France affect U.S. GDP? How does the production of a French firm located in Ohio affect U.S. GDP? Answer: U.S. GDP includes all production in the United States, regardless of who owns the factors of production used. Therefore, the production by the U.S. firm in France won't be counted in U.S. GDP because the production does not take place in the United States. However, the production by the French firm in the United States will be counted as part of U.S. GDP because the production has taken place in the United States. Topic: Gross Domestic Product Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 3) Why are only final goods and services included in measuring GDP? Give examples to complete your answer. Answer: We purposely leave intermediate goods or services out of our calculation of GDP so we don't double count. Examples of this are not counting the tires produced by Firestone that are then sold to Ford to be placed on their new cars. If we counted the tires when they were produced by Firestone and then also counted them when they were part of the Ford, we would be double counting them. Topic: Final Good Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

4) 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: Final Good Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) 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 or paper used by a publisher to publish a book are examples of intermediate goods. Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 6) Neither intermediate goods nor used goods are included in GDP. Explain why these expenditures are not included in GDP. Answer: Intermediate goods and used goods are not included in the measurement of GDP because they do not represent final expenditures on goods and services produced within the relevant time period. Intermediate goods are inputs used in the production of final goods and services. To count them twice would be double counting and inflate the level of GDP. Used goods already have been counted in GDP during the year in which they were produced. They were not produced in the current time period and therefore are not included in GDP. Topic: Intermediate Goods and Used Goods Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7) 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 expenditures 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: Total Expenditure Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 90 Copyright © 2014 Pearson Education, Inc.

8) How do firms and households interact within the context of the circular flow model? Answer: Households are the owners of the factors of production. Firms purchase these factors in the factor market. They use these factors to produce goods and services which are sold to households in the goods market. Households are paid for the services of the factors of production and use this income to pay for the goods and services. Topic: Circular Flow Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 9) 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 (as income) all 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: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 10) 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, which is paid to the households that own the firms. 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: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 11) 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: Capital and Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

12) Explain how gross investment, depreciation, net investment, and the capital stock are related. Answer: The change in the capital stock equals net investment and net investment equals gross investment minus depreciation. Topic: Capital and Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 13) What is the relationship between gross investment, net investment, and depreciation? Which measures the change in the capital stock? Answer: Gross investment minus depreciation equals net investment. Gross investment is all the investment made during the year. Depreciation is the wear and tear on capital from its use and obsolescence. The "depreciation part" of gross investment goes to replace old, worn out capital and so net investment is the change in the capital stock. Topic: Capital and Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 14) Explain the relationship among the capital stock, gross investment, net investment, and depreciation. Answer: The capital stock is the total quantity of plant, equipment, buildings and inventories. Some of this capital stock is always depreciating or wearing out. During a year a firm will purchase new capital. The amount of capital purchased is gross investment. The amount of gross investment minus the amount of depreciation during a year is net investment. So net investment is the change in the capital stock from one period to the next. Topic: Capital Stock and Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 15) Explain the difference between the capital stock, gross investment, depreciation, and net investment. Answer: The capital stock is the total quantity of plant, equipment, buildings, and inventories. Gross investment is the purchase of new capital. Depreciation is the wearing out and scrapping of capital. Net investment equals gross investment minus depreciation. The change in the capital stock from one period to the next equals net investment. Topic: Capital and Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

16) 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: Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 17) "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: Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 18) Investment, as included in GDP, consists of what? Answer: Investment is the purchase of new capital goods such as tools, instruments, machines, buildings, and additions to inventories. Investment does not include the purchase or sale of stocks and bonds. Topic: Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 19) 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: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

20) "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: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 21) List the components of the expenditure approach to measuring GDP. Answer: The expenditure approach measures GDP by adding final expenditures, so the components are personal consumption expenditure, gross private investment, government expenditures on goods and services, and net exports. Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 22) List and compare the four components of the expenditure approach to calculating GDP. Answer: The 4 parts can be summarized according to the formula GDP = C + I + G + (X - M). The first part, C, is consumption expenditure, which measures household spending and is the largest component accounting for around 70 percent of GDP. The next category, I, is investment and refers to the purchase of new capital, the purchase of new homes and changes in inventories. This fluctuates a great deal but generally accounts for 15 to 20 percent of GDP. Next is G, which government expenditure on goods and services. This component includes purchases by all levels of government on new goods and services and is about 20 percent of GDP. The final category, (X - M), is net exports. In it, exports are added and imports are subtracted. This component is typically negative in the United States because we typically run a trade deficit. It is generally around -1 to -5 percent or so of GDP. Topic: Expenditure Approach to GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

23) Explain how GDP is measured according to the expenditure and income approaches. Answer: GDP is measured using the expenditure approach and 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 compensation of employees, net interest, rental income of persons, corporate profits, and proprietors' income. 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 and then depreciation is added. Any statistical discrepancy is added to (or subtracted from) GDP calculated using the income approach. Topic: Expenditure Approach and Income Approach Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 24) How does the income approach measure GDP? Answer: The incomes approach adds the compensation of employees, net interest, rental income, corporate profits and proprietors' income to give net domestic income at factor cost. Then indirect taxes and depreciation are added. Finally, subsidies are subtracted to obtain GDP. Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 25) 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. Topic: Income Approach, Adjustments Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 95 Copyright © 2014 Pearson Education, Inc.

26) 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, Depreciation Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 27) 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 and Nominal GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 28) 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 and Nominal GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills

29) 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 and Nominal GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 30) What is the relationship between actual and potential real GDP? Answer: Real GDP equals potential GDP when all resources are fully employed and there are no shortages that lead to inflation. Real GDP can be greater than potential GDP and can be less than potential GDP. During a business cycle, real GDP cycles around potential GDP. During an expansion, real GDP rises above potential GDP and during a recession real GDP falls below potential GDP. Topic: Actual and Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 31) Explain the relationship between real GDP and potential GDP during the two phases of the business cycle. Answer: During an expansion the level of real GDP eventually surpasses potential GDP, reaches a peak and subsequently falls below potential GDP during a recession eventually reaching a trough. Topic: Actual and Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 32) Explain the relationship between potential GDP and real GDP in the United States since the early 1960s. You do not need to tell what happened during any specific year; just describe the general relationship. Answer: Potential GDP has grown over the period, albeit at a slower rate over the past 3 decades, while the level of real GDP has fluctuated around potential GDP throughout. Topic: Actual and Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

33) What is a business cycle? Answer: The business cycle is the recurrent but irregular upward and downward movements in production and jobs. A downward movement is called a recession and an upward movement is called an expansion. At the top of the cycle, when an expansion gives way to a recession, is a peak. At the bottom of the cycle, when a recession gives way to an expansion, is a trough. Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 34) List and explain the two phases and two turning points of the business cycle. Answer: The economy is defined as being an expansion when real GDP is increasing and in a recession when real GDP decreases for at least two consecutive quarters. Between expansion and recession the economy reaches a peak defined as a local maximum in the level of real GDP. A trough is the opposite of a peak where real GDP hits a local minimum as the economy goes from being in a recession to being in an expansion. Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 35) What is a recession? Answer: A recession is a period of time during which real GDP decreases, so that the growth rate of real GDP is negative, for at least two successive quarters. A recession occurs starts after a peak in the business cycle and ends before a trough in the business cycle. During a recession, real GDP falls below potential GDP. Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 36) Explain the business cycle by describing the phases and turning points. Answer: The business cycle has two phases, the expansion where GDP is increasing and the recession where GDP is declining for at least two consecutive quarters. There are two turning points, the peak, where an expansion ends and a recession begins, and the trough, where a recession ends and an expansion begins. Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

37) Why does real GDP have limitations in determining economic welfare? Answer: First economic welfare is a broad concept of economic well-being that entails all goods and services not just those measured by GDP. These include production in the home and within the underground economy. Secondly, items such as leisure time are all aspects that are highly desirable and count for economic welfare yet are not measured by GDP. Lastly, environmental quality is highly desired yet real GDP growth could actually reduce the quality of the environment. So for all these reasons, economic growth is not totally determined by real GDP. Topic: Economic Welfare Comparisons Skill: Conceptual Status: Revised AACSB: Reflective Thinking 38) Explain how our economic welfare depends upon our level of real GDP per person but there might not be a one-to-one relationship between economic welfare and real GDP per person. Give examples of things that can effect one but not the other. Answer: Although GDP has a significant impact on our economic welfare, it is not a perfect measure of economic welfare. GDP omits some factors that affect our economic welfare. 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. All of these factors influence the quality of our life and hence our economic welfare. Indeed, occasionally a change will affect GDP and economic welfare 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 economic welfare will increase. Or, if there is an increase in production that creates massive amounts of pollution, GDP increases even though economic welfare likely decreases. Topic: Economic Welfare Comparisons Skill: Conceptual Status: Revised AACSB: Communication 39) "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 economic welfare 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 economic welfare. For instance, factors such as household production, underground production, leisure time, and environmental quality all affect economic welfare and all are omitted from real GDP per person. Although real GDP per person is an important factor in determining a country's economic welfare, it is not the only factor. Topic: Economic Welfare Comparisons Skill: Conceptual Status: Revised AACSB: Communication

40) 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, are productive activities but do 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, are not reported to the government and hence are 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: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 41) What would happen to measured GDP if more people started hiring workers to do house 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: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 42) 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: GDP and Underground Economic Activity Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 43) Explain how underground economic activity affects measurement of GDP. Answer: The underground economy are transactions hidden from the government, either because they are illegal or to avoid taxes. Because the underground economy is hidden from the government, it is not included in GDP and so GDP is smaller than it otherwise would be. Topic: GDP and Underground Economic Activity Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

44) While studying with your friend, your friend states, "Our leisure time increases GDP but lowers our economic welfare 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 economic welfare. People enjoy their leisure time and therefore having more leisure time raises their economic welfare. Topic: GDP and Leisure Time Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 45) If you buy a 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: GDP and Leisure Time Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

6 Numeric and Graphing Questions 1) Assume a small nation has the following statistics: its consumption expenditure is $15 million, investment is $2 million, government purchases of 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 purchases of 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: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills Item Consumption expenditure Investment Government expenditure on goods and services Exports of goods and services Imports of goods and services

Billions of dollars 6,258 1,623 1,630 998 1,252

2) 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: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

3) On January 1, 2010, United Delivery had trucks valued at $1.3 million. During 2010, United Delivery purchased new trucks valued at $500,000. If the value of the trucks on December 31, 2010 was $1.5 million, what is the amount of its net investment and its depreciation during 2010? Answer: Net investment is the change in the capital stock from one period to the next. For United Delivery, net investment equals $1.5 million - $1.3 million = $200,000. Net investment also equals gross investment minus depreciation, so 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 Stock and Investment Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 4) Using a graph, draw and label the phases and turning points of the business cycle. Answer:

The figure shows a business cycle. Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

7 True or False 1) When IBM, an American firm, produces computer chips in another country, this production is not included in U.S. GDP because the production did not take place in the United States. Answer: TRUE Topic: Gross Domestic Product Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) The circular flow diagram shows that the flow of payments to the factors used to produce goods and services exceeds the flow of payments for final goods and services. Answer: FALSE Topic: Circular Flow Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 3) The circular flow diagram shows only the aggregate expenditures measure of GDP. Answer: FALSE Topic: Circular Flow, Aggregate Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 4) The circular flow shows that aggregate spending is larger than aggregate income because people save. Answer: FALSE Topic: Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) When gross investment is greater than depreciation, then the nation's capital stock increased. Answer: TRUE Topic: Capital and Investment Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 6) Net investment equals gross investment minus depreciation. Answer: TRUE Topic: Net Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 104 Copyright © 2014 Pearson Education, Inc.

7) If depreciation exceeds gross investment, net investment is negative. Answer: TRUE Topic: Net Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 8) The expenditure approach to measuring GDP includes firms' spending on wages. Answer: FALSE Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 9) Intermediate goods and services are one of the largest components of the expenditure approach to measuring GDP. Answer: FALSE Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 10) To calculate GDP using the expenditure approach, in part it is necessary to add exports and subtract imports. Answer: TRUE Topic: Expenditure Approach, Net Exports Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 11) To calculate GDP when using the income approach, you must add indirect business taxes and depreciation. Answer: TRUE Topic: Income Approach Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 12) The largest component of income is proprietors' income. Answer: FALSE Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

13) A productivity growth slowdown can be shown as year-to-year fluctuations of real GDP around potential GDP. Answer: FALSE Topic: Productivity Growth Slowdown Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 14) Real GDP fluctuates from year to year but is always below potential GDP. Answer: FALSE Topic: Real and Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 15) A business cycle is the pattern of short-run upward and downward movements in production and jobs. Answer: TRUE Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 16) Phases and turning points of the business cycle are expansion, peak, recession and trough. Answer: TRUE Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 17) The business cycle progresses from an expansion to a peak to a recession and then to a trough. Answer: TRUE Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 18) A recession occurs when real GDP decreases for at least 6 months. Answer: TRUE Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

19) An expansion ends when the economy hits a trough and then enters a recession. Answer: FALSE Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 20) To measure economic welfare, one needs only to measure real GDP. Answer: FALSE Topic: Economic Welfare Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 21) The omission of household production causes actual economic production to be underestimated. Answer: TRUE Topic: GDP and Household Production Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 22) Household production is not measured in the GDP. Answer: TRUE Topic: Household Production Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 23) All economic activity in the underground economy represents the production of illegal goods and services. Answer: FALSE Topic: GDP and Underground Economic Activity Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 24) The underground economy means that GDP will overstate the actual level of economic welfare. Answer: FALSE Topic: GDP and Underground Economic Activity Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

25) If a measure of real GDP could include the value of leisure time, measured real GDP would increase. Answer: TRUE Topic: GDP and Leisure Time Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 26) The fact that prices for similar goods differ across nations complicates comparisons of real GDP across countries. Answer: TRUE Topic: GDP and Purchasing Power Parity Prices Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

8 Extended Problems

Item Wages paid Consumption expenditure Taxes Transfer payments Profits Investment Government expenditure Exports Imports

Amount (millions of dollars) 100 120 40 15 35 30 50 30 40

1) The table above shows the transaction in Pinkland last year: a) Calculate Pinkland's GDP. b) What approach did you use to make this calculation? Answer: a) GDP = C + I + G + (X - M) = $120 + $30 + $50 + ($30 - $40) = $190 million. b) The expenditure approach is used, which measures GDP as C + I + G + (X - M). Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Real GDP (trillions of yen) 478 483 484 489 499 516 525 519 520 534 536

2) The table above shows Japan's real GDP between 1991 to 2001. a) Draw a figure with Japan's real GDP from 1991 to 2001. b) In the previous 30 years, the growth rate of Japan's potential GDP was 6 percent a year. On your graph, show the path that potential GDP would have followed if its GDP in 1991 was equal to potential GDP and the growth rate of potential GDP had been maintained in 1991-2001. c) Show the Lucas wedge on your figure. Answer:

a) See the figure above. b) Potential GDP is illustrated in the figure above. Potential GDP in 1991 is assumed to equal real GDP in 1991. Then, projected GDP levels for subsequent years are calculated by multiplying potential GDP in the previous year by 1.06. For example, in 1992, potential GDP equals 478 trillion yen × 1.06 = 507 trillion yen; potential GDP in 1993 equals 507 trillion yen × 1.06 = 537 trillion yen; and so on. 110 Copyright © 2014 Pearson Education, Inc.

c) The figure above shows the Lucas wedge as the darkened area. The Lucas wedge shows that the loss of output accumulated in Japan in 1991-2001 that resulted from a slowdown in the growth rate of real GDP was 1,575 trillion yen. Topic: Lucas Wedge Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 9 Appendix: Graphs in Macroeconomics 1) To see how variables evolve over time we use A) a scatter graph. B) an evolution plot. C) a cross-section plot. D) a time-series graph. Answer: D Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

2) The figure above shows a A) two-variable time-series graph. B) time-series graph. C) scatter diagram. D) regression. Answer: B Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 3) On a time-series graph, time is typically shown A) as an area. B) along the x-axis. C) along the y-axis. D) as an implicit variable held constant. Answer: B Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

4) The horizontal axis on a time-series graph A) measures the variable being graphed. B) measures units of time such as years. C) runs parallel to the y-axis. D) measures how the variable being graphed changes. Answer: B Topic: Time-Series Graphs Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills

5) The figure above shows a time-series graph. The horizontal axis measures ________ and the vertical axis measures ________. A) time; x-values B) time; the variable of interest C) the variable of interest; time D) y-values; the variable of interest Answer: B Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

6) 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. Answer: B Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 7) A trend shows A) the degree of correlation between two variables. B) the general tendency for a variable to rise or fall. C) the scale used to measure to variables. D) the increases in one variable. Answer: B Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 8) Trend refers to A) the scale used on the x- and y-coordinates. 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. Answer: D Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 9) Which of the following is TRUE regarding a trend? I. A cross section graph shows trends. II. A time-series graph shows trends. III. A scatter plot shows trends over time. A) I B) II C) I and II D) II and III Answer: B Topic: Time-Series Graphs Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 114 Copyright © 2014 Pearson Education, Inc.

10) Which type of graph is used to identify trends? A) time-series B) scatter diagram C) cross-section D) None of the above answers is correct. Answer: A Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 11) Which of the following is correct about a time-series graph? I. The x-axis measures time. II. A time-series graph can reveal if there is a trend in the variable. A) only I B) only II C) both I and II D) neither I nor II Answer: C Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 12) 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 graph C) trend in a variable; unrelated variables D) relationship between two variables; a trend in a variable Answer: A Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 13) A time-series graph showing total production in Japan from 1960 to 2010 shows a positive trend. It is the case that total production A) fell every year between 1960 and 2010. B) rose every year between 1960 and 2010. C) was lower in 2010 than in 1960. D) was higher in 2010 than in 1960. Answer: D Topic: Time-Series Graphs Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 115 Copyright © 2014 Pearson Education, Inc.

14) Using the above figure, during which month was the price for crude oil the highest? A) July B) December C) May D) October Answer: B Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 15) Using the above figure, during which of the following periods does the price of crude oil have a downward trend? A) May to July B) May to November C) July to October D) October to December Answer: C Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

16) Using the above figure, during which of the following periods does the price of crude oil shows an upward trend? A) May to November B) May to July and October to December C) July to October D) April to November Answer: B Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

17) According to the graph in the figure above, which year experienced the most rapid change in employment? A) Year 2 B) Year 3 C) Year 4 D) Year 5 Answer: B Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

18) 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. Answer: A Topic: Time-Series Graphs Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 19) Inflation climbed steadily from 1952 to 1972. A time-series graph with inflation on the vertical axis and time (in years) on the horizontal axis would show A) the rate of inflation as a horizontal line. B) that inflation was following a decreasing trend line. C) that inflation had a positive trend. D) that inflation had a negative trend. Answer: C Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

20) A time-series graph displays the price of copper. The slope of the line is negative for periods when the A) price of copper is falling. B) price of copper is rising. C) quantity of copper is falling. D) price of copper is low and not changing. Answer: A Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 21) A graph shows the wages of factory workers. The slope of the line is positive for periods when the wage rate is A) falling. B) rising. C) high but not rising any higher. D) low. Answer: B Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 22) On a time-series graph with a ratio scale, A) the slope of the line is negative when the level of the variable is rising. B) the same distance along the vertical axis measures different amounts of the variable. C) time is plotted on the vertical axis rather than the horizontal axis. D) it is impossible to determine a trend. Answer: B Topic: Ratio Scale Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 23) You believe that the total amount of goods produced in the United States has generally increased over the years. In a time-series graph illustrating the total amount produced, you expect to find A) an upward trend. B) no relationship between time and the amount of goods produced. C) an inverse relationship between time and the amount of goods produced. D) a linear relationship. Answer: A Topic: Study Guide Question, Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 119 Copyright © 2014 Pearson Education, Inc.

10 Appendix: Essay Questions 1) 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(s) at each point in time. Second, it shows whether the variable(s) is rising or falling as time passes. Third, it shows the speed with which the variable(s) is changing. Finally, it shows the presence—or absence—of a trend. Topic: Time Series Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Communication 11 Appendix: Numeric and Graphing Questions

1) The figure above shows the price of a DVD player from 2003 to 2007. 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 Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

12 Appendix: True or False 1) A time series graph can show both the level of a variable and the speed with which the variable changes over time. Answer: TRUE Topic: Graphing Data Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) A trend is a general tendency for a variable to increase or decrease over time. Answer: TRUE Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 13 Mathematical Note: Chained-Dollar Real GDP 1) Valuing the quantities of goods produced in consecutive years using prices in both years and then averaging the percentage changes in the value of output is part of the ________ method of calculating real GDP. A) base-year B) moving-base-year C) chain-weighted output index D) fixed quantities/variable prices Answer: C Topic: Real GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) The chain-weighted output index method ________. A) is used to calculate the value of nominal GDP B) values the quantities produced in a year at the prices of the base year C) shows that real GDP increases every year D) uses the prices of two adjacent years to calculate the real GDP growth rate Answer: D Topic: Chain-Weighted Growth Rate Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

3) Which of the following is TRUE regarding the chain-weighted output index method? I. It is the method used to measure the growth rate of nominal GDP. II. It uses data from the current year and from the previous year. III. It is a method of measuring the growth rate of real GDP. A) I and II B) II and III C) I and III D) I, II and III Answer: B Topic: Chain-Weighted Growth Rate Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 4) The chain-weighted output index A) uses only the current year's prices to calculate growth in real GDP. B) uses prices for the current year and the previous year to calculate growth in real GDP. C) must be calculated only every other year. D) is an inaccurate way to measure growth in real GDP and so has been replaced by the "nominalto-real" index. Answer: B Topic: Chain-Weighted Growth Rate Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) The chain-weighted output index method of calculating real GDP compares A) compares the quantities of goods produced in consecutive years using prices in both years and averaging the percentage changes in the value of output. B) quantities produced in different years using prices from a year chosen as a reference period. C) quantities produced in different years with the prices that prevailed during the year in which the output was produced. D) prices at different points in time using a sample of goods that is representative of goods purchased by households. Answer: A Topic: Chain-Weighted Growth Rate Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

6) The chain-weighted output index method of measuring real GDP is based on A) using current prices rather than base year prices B) averaging the market value of the expenditures over a two year period and then comparing with a base period. C) using the prices of two adjacent years to calculate the growth rate of real GDP. D) averaging the nominal and real measures of GDP to come up with a more accurate figure. Answer: C Topic: Chain-Weighted Growth Rate Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7) At 2012 prices, the value of production in 2013 was 6 percentage points higher than in 2012. At 2013 prices, the value of production in 2013 was 4 percentage points higher than in 2012. Using the chain-weighted output index, real GDP is ________ in 2013 than in 2012. A) 10 percent greater B) 5 percent greater C) 7.5 percent greater D) 4 percent smaller Answer: B Topic: Chain-Weighted Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 8) Real GDP in 2012 is $10 trillion. Between 2012 and 2013, using 2012 prices, GDP grew 3 percent and using 2013 prices real GDP grew 7 percent. Using the chain-weighted output index method, real GDP in 2013 is ________ trillion. A) $10.5 B) $11 C) $10.1 D) $12.72 Answer: A Topic: Chain-Weighted Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 5 Monitoring Jobs and Inflation 1 Employment and Unemployment 1) The working-age population is defined as the number of A) people over the age of 16 who are not in jail, hospital, or other institution. B) people who have a job. C) people working full-time jobs who are over the age of 16. D) people looking for work. Answer: A Topic: Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 2) The working-age population can be divided into two groups, A) people in the labor force and people looking for work. B) people in the labor force and people with a job. C) people looking for work and those in the armed forces. D) people in the labor force and people who are not in the labor force. Answer: D Topic: Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 3) The total number of people aged 16 years and over who are not institutionalized ________. A) equals the number of employed plus unemployed B) is the working-age population C) does not include students D) is the labor force Answer: B Topic: Working Age Population Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

4) Which of the following statements is incorrect? A) The labor force is equal to the number of people employed plus the number of people unemployed. B) The working age population includes everyone over the age of 16. C) The unemployment rate is the number of persons who are unemployed divided by the labor force then times 100. D) The labor-force participation rate is the labor force divided by the working-age population then times 100. Answer: B Topic: Working Age Population Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 5) Which of the following is NOT included in the working-age population? A) discouraged workers B) people waiting to be called back to a job after being laid off C) retirees under the age of 55 D) people in prison Answer: D Topic: Working Age Population Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 6) All people in the working-age population can be divided into A) labor force participants. B) employed, unemployed, or not in the labor force. C) either over-employed or under-employed. D) potential employees. Answer: B Topic: Working Age Population Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 7) Suppose the working age population in Tiny Town is 100 people. If 25 of these people are NOT in the labor force, the ________ equals ________. A) unemployment rate; 25/100 × 100 B) unemployment rate; 25/75 × 100 C) labor force; 75 D) labor force; 25/100 × 100 Answer: C Topic: Working Age Population Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 2 Copyright © 2014 Pearson Education, Inc.

8) The labor force is the sum of the A) working-age population and the number of unemployed people. B) number of employed people and the working-age population. C) number of employed people and the number of unemployed people. D) total population and the number of unemployed people. Answer: C Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 9) The labor force is defined as A) people with full time jobs. B) workers with jobs and unemployed workers. C) all people capable of work. D) All of the above answers are correct. Answer: B Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 10) The ________ equals the number of ________. A) labor force; persons over 16 years old B) labor force; unemployed and employed persons C) working age population; employed persons D) unemployment rate; people unemployed Answer: B Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 11) The labor force is defined as people A) who have a job or are looking for a job. B) in the working-age population who have a job. C) in the working-age population who have a full time job. D) who are 16 years of age or older. Answer: A Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

12) Which population category equals the sum of employed and unemployed people? A) working-age population B) labor force C) young and institutionalized D) not in the labor force Answer: B Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 13) The ________ is the total number of people aged 16 years and older (and not in jail, hospital or institutional care) while the ________ is the number of people employed and the unemployed. A) labor force; working-age population B) labor force participation rate; labor force C) working-age population; labor force D) working-age population; labor force participation rate Answer: C Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 14) The labor force is defined as the number of A) people 16 and over. B) unemployed people. C) people with jobs, both part-time and full-time. D) people who are employed and unemployed. Answer: D Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 15) The labor force is defined as the A) number of people over 16 years of age. B) number of people who are working. C) sum of employed and unemployed people. D) number of people in blue-collar jobs. Answer: C Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

16) The labor force is defined as the A) number of employed people plus the number of unemployed people. B) number of people who are working. C) number of people who are working in labor-type jobs. D) number of union members who are working. Answer: A Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 17) The labor force includes A) only the number of people employed. B) discouraged workers. C) only the number of people unemployed. D) both employed and unemployed workers. Answer: D Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 18) 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. Answer: A Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 19) Full-time students and prisoners are ________. A) not in the labor force B) in the labor force C) counted as discouraged workers D) counted as unemployed Answer: A Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

20) Which of the following is NOT considered to be in the labor force? A) a student who works part-time B) a person who is not working but who has tried to find a job in the past week C) a person who is waiting to start a new job in the next 30 days D) a person who is not working and who has not tried to find a job Answer: D Topic: Labor Force Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 21) In an economy, 42 million people are in the labor force, 38 million are employed, and 47 million are of working age. How many people are not in the labor force? A) 19 percent B) 9 million C) 5 million D) 4 million Answer: C Topic: Labor Force Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 22) If the number of people unemployed is 100, the number of people employed is 1000, and the working-age population is 1400, then the labor force is A) 1000. B) 1100. C) 1400. D) 1500. Answer: B Topic: Labor Force Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 23) The official U-3 unemployment rate A) includes persons without a job who have made efforts in the last week to find a job. B) includes persons without a job, whether they are actively searching for work or not. C) counts discouraged workers as unemployed. D) counts people with part-time jobs who want full-time jobs as unemployed. Answer: A Topic: Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

24) The official U-3 unemployment rate includes the total number of people who A) have jobs or are currently looking for jobs. B) are available and looking for work but 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. Answer: B Topic: Unemployment Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 25) Which of the following people would be counted as is 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 Answer: A Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 26) Which of the following best fits the definition of unemployed? A) retired and not working B) working less than a full work week C) not working but looking for a job D) not working and not looking for work Answer: C Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

27) Using the definition of unemployment, which of the following individuals would be unemployed? A) A full-time student quits school, enters the labor market for the first time, and searches for employment. B) Because of the increased level of automobile imports, an employee of General Motors is laid off but expects to be called back to work soon. C) Because of a reduction in the military budget, your next door neighbor loses her job in a plant where nuclear warheads are made and must look for a new job. D) All of these individuals are unemployed. Answer: D Topic: Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 28) Which of the following people would be considered unemployed by the Bureau of Labor Statistics? I. Mrs. X retires from her job at the age of 55 and does not look for another job. II. Mr. Y was laid off from his job as a welder, but expects to be rehired in 8 months. A) I only B) II only C) both I and II D) neither I nor II Answer: B Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 29) Using the official measure of unemployment, which of the following people is considered unemployed? A) a part-time worker who wishes to work full time B) a person who gave up looking for jobs because he or she was discouraged about his or her job prospects C) a person who has been searching for work, but turns down a job paying a lower wage rate than desired D) a person who is working but expects to be laid off at the end of the month Answer: C Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

30) Using the official measure of unemployment, which of the following would NOT be counted as unemployed? A) a person who is not working but who has tried to find a job in the past week B) a person who is waiting to be called back to a job after having been laid off C) a person who performs traditional housework and does not work outside the home for pay D) a person who is waiting to start a new job in the next 30 days Answer: C Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 31) The unemployment rate is the ________ who are unemployed. A) number of people in the labor force B) percentage of people in the labor force C) percentage of people in the country D) percentage of the working-age population Answer: B Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 32) The unemployment rate is calculated as A) [(labor force) ÷ (population)] × 100. B) [(unemployment) ÷ (population)] × 100. C) [(unemployment) ÷ (labor force)] × 100. D) [(labor force) ÷ (unemployment)] × 100. Answer: C Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical 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. Answer: B Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills

34) The unemployment rate equals the number of A) unemployed workers multiplied by 100. B) unemployed workers divided by the population then multiplied by 100. C) unemployed workers divided by the number of employed workers then multiplied by 100. D) unemployed workers divided by the labor force then multiplied by 100. Answer: D Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 35) The unemployment rate equals A) (the number of unemployed workers)/(the number of employed + unemployed workers) × 100. B) (the number of unemployed workers)/(the civilian population) × 100. C) (the number of unemployed workers)/(the U.S. population older than 16 years of age) × 100. D) (the number of unemployed + employed workers)/(U.S. population older than 16 years of age) × 100. Answer: A Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 36) The unemployment rate equals A) the total number of people without jobs in a given period. B) the percentage of the population not currently employed. C) the rate of change in unemployment figures from one period to another. D) the percentage of the labor force currently unemployed. Answer: D Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 37) The unemployment rate is found by dividing the number of unemployed people by the A) number of working individuals, and multiplying by 100. B) number of the working-age population, and multiplying by 100. C) sum of working individuals plus unemployed workers, and multiplying by 100. D) number in the labor force, and dividing by 100. Answer: C Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills

38) The ________ is calculated as the number of people ________ divided by the labor force multiplied by 100. A) unemployment rate; unemployed B) employment-to-population ratio; unemployed C) employment rate; employed D) employment-to-population ratio; in the working age population Answer: A Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 39) The unemployment rate is defined as the A) number of people not working. B) percentage of the population not working. C) percentage of the labor force not working. D) percentage of the working-age population not working. Answer: C Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 40) The unemployment rate is measured as A) the number of people that want to work but cannot find jobs out of the entire population. B) the percentage of people in the labor force who are unemployed. C) an indicator to determine long-term economic growth. D) an indicator for potential inflation. Answer: B Topic: Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

41) To calculate the unemployment rate, which of the following are necessary pieces of information? I. the number of unemployed persons II. the population III. the number of people in the labor force IV. the working age population A) I, II III and IV B) I and II C) I and III D) I and IV Answer: C Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 42) 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. Answer: C Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 43) Which labor market statistic tends rise during recessions and fall during expansions? A) the unemployment rate B) the labor-force participation rate C) the employment-to-population ratio D) aggregate hours Answer: A Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

44) Suppose the population of Tiny Town is 100 people and the working age population is 70. If 10 of these people are unemployed, the unemployment rate in Tiny Town is A) 10 percent. B) 10/70 × 100. C) 10/80 × 100. D) There is not enough information provided to calculate the unemployment rate. Answer: D Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 45) The population of Tiny Town is 100 people and the labor force is made up of 75 people. If 5 of these people are unemployed, the unemployment rate is A) 5/100 × 100. B) 5/80 × 100. C) 5/75 × 100. D) There is not enough information provided to calculate the unemployment rate. Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 46) Based on the following data for the country of Tiny Town, the unemployment rate equals: Population = 100 Labor force = 80 Number of employed persons = 70 Number of discouraged workers = 5 A) 10/100 × 100. B) 10/80 × 100. C) 15/80 × 100. D) 5/70 × 100. Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

47) In an economy, 23 million people are employed and 2 million are unemployed, but 5 million part-time workers would prefer full-time work. What is the unemployment rate? A) 23.2 percent B) 6.7 percent C) 8 percent D) 25 percent Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 48) Assume that the total labor force is 100 individuals with 10 unemployed. The unemployment rate is ________. Now assume that 10 people drop out of the labor force and that 10 remain unemployed. The new unemployment rate is ________. A) 9 percent; 10 percent B) 10 percent; 9 percent C) 10 percent; 11 percent D) 11 percent; 10 percent Answer: C Topic: Unemployment Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 49) Which of the following decreases the official U-3 unemployment rate? A) Workers leave the labor force. B) More women enter the labor force and seek jobs. C) Young people graduate from college and start to look for their first full-time job. D) None of the above because they all increase or do not change the unemployment rate. Answer: A Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 50) During a recession, people drop out of the labor force because they are unable to find a job. All else the same, this A) increases the official U-3 unemployment rate. B) decreases the official U-3 unemployment rate. C) does not change the official U-3 unemployment rate. D) increases the official U-3 unemployment rate and the labor force participation rate. Answer: B Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 14 Copyright © 2014 Pearson Education, Inc.

51) In August 2012, the official U-3 unemployment rate dropped from 8.3 percent to 8.1 percent. This change could have been caused by A) unemployed workers giving up looking for a job. B) part-time workers getting a full-time job. C) full-time workers becoming part-time workers. D) workers who had previously given up looking for a job starting to look again. Answer: A Topic: Unemployment Rate Skill: Analytical Status: New AACSB: Analytical Skills 52) In the United States in 1996, the population was 265.5 million and the working age population was 200.6 million. There were 133.9 million people in the labor force and 126.7 of them were employed. The unemployment rate equaled ________. A) 7.2 percent B) 5.4 percent C) 3.6 percent D) 33 percent Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 53) Suppose there are 100 million in the labor force, and 6 million unemployed people. During the next month, 200,000 people lose their jobs and 300,000 find jobs. The new total of employed persons is ________ and the new unemployment rate is ________. A) 100.1 million; 5.8 percent B) 100 million; 6.1 percent C) 94.1 million; 5.9 percent D) 93.9 million; 6.1 percent Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

54) Suppose the working-age population is 220 million, the labor force is 150 million, and the unemployment rate is 10 percent. The number of unemployed people is A) 15 million. B) 22 million. C) 37 million. D) 7 million. Answer: A Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 55) Suppose initially that the working-age population is 220 million, the labor force is 150 million, and the official U-3 unemployment rate is 10 percent. 5 million new jobs are created and filled by 5 million people who had previously been discouraged workers. What is the new U-3 unemployment rate? A) 6.25 percent B) 6.7 percent C) 9.7 percent D) 8.7 percent Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 56) Between August 2011 and August 2012 the number of discouraged workers decreased from 977,000 to 844,000. Assuming the change resulted from discouraged workers starting to make specific efforts to find a job again, this change creates A) an increase to the U-3 unemployment rate. B) a decrease to the U-3 unemployment rate. C) no change to the U-3 unemployment rate. D) a decrease in the labor force participation rate. Answer: A Topic: Unemployment Rate Skill: Analytical Status: New AACSB: Analytical Skills

57) Between August 2011 and August 2012 the number of economic part-time workers decreased from 8.8 million to 8.0 million. Assuming the change resulted from economic parttime workers transitioning to full-time jobs, this change created A) no change to the U-3 unemployment rate. B) a decrease to the U-3 unemployment rate. C) an increase to the U-3 unemployment rate. D) an increase in the employment-to-population ratio. Answer: A Topic: Unemployment Rate Skill: Analytical Status: New AACSB: Analytical Skills 58) If the number of people unemployed is 100, the number of people employed is 1000, and the working-age population is 1400, then the unemployment rate is A) 6.6 percent. B) 10 percent. C) 9.1 percent. D) 7.1 percent. Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 59) 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? A) 9.0 percent B) 13.3 percent C) 11.4 percent D) 15.4 percent Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

60) Suppose there are currently 100 people unemployed, 1500 people employed, 1600 people in the labor force, and 2000 people in the working age population. The unemployment rate equals 100 times A) 100/1500. B) 100/1600. C) 100/2000. D) 1500/2000. Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 61) If the population is 300 million, with 70 million under the age of 16 and institutionalized, another 70 million not in the labor force, 10 million unemployed and 150 million employed, the unemployment rate is A) 23.3 percent. B) 6.7 percent. C) 6.25 percent. D) 26.7 percent. Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 62) 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? A) 100 million people B) 25 million people C) 20 million people D) 5 million people Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

Person A Now that the kids are in school for a full day, this person is looking for work and has interviewed for three jobs during the past two weeks. Person B This person has been laid off from a job but expects to be called back as soon as the economy improves. Person C This person has just graduated from college and will start a new job in three weeks. In the meantime this person will tour the great American beaches. Person D This person was laid off last year when new equipment was installed at the plant, reducing the number of workers needed. Shortly after being laid off, this person looked for a new job, was unable to find one and then stopped looking, even though this person still wants a job and is available for work. 63) The above table shows answers given by people interviewed in a government survey of households. Which individuals are considered to be a part of the labor force? A) C and D B) B, C, and D C) A, C, and D D) A, B, and C Answer: D Topic: Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 64) The above table shows answers given by people interviewed in a government survey of households. Which individuals are considered unemployed using the official U-3 unemployment rate? A) A, B, and C B) B, C, and D C) A, C, and D D) C and D Answer: A Topic: Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

65) The above table shows answers given by people interviewed in a government survey of households. Which individual or individuals are considered marginally attached? A) A B) B, C, and D C) A and D D) D Answer: D Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking Not working Want to work but Total Currently and looking no longer looking population employed for work for work (millions) (millions) (millions) (millions) 80 40 2 4 66) In the table above, the size of the labor force is A) 80 million. B) 46 million. C) 42 million. D) 40 million. Answer: C Topic: Labor Force Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 67) In the table above, the number of people officially unemployed is ________. A) 40 million B) 6 million C) 4 million D) 2 million Answer: D Topic: Population Survey Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

68) In the table above, the official U-3 unemployment rate is A) 50 percent. B) 15 percent. C) 10 percent. D) 5 percent. Answer: D Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 69) In the table above, the number of marginally attached workers is ________. A) 40 million B) 6 million C) 2 million D) 4 million Answer: D Topic: Marginally Attached Workers Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 70) The employment-to-population ratio equals A) (labor force)/(working-age population) × 100. B) (number of people employed)/(labor force) × 100. C) (number of people with full-time jobs)/(labor force) × 100. D) (number of people employed)/(working-age population) × 100. Answer: D Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 71) The employment-to-population ratio is defined as A) total employment divided by labor hours then multiplied by 100. B) the labor force divided by the working-age population then multiplied by 100. C) total employment divided by the labor force then multiplied by 100. D) total employment divided by the working-age population then multiplied by 100. Answer: D Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills

72) The employment-to-population ratio is equal to the number of A) unemployed people divided by the total population then multiplied by 100. B) employed people divided by the working-age population then multiplied by 100. C) employed people divided by the total population then multiplied by 100. D) unemployed people divided by the working age population then multiplied by 100. Answer: B Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 73) The percentage of people employed aged 16 years and older divided by the working-age population is known as the A) employment rate. B) employment-to-population ratio. C) labor force participation rate. D) working-age population ratio. Answer: B Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 74) The percentage of the people of working age who have jobs is called the ________. A) labor force B) inverse of the unemployment rate C) employment-to-population ratio D) employment-to-working-age-population ratio Answer: C Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 75) In August 2012, the employment-to-population ratio dropped from 58.4 percent to 58.3 percent. This change could have been the result of A) an increase in the working-age population. B) unemployed workers becoming part-time workers. C) unemployed workers becoming discouraged workers. D) discouraged workers starting to look for jobs again. Answer: A Topic: Employment-to-Population Ratio Skill: Analytical Status: New AACSB: Analytical Skills

76) In an economy, 43 million people are employed, 3 million are unemployed, and 4 million are not in the labor force. What is the employment-to-population ratio? A) 86 percent B) 92 percent C) 93 percent D) 6.5 percent Answer: B Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 77) Suppose the number of people employed is 25 million and the number of people in the labor force is 75 million. What is the employment-to-population ratio? A) 33 percent B) 25 percent C) 75 percent D) There is not enough information given to answer the question. Answer: D Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 78) If the number of people unemployed is 100, the number of people employed is 1000, and the working-age population is 1400, then the employment-to-population ratio is A) 78.6 percent. B) 75 percent. C) 71.4 percent. D) 66.6 percent. Answer: C Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

79) If the population is 300 million, with 70 million under the age of 16 and institutionalized, another 70 million not in the labor force, 10 million unemployed, and 150 million employed, the employment-to-population rate is A) 53.3 percent. B) 65.2 percent. C) 46.7 percent. D) 87.5 percent. Answer: B Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 80) Based on the following data for the country of Tiny Town, the employment-to-population ratio equals ________ multiplied by 100. Population = 200 Working age population = 100 Labor Force = 90 Number of employed persons = 75 A) 90/100. B) 75/200 C) 90/200. D) 75/100. Answer: D Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 81) From 1980 to 2000 the trend in the employment-to-population ratio was ________ and from 2000 to 2012 the trend was ________. A) upward; downward B) downward; downward C) upward; upward D) downward; upward Answer: A Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

Not working Want to work but Total Currently and looking no longer looking population employed for work for work (millions) (millions) (millions) (millions) 80 40 2 4 82) The labor force participation rate is the ratio of A) (the labor force divided by the working-age population) multiplied by 100. B) (the number of unemployed divided by the working-age population) multiplied by 100. C) (the labor force divided by the total population) multiplied by 100. D) (the number of unemployed divided by the labor force) multiplied by 100. Answer: A Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 83) The labor force participation rate is calculated as the A) labor force divided by the number of persons employed then multiplied by 100. B) number of persons unemployed divided by the labor force then multiplied by 100. C) labor force divided by the unemployment rate then multiplied by 100. D) labor force divided by the working age population then multiplied by 100. Answer: D Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 84) The labor force participation rate is percentage of the ________ who are in the labor force. A) people under age 65 B) working-age population C) people over age 16 D) population Answer: B Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

85) The labor force participation rate shows the percentage of A) people not working, but who want to work. B) people who are not actively participating in meaningful economic activity. C) new entrants into the labor force. D) non-institutionalized working-age people who are actually working or seeking employment. Answer: D Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 86) From 1980 to 2000 the trend in the labor force participation rate was ________ and from 2000 to 2012 the trend was ________. A) upward; downward B) downward; downward C) upward; upward D) downward; upward Answer: A Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 87) Which of the following pieces of information do you need to calculate the labor force participation rate? I. the number of employed persons II. the number of unemployed persons III. the population IV. the working age population A) I and II B) I and III C) I, II and III D) I, II and IV Answer: D Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

88) If the people who take early retirement are not counted in the working-age population, then A) the unemployment rate would be lower. B) the labor force participation rate would be less. C) the unemployment rate would be higher. D) the labor force participation rate would be higher. Answer: D Topic: Labor Force Participation Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 89) In August 2012, the labor force participation rate dropped from 63.7 percent to 63.5 percent. This change could have been caused by A) unemployed workers giving up looking for a job. B) full-time workers becoming part-time workers. C) unemployed workers getting full-time jobs. D) discouraged workers starting to look for jobs again. Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: New AACSB: Analytical Skills 90) In an economy, 40 million people are employed, 2 million are unemployed, and 8 million are not in the labor force. What is the labor force participation rate? A) 83 percent B) 84 percent C) 80 percent D) 87.5 percent Answer: B Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 91) If the labor force participation rate is rising and the working-age population is not changing, then the A) size of the labor force is rising. B) number of unemployed people is rising and the size of the labor force is falling. C) size of the labor force is falling. D) number of unemployed people is falling and the size of the labor force is rising. Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 27 Copyright © 2014 Pearson Education, Inc.

92) Suppose the labor force in Tiny Town is 100 people. If the ________ in Tiny Town is 150 people, the labor force participation rate equals ________ multiplied by 100. A) working age population; 100/150 B) working age population; 100/250 C) number of employed persons; 100/250 D) number of employed persons; 100/150 Answer: A Topic: Labor Force Participation Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 93) Suppose there are currently 100 people unemployed, 1500 people employed, and 2000 people in the working age population. The labor force participation rate equals 100 times A) 100/1500. B) 100/1600. C) 1500/2000. D) 1600/2000. Answer: D Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 94) If the number of people unemployed is 100, the number of people employed is 1000, and the working-age population is 1400, then the labor force participation rate is A) 78.6 percent. B) 71.4 percent. C) 64.3 percent. D) 66.6 percent. Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

95) 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 labor force participation rate? A) 0.68 percent B) 68 percent C) 85.7 percent D) 86.7 percent Answer: C Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 96) If the population is 300 million, with 70 million under the age of 16 and institutionalized, another 70 million not in the labor force, 10 million unemployed and 150 million employed, the labor force participation rate is A) 69.6 percent. B) 23.3 percent. C) 6.67 percent. D) 50 percent. Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Category Discouraged workers Unemployed workers Employed workers Population (16 years and over)

Number (millions) 15 40 100 225

97) In the above table, the working age population is A) 225 million. B) 100 million. C) 140 million. D) 155 million. Answer: A Topic: Population Survey Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

98) In the above table, the size of the labor force is A) 210 million. B) 155 million. C) 140 million. D) 100 million. Answer: C Topic: Population Survey Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 99) In the above table, the unemployment rate is A) 6 percent. B) 24 percent. C) 18 percent. D) 29 percent. Answer: D Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 100) In the above table, the labor force participation rate is A) 55 percent. B) 44 percent. C) 62 percent. D) 69 percent. Answer: C Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 101) In the above table, the employment-to-population ratio is A) 51 percent. B) 42 percent. C) 62 percent. D) 44 percent. Answer: D Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

102) In the above table, the number of marginally attached workers is A) 40 million. B) 55 million. C) 15 million. D) 100 million. Answer: C Topic: Marginally Attached Workers Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Component Under 16 Working full-time Working part-time Retired Unemployed

Number of people (millions) 50 90 30 40 5

103) Using the data in the above table, the unemployment rate is A) 4.0 percent. B) 4.16 percent. C) 5.55 percent. D) 28.0 percent. Answer: A Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 104) Using the data in the above table, the labor force is ________ million. A) 215 B) 120 C) 125 D) 165 Answer: C Topic: Labor Force Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

105) Using the data in the above table, the labor force participation rate is A) 66 percent. B) 58.1 percent. C) 75.7 percent. D) 96.0 percent. Answer: C Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Component Total population Working-age population Not in labor force Employed

Number of people 2600 2000 500 1300

106) Using the information in the table above, calculate the number of people in the labor force. A) 2500 B) 2100 C) 1500 D) 800 Answer: C Topic: Labor Force Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 107) Using the information in the table above, calculate the unemployment rate. A) 53.3 percent B) 30.8 percent C) 13.3 percent D) 7.7 percent Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

108) Using the information in the table above, calculate the employment-to-population ratio. A) 75 percent B) 65 percent C) 50 percent D) 23.2 percent Answer: B Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Number of people (millions) Total population 246 Working-age population 207 Labor force 139 Employed 133 Unemployed 6 Component

109) Using the information in the above table, the unemployment rate is A) 4.5 percent. B) 4.3 percent. C) 2.8 percent. D) 6.0 percent. Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 110) The labor force participation rate is A) 67.1 percent. B) 64.0 percent. C) 95.7 percent. D) 56 percent. Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

111) The employment-to-population ratio is A) 67 percent. B) 64 percent. C) 50 percent. D) 62 percent. Answer: B Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 112) An individual who has stopped looking for a job but has looked in the past and still wants a job is referred to as A) a contingent worker. B) a productive worker. C) a marginally attached worker. D) an unemployed worker. Answer: C Topic: Marginally Attached Workers Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 113) An individual who has stopped looking for a job because he is convinced that he cannot find a job is referred to as A) a contingent worker. B) a productive worker. C) a discouraged worker. D) an unemployed worker. Answer: C Topic: Discouraged Workers Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 114) A discouraged worker ________ counted as officially unemployed and ________ counted as in the labor force. A) is; is B) is; is not C) is not; is D) is not; is not Answer: D Topic: Discouraged Workers Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 34 Copyright © 2014 Pearson Education, Inc.

115) Discouraged workers ________ counted as officially unemployed because they ________. A) are; are not working B) are; are still in the labor force C) are not; are not qualified to work D) are not; are not actively seeking work Answer: D Topic: Discouraged Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 116) During a recession, the ________. A) number of discouraged workers decreases B) unemployment rate decreases C) employment-to-population ratio increases D) number of marginally attached workers increases Answer: D Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 117) Including marginally attached workers in the calculation of the unemployment rate would A) increase the reported rate. B) lower the reported rate. C) not change the reported rate. D) change the reported rate, but in an unpredictable manner. Answer: A Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 118) When an individual who has not been working but has been looking for work decides to terminate the search process, the official unemployment rate A) will fall. B) will rise. C) will remain unchanged. D) may fall or rise depending on whether or not the individual resumes his education. Answer: A Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

119) Marginally attached workers fall into which of the following population categories? A) employed B) unemployed C) labor force D) not in the labor force Answer: D Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 120) In August 2012, 40 percent of unemployed workers had been unemployed for 6 months or more. This long-term unemployment is of particular concern because A) long-term unemployment is the most costly type of unemployment. B) the U-3 unemployment rate no longer includes these workers in the measurement since they are long-term unemployed. C) the employment-to-population ratio no longer includes these workers in the measurement since they are long-term unemployed. D) the labor force participation rate no longer includes these workers in the measurement since they are long-term unemployed. Answer: A Topic: Long-Term Unemployment Skill: Conceptual Status: New AACSB: Analytical Skills 121) Who of the following is counted as unemployed? A) Rene, a retired chemist B) Homer, a full-time student at a vocational school C) Kim, a worker on strike from her company for a week D) Glenn, a student who just graduated from college last week and is currently looking for a job Answer: D Topic: Study Guide Question, Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

122) In a country with a working-age population of 150 million, 120 million workers are employed and 10 million workers are unemployed. What is the size of the labor force? A) 150 million B) 130 million C) 120 million D) 10 million Answer: B Topic: Study Guide Question, Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 123) In a country with a working-age population of 300 million, 230 million workers are employed and 40 million workers are unemployed. What is the labor force participation rate? A) 100 percent B) 90 percent C) 65 percent D) 5 percent Answer: B Topic: Study Guide Question, Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 124) In a country with a working-age population of 100 million, 70 million workers are employed and 5 million workers are unemployed. What is the labor force participation rate? A) 70 percent B) 5 percent C) 75 percent D) 7 percent Answer: C Topic: Study Guide Question, Labor Force Participation Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 125) In a country with a working-age population of 130 million, 90 million workers are employed and 10 million workers are unemployed. What is the unemployment rate? A) 5.0 percent B) 7.1 percent C) 7.7 percent D) 10.0 percent Answer: D Topic: Study Guide Question, Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 37 Copyright © 2014 Pearson Education, Inc.

2 Unemployment and Full Employment 1) Bob inherits a large sum of money from his dead uncle's estate. Bob decides to retire young, so he quits his job and heads to the Bahamas. Bob is an example of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) None of the above is correct. Answer: D Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 2) The three types of unemployment are A) voluntary, involuntary, and structural. B) voluntary, part-time, and cyclical. C) frictional, part-time, and involuntary. D) frictional, structural, and cyclical. Answer: D Topic: Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 3) Frictional unemployment A) includes discouraged workers. B) is voluntary part-time unemployment. C) is unemployment associated normal labor turnover. D) is unemployment associated with declining industries. Answer: C Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 4) Frictional unemployment is A) unemployment associated with business cycle recessions. B) unemployment associated with the changing of jobs in a changing economy. C) long-term unemployment. D) unemployment associated with declining industries. Answer: B Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 38 Copyright © 2014 Pearson Education, Inc.

5) This type of unemployment reflects the normal amount of unemployed workers who possess skills that will enable them to find another job. A) cyclical unemployment B) frictional unemployment C) structural unemployment D) None of the above answers is correct. Answer: B Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 6) Frictional unemployment includes A) unemployment caused by normal labor turnover associated with people leaving and entering the labor force. B) unemployment caused by industries moving overseas to better meet foreign competition. C) unemployment caused by a lack of education so that workers do not possess necessary job skills. D) unemployment caused by automation of the work place that displaces unskilled workers. Answer: A Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 7) Unemployment caused by the normal labor turnover is called ________ unemployment. A) part-time B) frictional C) involuntary D) cyclical Answer: B Topic: Unemployment Types Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 8) 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) irresponsible workers with poor work habits. Answer: B Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 39 Copyright © 2014 Pearson Education, Inc.

9) Which of the following correctly describes "frictional unemployment"? A) Frictional unemployment is due mainly to job losers. B) Frictional unemployment is due mainly to job leavers. C) Frictional unemployment occurs mainly during recessions. D) Frictional unemployment is a normal occurrence in a growing economy. Answer: D Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 10) Frictional unemployment comes about because of A) friction between labor and management. B) a mismatch between skills and available jobs. C) normal labor market turnover. D) a general economic slowdown. Answer: C Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 11) The type of unemployment created by the normal rate of reentry and entry into the labor force is A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. Answer: A Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 12) Unemployment caused by people voluntarily leaving their jobs is classified as A) part-time unemployment. B) cyclical unemployment. C) frictional unemployment. D) seasonal unemployment. Answer: C Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

13) Suppose the country of Tiny Town experienced frictional unemployment. This frictional unemployment would A) definitely signal that the country is in a recession. B) be considered a natural occurrence in a growing economy. C) signal that there are more job leavers than job losers. D) signal that the number of discouraged workers is growing. Answer: B Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 14) When an individual is frictionally unemployed, the unemployment arises in part from A) a short-term elimination of jobs because of a slowdown in business activity. B) individuals searching for appropriate employment. C) the permanent elimination of jobs because of a change in the structure of the economy. D) a reduction in the overall demand for workers' skills. Answer: B Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 15) Frictional unemployment increases when A) real GDP decreases and the unemployment rate rises. B) the number of workers who quit one job to find another increases. C) discouraged workers drop out of the work force. D) workers are replaced by machines and the unemployed workers do not have the skills to perform new jobs. Answer: B Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 16) To prevent frictional unemployment, we would have to A) eliminate recessions. B) eliminate the business cycle. C) prevent people from leaving their jobs. D) make sure everyone goes to college. Answer: C Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

17) A person quits her job in order to spend time looking for a better-paying job. This type of unemployment is an example of A) frictional unemployment. B) cyclical unemployment. C) seasonal unemployment. D) structural unemployment. Answer: A Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 18) An individual with good job prospects who is between jobs is best considered as A) structurally unemployed. B) cyclically unemployed. C) not in the labor force. D) frictionally unemployed. Answer: D Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 19) A recent accounting graduate from a major business school is searching for a place to begin his career as an accountant. This individual is best considered as A) structurally unemployed. B) seasonally unemployed. C) cyclically unemployed. D) frictionally unemployed. Answer: D Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 20) When a worker quits a job to look for a better job, A) structural and cyclical unemployment increase. B) structural unemployment decreases. C) cyclical unemployment increases. D) frictional unemployment increases. Answer: D Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

21) When a woman reenters the labor force and looks for a job after spending time at home raising a child, A) cyclical unemployment increases. B) structural unemployment decreases. C) frictional and cyclical unemployment increase. D) frictional unemployment increases. Answer: D Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 22) Students who leave school in the spring and look for work are one source of ________. A) structural unemployment B) cyclical unemployment C) frictional unemployment D) business-cycle fluctuations Answer: C Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 23) When a student finishes college and begins looking for work, A) cyclical unemployment increases. B) structural unemployment increases. C) frictional unemployment increases. D) frictional and cyclical unemployment increase. Answer: C Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 24) Which of the following most likely would decrease frictional unemployment? A) an increase in the number of high school and college graduates B) effective Internet-based employment services and job registries C) an expansion of unemployment compensation benefits D) All of the above would decrease frictional unemployment. Answer: B Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

25) Suppose that Matt quits a job with the XYZ Corporation in order to look for more rewarding employment. Matt would be best be considered as A) still being employed. B) included in the economy's "hidden employment." C) frictionally unemployed. D) cyclically unemployed. Answer: C Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 26) Catherine quit her job in order to look for a new one; therefore, she is best considered as A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed. Answer: A Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 27) Because of a bank merger, Ms. Davis lost her position as Vice President and had to seek work with other banks. Ms. Davis has the skills necessary to find a new job, thus she is best considered as A) frictionally unemployed. B) cyclically unemployed. C) structurally unemployed. D) naturally unemployed. Answer: A Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

28) Bill loses his job as a loan officer when the bank he works for is bought up by a larger financial institution. Bill has the skills necessary to find a new job, so as Bill searches for work he is best considered an example of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) a discouraged worker. Answer: A Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 29) The best example of a frictionally unemployed individual is A) Charles who has lost his job as an autoworker because of increased imports and can't find a good job that utilizes his skills. B) Mary who quit her job to find work closer to her home. C) Sam who lost his job as a real estate salesperson when the housing market went soft because of a recession. D) Sandy who has few skills and is no longer looking for work. Answer: B Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 30) Structural unemployment is A) associated with the normal changing of jobs in a dynamic economy. B) associated with the general downturns in the economy. C) associated with the general decline of specific industries. D) almost always short-term in nature. Answer: C Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 31) 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. Answer: A Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 45 Copyright © 2014 Pearson Education, Inc.

32) Structural unemployment is A) associated with the changing of jobs in a dynamic economy. B) associated with general downturns in the economy. C) associated with changes in technology that change required job skills. D) very short-term unemployment. Answer: C Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 33) Suppose that over a period of years the country of Quasiland switched from being an agriculturally-based economy to a technologically-based economy. As a result, many people lost jobs because they lacked the correct skills. As they search for new jobs, these people are part of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) discouraged workers. Answer: B Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 34) An individual is structurally unemployed if A) there is a recession and the individual is laid off. B) the individual wants to work just during certain months of the year. C) the individual quits a job in order to search for a better one. D) the individual lacks marketable job skills because technology has changed. Answer: D Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 35) Which statement correctly describes "structural unemployment?" A) Structural unemployment occurs mainly during recessions. B) Structural unemployment is also called "frictional unemployment." C) Structural unemployment occurs even when the economy is at the natural unemployment rate. D) The amount of structural unemployment depends on normal labor turnover. Answer: C Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

36) Unemployment caused by changes in technology is called ________ unemployment. A) structural B) frictional C) techno D) cyclical Answer: A Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 37) Structural unemployment A) falls during the expansion phase of the business cycle. B) falls as the pace of technological progress increases. C) generally lasts longer than frictional unemployment. D) falls when the government provides more generous unemployment compensation benefits. Answer: C Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 38) Suppose that the number of jobs in the fishing industry decreases but the number of jobs in the travel industry increases. Initially, ________. A) the economy remains at full employment B) structural unemployment increases C) there is a shortage of workers in both sectors D) cyclical unemployment increases Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 39) 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 A) frictional unemployment. B) structural unemployment. C) frictional and cyclical unemployment. D) cyclical unemployment. Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 47 Copyright © 2014 Pearson Education, Inc.

40) The nation's structural unemployment will increase when A) bad economic policies send the economy into a recession. B) there is influx into the labor market of new college graduates. C) there is an increase in post-Christmas layoffs of workers. D) an increase in textile imports displaces older textile workers who do not have the skills necessary to find new jobs. Answer: D Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 41) A major characteristic of structural unemployment that differentiates it from frictional unemployment is that structural unemployment A) exists only during a recession. B) exists in an expansion whereas there is no frictional unemployment in an expansion. C) is a short-term problem. D) usually lasts longer than frictional unemployment. Answer: D Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 42) When the economy switches production toward services and away from manufacturing and workers in the manufacturing industry are permanently laid off, A) frictional unemployment decreases. B) structural unemployment increases. C) cyclical unemployment increases. D) frictional and cyclical unemployment increase. Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

43) Suppose the country of Tiny Town decided to open its borders to free trade. As a result, a number of its workers lost their jobs to international competition and can't find new jobs because their skills don't match what is required for job openings. The workers who lost their jobs and searched for new ones are best be considered part of A) frictional unemployment. B) structural unemployment C) cyclical unemployment. D) discouraged workers. Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 44) In the 1990s, video recordings were made primarily on tapes. However, in the 2000s DVDs became increasingly popular, leading to a sharp decline in video tapes. As a result, many people who manufactured tapes lost their jobs and didn't have the skills necessary to work making DVDs. This occurrence is best consider an example of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) underemployment. Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 45) How would you best describe a manufacturing employee who has been fired because he was replaced by a robot (new technology) and does not have the skills necessary to help operate the robot? A) job leaver B) entrant/reentrant C) cyclically unemployed D) structurally unemployed Answer: D Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

46) Which of the following individuals is the best example of a structurally unemployed worker? A) a recent college graduate who has entered the labor force B) an individual who has been laid off from his job because of a business cycle recession C) an automobile worker who has lost her job because of an increase in automobile imports and does not have the skills currently needed by businesses D) an individual who quits one job in the hope of finding a better job Answer: C Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 47) Ms. Krupsky has shorthand and typing skills and still finds herself unemployed. In today's economy, Ms. Krupsky is an example of what type of unemployment? A) cyclical unemployment B) frictional unemployment C) structural unemployment D) None of the above answers is correct. Answer: C Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 48) Andrew just lost his job as a corkscrew operator since his company has found a machine to perform his work tasks. Andrew did not have the skills needed to operate the machine. Andrew has searched for a new job for 6 months and continues to search. Therefore, Andrew is considered to be A) frictionally unemployed. B) a discouraged worker. C) cyclically unemployed. D) structurally unemployed. Answer: D Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

49) Nicholas does not possess marketable job skills; therefore, he is A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed. Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking Person A This person has just graduated from high school and is working at a part-time job but wants a full-time job. Person B At the age of 45, this person was laid off from the automobile industry when new equipment was installed and the person did not have the skills necessary to use the equipment. This person now is searching to find a new job. Person C As a result of this person's spouse being transferred to a job in a new city, this person is looking for a new job. Person D This person just graduated from college and is looking for an engineering job. In the meantime, this person is working full-time waiting tables. 50) The above table shows answers given by people interviewed in the Current Population Survey. Which people are structurally unemployed? A) A, B, C, and D B) A, B, and C C) B and C. D) A, B, and D Answer: C Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

51) The above table shows answers given by people interviewed in the Current Population Survey. Which person is cyclically unemployed? A) A B) B C) C D) None of the people Answer: D Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 52) Cyclical unemployment A) is due mainly to job leavers. B) may increase or decrease during an expansion. C) occurs when technology improvements change job requirements. D) fluctuates over the business cycle. Answer: D Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 53) Which type of unemployment increases during a recession? A) cyclical unemployment B) frictional unemployment C) structural unemployment D) the natural unemployment rate Answer: A Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 54) Cyclical unemployment A) is always present in an economy. B) is higher during an expansion. C) decreases during a recession. D) fluctuates over the business cycle. Answer: D Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

55) Cyclical unemployment is the result of A) technological change or foreign competition. B) normal labor market turnover. C) the business cycle. D) irresponsible workers with poor work habits. Answer: C Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 56) Cyclical unemployment occurs when A) individuals enter into the labor market making the rounds of potential employers. B) individuals with skills no longer valued in the labor market cannot find employment. C) individuals give up the search for employment. D) a business cycle recession decreases employment. Answer: D Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 57) Unemployment caused by the fluctuation of the business cycle is called ________ unemployment. A) structural B) recession-related C) frictional D) cyclical Answer: D Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 58) Unemployment that is the result of recessions is called A) frictional unemployment. B) cyclical unemployment. C) downtime unemployment. D) structural unemployment. Answer: B Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

59) Suppose the country of Quasiland experienced a decrease in real GDP and people were laid off from their jobs. The people would be considered part of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) discouraged workers. Answer: C Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 60) The primary factor leading to cyclical unemployment is when A) businesses often discriminate in their hiring practices on the basis of age, sex, and race. B) the level of overall economic activity fluctuates. C) workers quit their jobs in order to look for higher paying employment. D) some workers do not have marketable job skills. Answer: B Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 61) If a worker is temporarily laid off because the economy is in a recession, A) frictional unemployment increases. B) structural unemployment increases. C) the size of the labor force rises. D) cyclical unemployment increases. Answer: D Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 62) A recession causes a decrease in the demand for housing, resulting in substantial layoffs in the construction industry. The people laid off are considered A) cyclically unemployment. B) frictionally unemployment. C) seasonally unemployment. D) structurally unemployment. Answer: A Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

63) If the economy enters an expansion, A) cyclical unemployment increases. B) structural unemployment increases. C) cyclical unemployment decreases. D) structural unemployment decreases. Answer: C Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 64) Cyclical unemployment A) is the major part of the natural unemployment rate. B) decreases during economic expansions. C) rises as a result of increased international competition. D) falls when unemployment compensation payments are increased. Answer: B Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 65) During an economic expansion, real GDP ________ and unemployment ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 66) An observer of the economy notices that over the past 12 months the unemployment rate has fallen from 7.0 percent to 6.5 percent. During the same time, the rate of growth in real GDP has been positive. From this information we might conclude that A) inflation is not occurring. B) an expansion is occurring in the economy. C) a recession is in progress. D) a trough in the business cycle will soon be reached. Answer: B Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

67) Cyclical unemployment ________. A) decreases during an expansion B) grows at the same rate as potential GDP C) is zero at a business-cycle trough D) decreases during a recession Answer: A Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 68) Cyclical unemployment ________ during expansions and ________ during recessions. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 69) Auto and steel workers commonly experience this type of unemployment in a recession. A) frictional unemployment B) cyclical unemployment C) structural unemployment D) natural unemployment rate Answer: B Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 70) If the economy enters a recession, A) frictional unemployment increases. B) structural unemployment decreases. C) cyclical unemployment increases. D) the number of workers on layoff decreases. Answer: C Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

71) Recessions and expansions affect most strongly which type of unemployment? A) frictional unemployment B) structural unemployment C) cyclical unemployment D) seasonal unemployment Answer: C Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 72) Mike has just been laid off from his construction job because consumers are not purchasing new homes because of the recession. Mike would be considered to be part of A) structural unemployment. B) cyclical unemployment. C) seasonal unemployment. D) frictional unemployment. Answer: B Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 73) Bill is a high-school drop out who lost his job in a fast food restaurant when the economy plunged into a recession. After 8 months, Bill is still looking for work. He is an example of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) the natural unemployment rate Answer: C Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 74) The best example of a cyclically unemployed individual is A) Charles who lost his job as a real estate salesperson when the housing market went soft because of a recession. B) Alice who quit her job to enter college. C) Mary who lost her job in the textile industry following a decrease in the tariff on textiles. D) Bob who has just graduated from college and is entering the labor market. Answer: A Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 57 Copyright © 2014 Pearson Education, Inc.

75) Which of the following situations best describes an individual who is cyclically unemployed? A) Catherine is a ski instructor who is not working because it is summer. B) Matthew was an artillery man, but he has been unable to find work since he left the army. C) Nicholas was laid-off when orders for General Motors cars fell during a recession. D) Susan quit her job as a preschool teacher to try to find a better paying job. Answer: C Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 76) Full employment occurs when A) structural unemployment is zero. B) cyclical unemployment is zero. C) frictional unemployment is zero. D) cyclical and frictional unemployment are zero. Answer: B Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 77) Full employment occurs when A) there is no cyclical unemployment. B) there is no unemployment. C) there is no frictional unemployment. D) the unemployment rate is less than 5 percent. Answer: A Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 78) Full employment means that A) no one is unemployed. B) there is no cyclical unemployment. C) there is no cyclical or frictional unemployment. D) there is no structural or frictional unemployment. Answer: B Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

79) The economy is at full employment when A) there are no unemployed workers. B) all unemployment is frictional or structural. C) there are fewer unemployed workers than available jobs. D) all unemployment is cyclical. Answer: B Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 80) 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. Answer: A Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 81) Full employment occurs A) only if the unemployment rate is zero. B) only if the unemployment rate is equal to the natural unemployment rate. C) only if unemployment is equal to structural unemployment plus cyclical unemployment. D) None of the above answers are correct. Answer: B Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 82) 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. Answer: B Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

83) An economy is at full employment when ________. A) the unemployment rate is zero B) there is no frictional unemployment C) the unemployment rate equals the natural unemployment rate D) there is no structural unemployment Answer: C Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 84) Suppose the natural unemployment rate equals 6 percent and the current unemployment rate is 8 percent. We can conclude that A) there is no structural unemployment. B) there is no frictional unemployment. C) there is no cyclical unemployment. D) full employment is not occurring. Answer: D Topic: Full Employment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 85) Full employment means A) zero unemployment. B) only cyclical unemployment exists. C) only frictional and structural unemployment exists. D) None of the above answers are correct. Answer: C Topic: Full Employment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 86) When economists speak of full employment, they refer to the case in which the sum of frictional and structural unemployment is A) falling over time. B) equal to zero. C) equal to the actual amount of unemployment. D) greater than the level of deficient demand unemployment. Answer: C Topic: Full Employment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

87) When the economy is operating at full employment, the natural unemployment rate consists of only A) cyclical unemployment. B) frictional and structural unemployment. C) frictional and cyclical unemployment. D) structural and cyclical unemployment. Answer: B Topic: Full Employment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 88) An unemployment rate of zero percent cannot be expected because A) there are some people who do not want to work. B) there will always be discouraged workers. C) some portion of the labor force will always be between jobs. D) cyclical unemployment will always exist. Answer: C Topic: Natural Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 89) The natural unemployment rate I. occurs when only there is no cyclical unemployment present. II. is the unemployment rate when the economy is at potential GDP. A) I only. B) II only C) neither I nor II. D) I and II Answer: D Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 90) The natural unemployment rate A) falls with an increase in cyclical unemployment. B) rises with an increase in structural unemployment. C) rises with an increase in cyclical unemployment. D) rises with a decrease in frictional unemployment. Answer: B Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 61 Copyright © 2014 Pearson Education, Inc.

91) The unemployment rate is at the natural unemployment rate when A) frictional unemployment equals zero. B) structural unemployment equals zero. C) cyclical unemployment equals zero. D) all types of unemployment equal zero. Answer: C Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 92) 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. Answer: C Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 93) 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. Answer: D Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 94) The natural unemployment rate A) is a constant figure of about 4 percent. B) fluctuates with the rate of inflation. C) is the unemployment rate that occurs when the economy is at full employment. D) is equal to cyclical unemployment. Answer: C Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

95) If unemployment is at the natural rate, then there A) is no cyclical unemployment. B) is no frictional unemployment. C) will be cyclical and frictional unemployment but not structural unemployment. D) will be only cyclical unemployment. Answer: A Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 96) If unemployment equals the natural unemployment rate, then there A) is zero unemployment. B) is only frictional or structural unemployment. C) are no job openings existing at the time. D) is less than full employment. Answer: B Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 97) The natural unemployment rate A) occurs when the unemployment rate is 0 percent. B) is the unemployment rate when there is no structural unemployment. C) is the unemployment rate at full employment. D) is the unemployment rate when there is only cyclical unemployment. Answer: C Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 98) Full employment exists when A) there is only frictional and structural unemployment. B) the economy is at the natural unemployment rate. C) there is no cyclical unemployment. D) All of the above answers are correct. Answer: D Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

99) When the economy moves into and out of recessions and expansions, the unemployment rate fluctuates around the A) natural unemployment rate. B) structural unemployment rate. C) cyclical unemployment. D) frictional unemployment rate. Answer: A Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 100) The natural unemployment rate ________. A) is the same from year to year B) is greater than the actual rate of unemployment C) is the unemployment rate when there is no cyclical unemployment D) equals zero Answer: C Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 101) When cyclical unemployment increases and other things remain the same, ________. A) the natural unemployment rate increases B) the amount of frictional unemployment increases C) the amount of structural unemployment decreases D) the natural unemployment rate does not change Answer: D Topic: Natural Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 102) The relationship between the unemployment rate and the natural unemployment rate is that the unemployment rate A) fluctuates about the natural rate. B) equals the natural rate. C) is always below the natural rate. D) is always above the natural rate. Answer: A Topic: Natural Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

103) Suppose the economy is experiencing frictional unemployment of 1 percent, structural unemployment of 3 percent and cyclical unemployment of 4 percent. What is the natural unemployment rate? A) 3 percent. B) 4 percent. C) 5 percent. D) 7 percent. Answer: B Topic: Natural Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 104) Suppose that the natural unemployment rate is 4.5 percent and the actual unemployment rate is 3.5 percent. Then cyclical unemployment is A) 1 percent. B) -1 percent. C) 8 percent. D) 0 percent. Answer: B Topic: Natural Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 105) The natural unemployment rate A) estimated to be close to 9 percent in recent years in the United States. B) has been estimated to range between 4 percent and 6 percent in the United States in recent years. C) is attained whenever the unemployment rate is less than 5 percent because 95 percent employment is considered full employment. D) occurs when 100 percent of the labor force is employed. Answer: B Topic: Natural Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

106) Cyclical unemployment exists when A) frictional and structural unemployment is zero. B) real national income exceeds potential income. C) real GDP exceeds potential GDP. D) real GDP is less than potential GDP. Answer: D Topic: Potential GDP and Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 107) When real GDP is ________ potential GDP, the unemployment rate is ________ the natural unemployment rate. A) greater than; less than B) less than; equal to C) equal to; greater than D) greater than; greater than Answer: A Topic: Potential GDP and Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 108) Suppose that the unemployment rate equals 4.5 percent and that the natural unemployment rate is 5.5 percent. We can conclude that A) the output gap is negative. B) the output gap equals zero. C) the output gap is positive. D) we have mismeasured the natural unemployment rate. Answer: C Topic: Potential GDP and Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 109) In September 2012 the U.S. unemployment rate was 7.8 percent while the natural unemployment rate was 6 percent. The U.S. economy A) had a negative output gap. B) had a positive output gap. C) had an output gap of zero. D) was at full employment. Answer: A Topic: Potential GDP and Unemployment Skill: Analytical Status: New AACSB: Analytical Skills 66 Copyright © 2014 Pearson Education, Inc.

110) When the unemployment rate is less than the natural unemployment rate, A) the output gap is positive. B) the output gap equals zero. C) the output gap is negative. D) None of the above is possible because it is impossible for the unemployment rate to be less than the natural rate. Answer: A Topic: Potential GDP and Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 111) When more labor is unemployed than the amount at the natural unemployment rate, then real GDP ________ potential GDP. A) is equal to B) is less than C) is greater than D) cannot be compared to Answer: B Topic: Potential GDP and Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 112) The unemployment rate generally falls during ________ in the business cycle. A) a peak B) a recession C) a trough D) an expansion Answer: D Topic: Study Guide Question, Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 113) At the natural unemployment rate, there is no A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) unemployment. Answer: C Topic: Study Guide Question, Natural Rate of Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

114) If the economy is at full employment, A) the entire population is employed. B) the entire labor force is employed. C) the only unemployment is frictional unemployment plus discouraged workers. D) real GDP equals potential GDP. Answer: D Topic: Study Guide Question, Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 3 The Price Level, Inflation, and Deflation 1) An increase in the price level is defined as A) a recession. B) a growth boom. C) inflation. D) an expansion. Answer: C Topic: Inflation Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 2) Inflation is a problem when A) it is unpredictable. B) it causes the value of money to vary unpredictably. C) it causes resources to be diverted from productive uses. D) All of the above answers are correct. Answer: D Topic: Why Inflation Is a Problem Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 3) Unpredictable changes in the value of money, which brings about gains and losses, are a consequence of unpredictable changes in A) real GDP. B) unemployment rate. C) inflation. D) productivity. Answer: C Topic: Why Inflation Is a Problem Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 68 Copyright © 2014 Pearson Education, Inc.

4) The cost of inflation to society includes I. the opportunity costs of resources used by people to protect themselves against inflation. II. the diversion of productive resources to forecasting inflation. A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Why Inflation Is a Problem Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 5) The cost of inflation to society includes A) unpredictable changes in the value of money. B) higher interest rates paid by borrowers. C) higher interest rates paid by the government on its debt. D) the lost spending when people do not have enough money. Answer: A Topic: Why Inflation Is a Problem Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 6) In a period of rapid, unexpected inflation, resources can be lost A) when firms invest in research and development instead of forecasting inflation. B) when firms use resources to forecast inflation. C) because rapid inflation almost always turns into a hyperinflation. D) Both answers B and C are correct. Answer: B Topic: Why Inflation Is a Problem Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 7) Hyperinflation is defined as A) declining inflation rates. B) rising but low inflation rates. C) very high inflation rates. D) very low inflation rates. Answer: C Topic: Why Inflation Is a Problem Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

8) The Consumer Price Index is a measure of the average of the prices paid by ________ for a fixed basket of consumer goods and services. A) urban consumers B) all consumers C) urban wage earners and clerical workers D) consumers living in cities with a population greater than 100,000 Answer: A Topic: Consumer Price Index Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 9) The first step in measuring the CPI is to A) select the market basket. B) conduct a monthly survey. C) collect prices for the basket of goods and services. D) interview businesses. Answer: A Topic: Consumer Price Index Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 10) The consumer price index (CPI) A) compares the cost of the typical basket of goods consumed in period 1 to the cost of a basket of goods typically consumed in period 2. B) compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period. C) measures the increase in the prices of the goods included in GDP. D) is the ratio of the average price of a typical basket of goods to the cost of producing those goods. Answer: B Topic: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

11) If the basket of goods and services used to calculate the CPI cost $200 in the reference base period and $450 in a later year, the CPI for the latter year equals A) 200. B) 225. C) 325. D) 450. Answer: B Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 12) If the CPI basket costs $35 in the base period but costs $42, what is the CPI in the next period? A) 83.3 B) $42 C) 20 percent D) 120 Answer: D Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 13) Suppose the Consumer Price Index is 143.6. What does that number mean? A) On average, goods cost $143.60. B) On average, goods cost $243.60. C) Prices rose 143.6 percent over the reference base period, on average. D) Prices rose 43.6 percent over the reference base period, on average. Answer: D Topic: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 14) If the CPI is 120, this means that A) prices are 120 percent higher than in the reference base period. B) prices are 0.12 times higher than in the reference base period. C) prices are 20 percent higher than in the reference base period. D) the inflation rate must be positive. Answer: C Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

DVDs Bottled water

CPI basket quantity 10 discs 200 bottles

2003 price

2011 price

$16 per disc $1.00 per bottle

$12 per disc $1.25 per bottle

15) If 2003 is the reference base period, what is the price index for the CPI basket of goods for 2011 in the above table? A) 97.3 B) 102.8 C) 128.0 D) zero because the price of CDs fell and the price of water increased Answer: B Topic: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 2012 2013 Item Quantity Price Price Movie tickets 4 $5.00 $7.50 Bags of 2 $3.00 $3.00 popcorn Drinks of soda 4 $1.00 $1.50 16) The information in the table above gives the 2012 reference base period CPI basket and prices used to construct the CPI for a small nation. It also has the 2013 prices. What is the value of the CPI for the reference base period, 2012? A) 140 B) 133 C) 100 D) 75 Answer: C Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills

17) The information in the table above gives the 2012 reference base period CPI basket and prices used to construct the CPI for a small nation. It also has the 2013 prices. What is the value of the CPI for 2013? A) 140 B) 133 C) 100 D) 75 Answer: A Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills 18) The CPI basket contains 400 oranges and 800 pens. In the base year, the price of an orange is $1.00 and the price of a pen is $0.75. This year, urban consumers each buy 300 oranges at $2.00 each and 850 pens at $1.00 each. The CPI this year is ________. A) 1.60 B) 62.5 C) 160 D) 140 Answer: C Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 19) If the CPI basket of goods cost $200 in the reference base period and $450 in a later year, the CPI in the later year equals A) 225. B) 250. C) 300. D) 450. Answer: A Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

20) Using the notation Pt to designate this period's price level and Pt-1 to designate last period's price level, the formula for measuring the inflation rate from last period to this period is A) [(Pt - Pt - 1) / Pt] × 100. B) [(Pt -1 - Pt) / Pt - 1] × 100. C) [(Pt - Pt - 1) / Pt - 1] × 100. D) [(Pt -1 - Pt) / Pt] × 100. Answer: C Topic: Inflation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 21) Suppose the CPI last year is 121 and the CPI this year is 137. The correct method to calculate the inflation rate is A) (137 - 121)/100 = 0.16. B) 137 × 121 = 258. C) [(137 - 121)/121] × 100 = 13.2. D) (137/121) × 100 = 113.2. Answer: C Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 22) If the CPI was 132.5 at the end of last year and 140.2 at the end of this year, the inflation rate over these two years was A) 7.7 percent. B) 5.4 percent. C) 4.4 percent. D) 5.8 percent. Answer: D Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

23) If the CPI was 121.5 at the end of last year and 138.3 at the end of this year, the inflation rate over these two years was A) 10.2 percent. B) 13.8 percent. C) 12.2 percent. D) 16.8 percent. Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 24) If the CPI was 122.3 at the end of last year and 124.5 at the end of this year, the inflation rate over these two years was A) 1.8 percent. B) 2.5 percent. C) 22.5 percent. D) 18.0 percent. Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 25) If the CPI was 132.5 at the end of last year and 137.5 at the end of this year, the inflation rate over these two years was A) 3.6 percent. B) 3.8 percent. C) 5.0 percent. D) None of the above answers is correct. Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 26) At the end of last year the Consumer Price Index was equal to 163.8 and at the end of this year it was equal to 157.5. What is the inflation rate over this time period? A) 6.3 percent B) 4.0 percent C) 3.85 percent D) 10.1 percent Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 75 Copyright © 2014 Pearson Education, Inc.

27) If the price level last year was 220 and this year is 250, what is the inflation rate between the two years? A) 30 percent B) 13.6 percent C) 12.2 percent D) 20 percent Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 28) If this year the price level is 135 and last year it was 125, the inflation rate is A) 8 percent. B) 10 percent. C) 12 percent. D) none of the above Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 29) Suppose the price level this year is 150 and the price level last year was 125. The inflation rate between last year and this year was A) 20 percent. B) 2 percent. C) 16.6 percent. D) 1.6 percent. Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 30) Suppose that last year the Consumer Price Index was 124; this year it is 130.7. What was the inflation rate between these years? A) 30.7 percent B) 6.7 percent C) 5.4 percent D) 5.1 percent Answer: C Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 76 Copyright © 2014 Pearson Education, Inc.

31) If the CPI this year is 220 and was 200 in last year, the annual inflation rate between the two years is A) 5 percent. B) 10 percent. C) 20 percent. D) 2 percent. Answer: B Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 32) If the Consumer Price Index last year was 110 and 115 this year, the inflation rate is approximately A) 4.5 percent. B) 5.0 percent. C) 10.0 percent. D) 15.0 percent. Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 33) If the CPI for this year is 220 and the CPI for last year was 215, the inflation rate is A) just over 2 percent. B) 5 percent. C) just over 5 percent. D) 10 percent. Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 34) If this year's price level is 126 and last year's price level was 120, the inflation rate is ________. A) 0.95 percent a year B) 5 percent a year C) 6 percent a year D) 1.05 percent a year Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 77 Copyright © 2014 Pearson Education, Inc.

35) If the CPI at the end of last year was 100 and the CPI at the end of this year was 115, the inflation rate was A) 1.5 percent. B) 15 percent. C) 100 percent. D) 115 percent. Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 36) Last year's price level was 120 and since then there has been a 5 percent inflation. This year's price level is A) 125. B) 126. C) 130. D) none of the above Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Year 2008 2009 2010 2011

Price level 91 100 110 121

37) In the above table, the inflation rate between 2008 and 2009 is approximately A) 0.9 percent. B) 1 percent. C) 10 percent. D) 100 percent. Answer: C Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

38) In the above table, the inflation rate between 2009 and 2010 is approximately A) 9 percent. B) 10 percent. C) 100 percent. D) 110 percent. Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 39) In the above table, the inflation rate between 2010 and 2011 is approximately A) 10 percent. B) 11 percent. C) 121 percent. D) None of the above answers is correct. Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Year

Price index

1 2 3 4 5 6

100 117 125 120 D 150

Inflation rate (percent) A B C 8.3 E

40) In the table above, what inflation rate belongs in space A? A) 17.0 percent B) 6.8 percent C) 8.3 percent D) -4.0 percent Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

41) In the table above, what inflation rate belongs in space B? A) 17.0 percent B) 6.8 percent C) 8.3 percent D) -4.0 percent Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 42) In the table above, what inflation rate belongs in space C? A) 17.0 percent B) 6.8 percent C) 8.3 percent D) -4.0 percent Answer: D Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 43) In the table above, what price level belongs in space D? A) 125 B) 130 C) 140 D) 145 Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 44) In the table above, what inflation rate belongs in space E? A) 17.0 percent B) 6.8 percent C) 8.3 percent D) 15.4 percent Answer: D Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

Item Books Pens

2012 Quantity Price 10 $30 20 $1

2013 Quantity Price 8 $50 15 $2

45) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for 2012 and 2013 are listed in the table above. The reference base period for Dexter's CPI is 2012. What is the cost of the CPI basket in 2012? A) $430 B) $335 C) $320 D) $540 Answer: C Topic: The Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills 46) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for 2012 and 2013 are listed in the table above. The reference base period for Dexter's CPI is 2012. What is the CPI in 2012? A) 320 B) 1.00 C) 3.20 D) 100 Answer: D Topic: The Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills 47) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for 2012 and 2013 are listed in the table above. The reference base period for Dexter's CPI is 2012. What is the cost of the CPI basket in 2013? A) $430 B) $335 C) $320 D) $540 Answer: D Topic: The Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills

48) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for 2012 and 2013 are listed in the table above. The reference base period for Dexter's CPI is 2012. What is the CPI in 2013? A) 59 B) 129 C) 169 D) 102 Answer: C Topic: The Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills 49) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for 2012 and 2013 are listed in the table above. The reference base period for Dexter's CPI is 2012. What is the inflation rate in 2013? A) 69 percent B) zero C) 31 percent D) 2 percent Answer: A Topic: Inflation Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 50) If this year's price level exceeds last year's, A) the inflation rate between these years has been positive. B) the inflation rate is accelerating. C) deflation is occurring. D) no relative price changes are occurring. Answer: A Topic: Inflation and the Price Level Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

51) If the price level for the last three months has been 112, 125, and 126, we would say A) inflation has been constant over the three months. B) inflation was more rapid between the first and second month than between the second and third month. C) inflation was less rapid between the first and second month than between the second and third month. D) inflation has steadily increased over the three months. Answer: B Topic: Inflation and the Price Level Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 52) Assume the inflation rate falls from 4 percent to 2 percent. This means that A) the price level has fallen. B) the price level is increasing more slowly. C) the economy is experiencing deflation. D) real GDP is decreasing. Answer: B Topic: Inflation and the Price Level Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 53) If the inflation rate is negative, the price level in an economy is A) falling. B) rising slowly. C) constant. D) rising rapidly. Answer: A Topic: Inflation and the Price Level Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 54) Suppose that the price level was 100 in 2011, 110 in 2012, and 130 in 2013. Over these three years, A) deflation occurred at an accelerating rate. B) the inflation rate was positive but slowing. C) prices were stable. D) the inflation rate was positive and accelerating. Answer: D Topic: Inflation and the Price Level Skill: Analytical Status: Revised AACSB: Analytical Skills 83 Copyright © 2014 Pearson Education, Inc.

55) In China, suppose that the price level was 100 in 2011, 110 in 2012, and 120 in 2013. Over these three years, A) the inflation rate accelerated. B) inflation did not occur. C) prices were stable. D) the inflation rate was positive. Answer: D Topic: Inflation and the Price Level Skill: Analytical Status: Revised AACSB: Analytical Skills 56) In the United States, the inflation rate has A) remained almost constant over the past 25 years. B) risen and fallen since the 1970s. C) fallen as a result of OPEC oil price hikes. D) risen constantly over the past 30 years. Answer: B Topic: Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 57) Looking at inflation rates in the United States since the 1970s we see that A) inflation fell the most during the 1970s productivity slowdown. B) the highest inflation rates were the double digits during the 1990s. C) the inflation rate increased with the increased growth of the 1990s. D) the 1970s experienced the highest inflation rates. Answer: D Topic: Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 58) The biases in the CPI include the A) old goods, unemployment, and inflation biases. B) new goods, quality change, and substitution biases. C) old goods, new goods, and quality change biases. D) substitution, new goods, and old goods biases. Answer: B Topic: Biased CPI Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

59) The bias in the CPI typically A) overstates inflation. B) understates inflation. C) about half the time overstates and about half the time understates the inflation rate. D) cannot be measured or estimated. Answer: A Topic: Biased CPI Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 60) Which of the following means that the CPI overstates the actual inflation rate? A) new goods bias B) quality change bias C) outlet substitution bias D) All of the above cause the CPI to overstate inflation Answer: D Topic: Biased CPI Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 61) The biases in the CPI are A) not important since they are so small. B) important only to economists, not the real world. C) important since they effect nearly 1/3 of federal government spending. D) not important although they are large. Answer: C Topic: Biased CPI Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 62) The currently used method for calculating the CPI A) accounts for people increasing consumption of a good that falls in relative price. B) probably overstates inflation by about 1 percentage point. C) has no effect on government expenditures. D) None of the above answers are correct. Answer: B Topic: Biased CPI Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

63) Because of the biases in calculating the CPI, actual inflation is A) accurately measured. B) less than the measured inflation rate by about 1 percent per year. C) more than the measured inflation rate by about 1 percent per year. D) more than the measured inflation rate by about 1 percent per month. Answer: B Topic: Biased CPI Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 64) The currently used method for calculating the CPI A) accounts for people increasing consumption of a good that falls in relative price. B) probably overstates inflation by about 1 percentage point. C) has no effect on government expenditures. D) None of the above answers are correct. Answer: B Topic: Biased CPI Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 65) An example of the new goods bias in the CPI is the A) introduction of higher quality brakes as standard equipment on new cars. B) introduction of hybrid automobiles, vehicles that were not made until recently. C) decreasing popularity of SUVs as the price of gasoline has risen. D) switch from traditional car dealerships to low-cost Internet car buying services. Answer: B Topic: Biased CPI, New Goods Bias Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 66) If a new and better good replaced an older and less expensive good, then the price level measured by the CPI ________. A) is lower than the actual price level B) is higher than the actual price level C) might be either higher or lower than the actual price D) is the same as the actual price level because it measures the prices of the actual goods Answer: B Topic: The Biased CPI, New Goods Bias Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

67) Price indexes can overstate inflation because they A) omit some quality improvements. B) do not contain the prices of any used goods. C) do not contain the prices of foreign goods. D) do not contain the prices of services. Answer: A Topic: Biased CPI, Quality Improvement Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 68) As currently calculated, the CPI tends to overstate the true inflation rate because A) we cannot know what the true inflation rate is. B) it fails to correctly measure quality changes for some products. C) the market basket selected is inappropriate. D) the market basket fails to weigh housing costs sufficiently. Answer: B Topic: Biased CPI, Quality Improvement Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 69) The technique currently used to calculate the CPI implicitly assumes that over time consumers buy A) relatively more of goods whose relative prices are rising. B) relatively less of goods whose relative prices are rising. C) the same relative quantities of goods as in a base year. D) goods and services whose quality improves at the rate of growth of real income. Answer: C Topic: Biased CPI, Commodity Substitution Bias Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 70) Substitution bias in the CPI refers to the fact that the CPI A) takes into account the substitution of goods by consumers when relative prices change. B) takes no account of the substitution of goods by consumers when relative prices change. C) substitutes quality changes whenever they occur without taking account of the cost of the quality changes. D) substitutes relative prices for absolute prices of goods. Answer: B Topic: Biased CPI, Commodity Substitution Bias Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

71) In August 2012, the CPI inflation rate was 0.6 percent while the core CPI inflation rate was 0.1 percent. The difference between these two measurements of inflation indicates A) prices for food and fuel were increasing more rapidly than prices for other goods. B) prices for food and fuel were increasing less rapidly than prices for other goods. C) the underlying inflation rate was higher than the overall inflation rate. D) a negative underlying inflation rate. Answer: A Topic: Core CPI Skill: Analytical Status: New AACSB: Analytical Skills 72) As of July 2012, the 12 month CPI inflation rate was 1.4 percent and the 12 month core CPI inflation rate was 2.1 percent. The difference between these two measurements of inflation indicates A) prices for food and fuel grew more rapidly than prices for other goods. B) prices for food and fuel grew less rapidly than prices for other goods. C) the underlying inflation rate was lower than the overall inflation rate. D) hyperinflation. Answer: A Topic: Core CPI Skill: Analytical Status: New AACSB: Analytical Skills 73) At the end of last year, the CPI equaled 120. At the end of this year, the CPI equals 132. What is the inflation rate over this year? A) 6 percent B) 10 percent C) 12 percent D) None of the above answers are correct because more information is needed to calculate the inflation rate. Answer: B Topic: Study Guide Question, Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

74) If last year's price level was 100 and this year's price level is 114, over the year the inflation rate has been A) 14 percent. B) 114 percent. C) 12 percent D) 100 percent. Answer: A Topic: Study Guide Question, Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 75) Of the following sequences of price levels, which correctly represents a 5 percent inflation rate? A) 100, 100, 100, 100 B) 100, 105, 105, 105 C) 100, 105, 110, 115 D) 100, 105, 110.25, 115.76 Answer: D Topic: Study Guide Question, Inflation and the Price Level Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 76) The commodity substitution bias is that A) consumers substitute high-quality goods for low-quality goods. B) government spending is a good substitute for investment expenditures. C) national saving and foreign borrowing are interchangeable. D) consumers decrease the quantity they buy of goods whose relative prices rise and increase the quantity of goods whose relative price falls. Answer: D Topic: Study Guide Question, Commodity Substitution Bias Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

4 News Based Questions 1) The New York Times reported in November 2008 that 240,000 additional people lost their jobs which increased the unemployment rate to 6.5 percent. In addition, it was noted that a large number of college graduates were "taking jobs that do not require a college degree." It was also expected that "teens will be thrown out of the labor market....causing youths to miss experience" that could help them prepare for higher-skilled jobs. The article reflects the idea that unemployment is a problem because it results in A) a loss of human capital. B) fewer discouraged workers. C) a loss of income. D) a decrease in the labor force. Answer: A Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 2) The table below shows data regarding Germany's labor market.

Year 2006 2007 2008

Labor Force (millions) 43.7 43.7 43.6

Number of Employed (millions) 39.01 39.06 39.8

Population (millions) 82.3 82.2 82.1

The data show that Germany's unemployment rate in 2007 was A) 9.8 percent. B) 8.4 percent C) 5.6 percent D) More information is needed to answer this question. Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

3) The table below shows data regarding Germany's labor market.

Year 2006 2007 2008

Labor Force (millions) 43.7 43.7 43.6

Number of Employed (millions) 39.01 39.06 39.8

Population (millions) 82.3 82.2 82.1

The data show that Germany's unemployment rate between 2007 and 2008 A) increased. B) decreased C) stayed the same. D) cannot be determined because the population decreased. Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 4) The table below shows data regarding Germany's labor market.

Year 2006 2007 2008

Labor Force (millions) 43.7 43.7 43.6

Number of Employed (millions) 39.01 39.06 39.8

Population (millions) 82.3 82.2 82.1

Working-age Population (millions) 54.9 54.7 54.6

The data show that Germany's employment-to-population ratio is ________ in 2007. A) 92 percent B) 47.5 percent C) 67 percent D) 80 percent Answer: C Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

5) The table below shows data regarding Germany's labor market.

Year 2006 2007 2008

Labor Force (millions) 43.7 43.7 43.6

Number of Employed (millions) 39.01 39.06 39.8

Population (millions) 82.3 82.2 82.1

Working-age Population (millions) 54.9 54.7 54.6

The data show that Germany's labor force participation rate is ________ in 2007. A) 80 percent B) 47.5 percent C) 67 percent D) 78 percent Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 6) An article in the Financial Times reports on a trend by college students to take a year off after graduation given the lack of success in finding a job. "In a survey published last month by TMP Worldwide... 54 per cent of the final-year undergraduate interviewees were thinking about taking a gap year and one in 10 was planning to wait for a year to escape the financial chaos and wait for the economy to either improve or for the picture to become clearer." www.ft.com, 10/13/2008 These choices add to the fluctuations seen in the ________ as workers leave the labor force given their unsuccessful job searches. A) labor force participation rate B) employment rate C) efficiency wage D) inflation rate Answer: A Topic: Labor Force Participation Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication

7) NPR ("Certain Green Industries Have Job Openings", November 12, 2008) reported on a story about wind turbine manufacturers in Ohio having trouble finding skilled workers. The report noted that as a result tens of thousands of people having been laid off, there is "a huge pool of job-seekers." The firms claim to "offer good pay and benefits." A representative from the United Steelworkers claim that their union members have easily transferrable skills, but the pay is too low, around $30,000 annually. A manager at Apollo Alliance says that workers in the new industry need different skills than those in the old steel industry. The type of unemployment described in the story is ________ unemployment. A) cyclical B) structural C) frictional D) efficiency wage Answer: B Topic: Unemployment Types Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 8) Reflecting the state of the economy in 2008, the Bureau of Labor Statistics reported in October that over 1000 jobs were lost in the legal services sector. For example, one firm in Chicago stated that it had fired 54 lawyers in 2008. A representative from the firm stated that most had worked in its real estate division. www.nytimes.com, 11/11/2008 The lawyers that were fired are an example of ________ unemployment. A) frictional B) structural C) efficiency wage D) cyclical Answer: D Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

9) In late 2006, the unemployment rate increased from 4.4 percent to 4.5 percent. It was reported that new jobs were created in several sectors including accounting, engineering services, computer design and education. These increases offset job losses in the construction and automobile industries. At the same time, the natural unemployment rate was estimated to be about 5.5 percent www.nytimes.com, 12/9/2006 Based on the story, the labor market reflects A) a positive output gap. B) a negative output gap. C) cyclical unemployment. D) efficiency wages. Answer: A Topic: Output Gap Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 10) Inflation in Vietnam rose to 27 percent in July 2008— the highest inflation rate in Asia. "Squeezed on all sides, people are cutting back on food, limiting travel, looking for second jobs, delaying major purchases and waiting for the cost of a wedding to go down before marrying...Given this slowdown, Vietnam... is scaling back its plans for growth and economic development. ... Some are losing confidence in the ability of the government to manage the economy. And rumors of price increases have caused panic buying of fuel and rice." www.nytimes.com, 8/23/2008 The story provides an example of how inflation A) redistributes income. B) diverts resources from production. C) leads to increases in the consumer price index. D) can lead to changes in the CPI market basket. Answer: B Topic: Inflation Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

11) In 2000, you could buy a Cadillac DTS for $45,000. In 2011, the Cadillac DTS sold for $55,000. While both models include anti-lock brakes and air bags (along with other similar features), the 2011 model also includes satellite radio and new technology that provides improved gas mileage and safer driving. If the Cadillac DTS was included in the CPI basket, it would create A) a downward bias in the inflation rate. B) an upward bias in the CPI as a result of quality change bias. C) an upward bias in the CPI as a result of commodity substitution bias. D) a downward bias in the CPI as a result of new goods bias. Answer: B Topic: Biased CPI, Quality Improvement Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 12) The table below shows the price index for Zimbabwe starting in 2000. Year 2000 2001 2002 2003 2004 2005 2006

Price Index 100.0 173.4 404.37 1880.5 8462.2 28,586.6 319,222.5

www.econstats.com Which of the following statements correctly describe the behavior of prices in Zimbabwe? I. The cost of the CPI basket increased. II. The inflation rate was 73.4 percent between 2000 and 2001. A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

13) The table below shows the price index for Zimbabwe starting in 2000. Year 2000 2001 2002 2003 2004 2005 2006

Price Index 100.0 173.4 404.37 1880.5 8462.2 28,586.6 319,222.5

www.econstats.com The data show that A) the inflation rate between the base year and 2001 is 73.4 percent. B) new goods bias and quality change bias are responsible for most of Zimbabwe's inflation. C) the inflation rate between 2005 and 2006 was 319.2 percent. D) while Zimbabwe experienced a high price level, it did not experience high inflation. Answer: A Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 14) The table below shows the price index for China starting in 2000. Year 2000 2001 2002 2003 2004 2005 2006

Price Index 100.0 100.73 99.95 101.12 105.06 106.95 108.52

www.econstats.com Which of the following statements correctly describe the behavior of prices in China? A) The cost of the CPI basket decreased in 2002. B) China experienced a high price level and high inflation. C) Inflation reached 73% between the base year and 2001. D) The inflation rate between 2005 and 2006 was 14.4 percent. Answer: A Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 96 Copyright © 2014 Pearson Education, Inc.

15) The table below shows the price index for China starting in 2000. Year 2000 2001 2002 2003 2004 2005 2006

Price Index 100.0 100.73 99.95 101.12 105.06 106.95 108.52

www.econstats.com The inflation rate between 2004 and 2005 was A) 3.9 percent B) 2.8 percent C) 1.8 percent D) 0.7 percent. Answer: C Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 16) ABC news in Australia reported that the average annual wage in 2008 was $13,308. To calculate the real wage rate in Australia, you would need to know A) Australia's inflation rate between 2007 and 2008. B) Australia's price level in 2008. C) the core inflation rate in Australia in 2008. D) the exchange rate between the US dollar and the Australian dollar. Answer: B Topic: Real Wage Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

17) The table below shows Vietnam's price index between 2004 and 2007. Year 2004 2005 2006 2007

Price Index 115.15 124.65 134 145.12

www.econstats.com From the data, we can conclude that A) the inflation rate 2005 and 2006 was 7.5 percent. B) food and energy prices in Vietnam were increasing between 2004 and 2007. C) commodity substitution bias occurred over the four years. D) deflation occurred between 2005 and 2006 as price increased more slowly than in 2004. Answer: A Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 5 Essay Questions 1) Why is unemployment a problem? Answer: Unemployment is a problem for both the nation and for the unemployed worker. For the nation, unemployment represents lost production and lost incomes. The lost income is also a major problem for the unemployed worker. In the long run, the worker also suffers a loss of human capital which can permanently damage the worker's future job prospects. Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 2) 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: Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Communication 98 Copyright © 2014 Pearson Education, Inc.

3) How is the unemployment rate calculated? Include in your answer the process by which the U.S. Census Bureau classifies the data it collects in its Current Population Survey. Answer: The U.S. Census Bureau conducts the Current Population Survey which asks questions about the age and employment status of household members. The population is divided into the working-age population (everyone 16 or older who is available to work) and all the others. The working age population is divided into the labor force and those not in the labor force. The labor force includes all those who are working (either part-time or full-time) and those who are unemployed. The unemployment rate is the ratio of the unemployed to the labor force multiplied by 100 to convert it into a percentage. Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 4) The current U.S. population is about 300 million yet the current U.S. labor force is only about 150 million. What subtractions are made from the population number to set it equal to the labor force? Answer: The population is first reduced by eliminating those who are less than 16 years of age or institutionalized. Then those who are neither working nor looking for work are eliminated. This leaves just those who are employed or unemployed. These two groups together comprise the labor force. Topic: Employment Calculations Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Communication 5) 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: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 6) How does the unemployment rate change in a recession and in an expansion? Answer: During a recession, the unemployment rate generally increases. During an expansion, the unemployment rate generally decreases. Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 99 Copyright © 2014 Pearson Education, Inc.

7) Define the unemployment rate and labor-force participation rate. Discuss the differences between these two rates. Answer: The unemployment rate is defined as [(number of unemployed) ÷ (labor force)] × 100. and the labor force participation rate is defined as is [(labor force) ÷ (working-age population)] × 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: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 8) 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 stopped looking in the recent past. One type of marginally attached worker is a discouraged worker. Essentially, a discouraged worker is someone who wants a job but has grown so "discouraged" about finding one, he or she has stopped looking. Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 9) What is a discouraged worker? How do they affect the unemployment rate? Answer: A discouraged 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 discouraged worker is someone who wants a job but has grown so "discouraged" about finding one, he or she has stopped looking. Discouraged workers are not in the labor force so in one sense they do not affect the unemployment rate. However, if they re-enter the labor force to look for work, the unemployment will increase because while they are searching they are now counted among the ranks of the unemployed. Topic: Discouraged Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 10) 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: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

11) List and define the three types of unemployment. Answer: The three types are frictional, structural and cyclical. Frictional unemployment is defined as the normal turnover in the labor market of workers entering and leaving the work force. Structural unemployment is caused by technological change or international competition that causes jobs to disappear. Cyclical unemployment is caused by business cycle fluctuations that change the unemployment rate. Topic: Types of Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 12) 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 unemployment—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 an expansion, cyclical unemployment decreases. Hence, cyclical unemployment increases during a recession and decreases during an expansion. Topic: Types of Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Communication 13) Give an example of a frictionally unemployed person. Answer: A person who is without a job because of a normal labor market turnover is frictionally unemployed. For instance, a student who just graduated from school and is looking for a job is frictionally unemployed as is a worker who quit to look for a better job. Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 14) 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 losers may release workers and these people also are frictionally unemployed. Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

15) 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: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 16) 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: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 17) Give an example of a structurally unemployed person. Answer: A person who loses his or her job because his firm had to close because of foreign competition or because he or she no longer possesses the skills necessary for a job is structurally unemployed. Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 18) 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: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

19) Give an example of a cyclically unemployed person. Answer: A person who loses his or her job because of a recession is cyclically unemployed. Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 20) 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: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 21) 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: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 22) What is the relationship between the natural unemployment rate, the unemployment rate, potential GDP, and actual GDP? Answer: When the economy is at potential GDP, the unemployment rate is the natural unemployment rate. If actual GDP is less than potential GDP, then the unemployment rate exceeds the natural unemployment rate. And if actual GDP exceeds potential GDP, then the unemployment rate is less than the natural unemployment rate. Topic: Actual and Potential GDP Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

23) 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: Actual and Potential GDP Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 24) 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: Actual and Potential GDP Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 25) What is potential GDP and what is the relationship between actual and potential real GDP? Answer: The quantity of GDP at full employment is called potential GDP. Over the business cycle, real GDP fluctuates around potential GDP. When the unemployment rate is higher than the natural rate, real GDP is less than potential GDP and when the unemployment rate is lower than the natural rate, real GDP exceeds potential GDP. Topic: Actual and Potential GDP Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

26) 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: Actual and Potential GDP Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 27) 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: Actual and Potential GDP Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 28) What are the three stages of constructing the CPI? Answer: The first stage is to select the CPI basket. The 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 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 basket using current-period prices divided by the cost of the basket in the reference base period. Topic: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

29) "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 basket are collected monthly so that the CPI can be computed monthly. Topic: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 30) 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 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: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 31) 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 so can be used to calculate the inflation rate. Topic: Inflation Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

32) List the four sources of bias in the CPI and briefly explain them. Answer: There are four potential biases. First is the new goods bias, which occurs when new, higher priced goods replace older goods. Second is the quality change bias, which occurs when the CPI fails to take account of quality improvements that raise prices. Third is the commodity substitution bias, which occurs when consumers shift their purchases away from goods whose relative prices rise toward lower priced goods. Last is the outlet substitution bias, which because with higher prices, people switch to low-cost discount stores. Topic: Biased CPI Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 33) Is the CPI a biased measure of the inflation rate? Explain your answer. Answer: There are at least 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 of 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: Biased CPI Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 34) "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: The Biased CPI, New Goods Bias Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication

35) 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 then price of Coke rises 20 cents 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 basket of goods and services. So, if the basket contains, say, 10 bottles of Coke and 8 bottles of Pepsi, the 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: The Biased CPI, Commodity Substitution Bias Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 36) "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: The Biased CPI, Private Contracts Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 37) 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: The Biased CPI, Government Outlays Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication

38) What, if any, is the impact of the CPI bias on government spending? 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. Topic: The Biased CPI, Government Outlays Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 39) How is the GDP deflator is calculated. Answer: The GDP deflator equals 100 times the nominal GDP divided by real GDP, or in terms of symbols, the GDP deflator equals (100) × (nominal GDP) ÷ (real GDP). Topic: GDP Deflator Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 6 Numeric and Graphing Questions 1) 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: Population Survey Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 2) 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. So the number of unemployed people is (400 million) × (5 percent) = 20 million people. Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

3) Suppose that the U.S. 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: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 4) 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: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 5) 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: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

6) 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 official 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 and Discouraged Workers Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 7) 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 and Discouraged Workers Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Category Total population Working-age population Labor force Employed Unemployed

Number of people (millions) 246 207 139 133 6

8) Based on the information in the above table, what is the unemployment rate? What is the labor force participation rate? Answer: The unemployment rate equals (6 million unemployed) ÷ (139 million labor force) × 100 = 4.3 percent. The labor force participation rate equals (139 million labor force) ÷(207 million working-age population) × 100 = 67.1 percent. Topic: Unemployment Rate and Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

9) If the base year CPI basket costs $250 and next year the CPI basket costs $275, what is next year's CPI? Answer: The CPI equals 100 × ($275/$250) = 110. Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Item Loaves of bread Jugs of soda Item Loaves of bread Jugs of soda

Quantity (2012) 20 20

Price (2012) $3.00 $2.00

Quantity (2013) 22 30

Price (2013) $4.00 $1.50

10) The tables above give the purchases of an average consumer in a small economy. (These consumers purchase only loaves of bread and jugs of soda.) Suppose 2012 is the reference base period. a) What quantities are in the CPI basket? b) What is the cost of the CPI basket using 2012 prices? c) What is the cost of the CPI basket using 2013 prices? d) What is the CPI in 2013? Answer: a) The quantities in the CPI basket are the 2012 quantities because 2012 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 2012 prices is (20 loaves) × ($3) + (20 jugs) × ($2) = $100. c) The cost of the CPI basket using 2013 prices is (20 loaves) × ($4) + (20 jugs) × ($1.50) = $110. Note that the quantities used in this calculation are the quantities in the CPI basket. d) The CPI in 2013 equals 100 times the cost of the CPI basket at 2013 prices divided by the cost of the CPI basket at 2012 (base period) prices. The CPI equals 100 × ($110) ÷ ($100) = 110. Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills

Item Shampoo Pizza Item Shampoo Pizza

Quantity (2012) 25 15

Price (2012) $2.35 $7.50

Quantity (2012) 25 15

Price (2013) $2.50 $7.75

11) The tables above give the purchases of an average consumer in a small economy. (These consumers purchase only shampoo and pizza.) Suppose 2012 is the reference base period. a) What is the cost of the CPI basket in 2012 and 2013? b) What is the CPI in 2012 and in 2013? c) What is the inflation rate between 2012 and 2013? Answer: a) For 2012 the CPI basket costs $171.25. For 2013 the CPI basket costs $178.75. b) For 2012, the base period, the CPI is 100.0. For 2013 the CPI is ($178.75/$171.25) × 100, which is 104.4. c) Between the two years the inflation rate is equal to [(104.4 - 100.0)/100] × 100, which is 4.4 percent. Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills

Item Meals Parking Item Meals Parking

Quantity (2012) 100 50

Price (2012) $10.00 $100.00

Quantity (2013) 100 50

Price (2013) $12.00 $97.50

12) The tables above give the purchases of a typical consumer in a country comprised of one large city. These consumers purchase only restaurant meals and parking. The year 2012 is the reference base period. a) Find the total cost of the CPI basket for 2012 and 2013. b) What is the CPI in 2012 and in 2013? c) What is the inflation rate between 2012 and 2013? Answer: a) The total cost of the CPI basket in 2012 equals (100 meals) × ($10) + (50 parking) × ($100) = $6,000. The total cost of the CPI basket in 2013 equals (100 meals) × ($12) + (50 parking) × ($97.50) = $6,075. The quantities are the same in 2012 and 2013. If the quantities differed, the 20120 quantities would be used because 2012 is the base year. b) The CPI in 2012 is 100 because 2012 is the base period. (Alternatively, the CPI in 2012 equals 100 × ($6,000)/$6,000) = 100.) The CPI in 2013 equals 100 × ($6075)/($6,000) = 101.25. c) The inflation rate between 2012 and 2013 equals 100 × [(101.25 - 100) ÷ (100)] = 1.25 percent. Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills

Item Oranges Bananas Chicken Beef Bread

Quantity (2012) 50 100 200 100 300

Price (2012) $0.90 $0.50 $2.00 $5.00 $1.75

Price (2013) $0.75 $0.95 $2.50 $4.80 $2.00

13) The table above gives the CPI basket for 2012. Suppose that 2012 is the reference base period. a) What is the cost of the CPI basket in 2012? b) What is the cost of the CPI basket in 2013? c) What is the CPI for 2012? d) What is the CPI for 2013? Answer: a) The cost of the CPI basket in 2012 is $1,520.00. b) The cost of the CPI basket in 2013 is $1,712.50. c) The CPI for 2012 is 100 because 2012 is the base period. d) The CPI for 2013 equals 100 × [$1,712.50 ÷ $1,520.00] = 112.66. Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills 14) 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 Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 15) Last year the CPI was 177.1 and this year the CPI is 180.9. What was the inflation rate between these two years? Answer: The inflation rate equals 100 ( [(180.9 ( 177.1) ÷ 177.1] = 2.1 percent. Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

Year 1997 1998 1999 2000 2001 2002

CPI 152.5 157.0 160.6 163.1 166.7 172.3

16) 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 Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 17) For each of the following values of nominal GDP and real GDP, calculate the GDP price deflator. 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 deflator equals($600 ÷ $800) × 100, which is 75. b) The GDP deflator equals($900 ÷ $900) × 100, which is 100. c) The GDP deflator equals($1,200 ÷ $1,000) × 100, which is 120. Topic: GDP Deflator Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 18) If nominal GDP is $230 for a period and real GDP is $200 for the same period, what is the GDP deflator for this period? Answer: The GDP deflator equals 115, or (100) × ($230) ÷ ($200). Topic: GDP Deflator Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

7 True or False 1) The working-age population is divided between those people in the labor force and those people unemployed. Answer: FALSE Topic: Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 2) One way to be considered unemployed is to be without a job and looking for work. Answer: TRUE Topic: Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 3) The labor force is the sum of the working-age population and the number of unemployed people. Answer: FALSE Topic: Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 4) The unemployment rate equals [(the number of people unemployed)/(the population)] × 100. Answer: FALSE Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 5) The unemployment rate measures the percentage of the working-age population who can't find a job. Answer: FALSE Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 6) The unemployment rate measures the percentage of people in the labor force who can't find a job. Answer: TRUE Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 117 Copyright © 2014 Pearson Education, Inc.

7) Unlike cyclical unemployment, both frictional and structural unemployment rise during recessions and fall during expansions. Answer: FALSE Topic: Types of Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 8) Frictional, structural and cyclical unemployment are three classifications of unemployment. Answer: TRUE Topic: Types of Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 9) If a worker is temporarily laid off because the economy is in a recession, frictional unemployment increases. Answer: FALSE Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 10) Structural unemployment usually lasts longer than frictional unemployment. Answer: TRUE Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 11) When the economy is at full employment the unemployment rate equals the natural unemployment rate. Answer: TRUE Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 12) The absence of cyclical unemployment means the economy is at the natural unemployment rate. Answer: TRUE Topic: Natural Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 118 Copyright © 2014 Pearson Education, Inc.

13) The natural unemployment rate increased significantly during the 1980s and the 1990s. Answer: FALSE Topic: Explaining Employment and Wage Rates Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 14) The CPI is the average price of all goods and services produced within the economy. Answer: FALSE Topic: Consumer Price Index Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 15) The commodity substitution bias is that consumers substitute high-quality goods for lowquality goods. Answer: FALSE Topic: Commodity Substitution Bias Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

8 Extended Problems Category Working age population Labor force Employment

Number (millions) 222.0 146.8 138.0

1) The Bureau of Labor Statistics reported the data in the table above for October 2003. a) Calculate the number of people unemployed. b) Calculate the number of people who are not in the labor force c) Calculate the unemployment rate. d) Calculate the labor force participation rate. Answer: a) The labor force is the sum of the number of people employed plus the number of unemployed. So the number of people unemployed is the labor force minus the number of employed: b) The number of people who are not in the labor force is the difference between the working age population and the labor force: c) The unemployment rate is the number of unemployed as a percentage of the labor force: d) The labor force participation rate is the percentage of the working-age population who are in the labor force: Topic: Population Survey Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 2) A labor force survey in Brownland records the following data: Employed: 189,000 Unemployed: 15,000 Not in the labor force: 84,000 a) Calculate the unemployment rate. b) Calculate the labor force participation rate. Answer: a) The unemployment rate is the number of unemployed as a percentage of the labor force. The labor force is the sum of the number of people employed plus the number of unemployed. Brownland's labor force is So the unemployment rate is b) The labor force participation rate is the percentage of the working-age population who are in the labor force. The working age population are those who are in the labor force and those who are not in the labor force. So Brownland's working-age population is and its labor force participation rate is Topic: Unemployment Rate and Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 120 Copyright © 2014 Pearson Education, Inc.

3) A typical household in Orangeland consumes only orange juice and shorts. Last year, which was the base year, the household spent $400 on juice and $120 on shorts. In the base year, juice was $2 a bottle and shorts were $10 a pair. This year, juice is $3 a bottle, shorts are $12 a pair, and a typical household has bought 180 bottles of juice and 14 pairs of shorts. a) What is the basket used in the CPI? b) Calculate the CPI in the current year. c) Calculate the inflation rate in the current year. d) Is the inflation rate that you've calculated likely to be biased? Why or why not? Answer: a) The CPI basket is the quantities bought in the base year. In the base year, a typical household spent $400 on juice at $2 a bottle, so the quantity of juice bought was The household spent $120 on shorts at $10 a pair, so the quantity of shorts bought was Thus the CPI basket is 200 bottles of juice and 12 pairs of shorts. b) The cost of the CPI basket last year was The cost of the CPI basket in the current year is So the CPI is c) The inflation rate is the percentage change in the CPI. Because the last year was also the base year, the CPI last year was 100. So the inflation rate for the current year is which is 43.1 percent. d) The calculated CPI is likely to overstate inflation because of the commodity substitution bias. The relative price of shorts has fallen from 5 to 4 bottles of juice. This fall led consumers to buy more shorts and less juice. As a result, the actual consumer basket in the current year is less expensive than the CPI basket. The CPI ignores this commodity substitution, and so overstates the inflation rate. Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 6 Economic Growth 1 The Basics of Economic Growth 1) The best definition for economic growth is A) a sustained expansion of production possibilities measured as the increase in real GDP over a given period. B) a sustained expansion of production possibilities measured as the increase in nominal GDP over a given period. C) a sustained expansion of consumption goods over a given period. D) a sustained expansion of production goods over a given period. Answer: A Topic: Long-Term Growth Trends Skill: Definition Status: Old AACSB: Analytical Skills 2) Economic growth is measured by A) changes in real GDP. B) changes in nominal GDP. C) changes in the employment rate. D) All of the above are used to measure economic growth. Answer: A Topic: Long-Term Growth Trends Skill: Definition Status: Old AACSB: Analytical Skills 3) We are interested in long-term growth primarily because it brings A) higher price levels. B) lower price levels. C) higher standards of living. D) trade wars with our trading partners. Answer: C Topic: Long-Term Growth Trends Skill: Conceptual Status: Old AACSB: Analytical Skills

4) If a nation's population grows, then, A) growth in real GDP per person will be less than the growth of real GDP. B) there can be no economic growth. C) growth in real GDP per person will be greater than the growth of real GDP. D) there must be an increase in real GDP per person. Answer: A Topic: Long-Term Growth Trends Skill: Conceptual Status: Old AACSB: Analytical Skills 5) In 2011, Armenia had a real GDP of $4.21 billion and a population of 2.98 million. In 2012, real GDP was $4.59 billion and population was 2.97 million. What was Armenia's economic growth rate from 2011 to 2012? A) 0.38 percent B) 9.0 percent C) 3.8 percent D) 8.3 percent Answer: B Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 6) In 2011, Armenia had a real GDP of approximately $4.21 billion and a population of 2.98 million. In 2012, real GDP was $4.59 billion and population was 2.97 million. From 2011 to 2012, Armenia's standard of living ________. A) increased B) decreased C) did not change D) might have increased, decreased, or remained unchanged but more information is needed to determine which. Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

7) In 2011, Armenia had a real GDP of approximately $4.21 billion and a population of 2.98 million. In 2012, real GDP was $4.59 billion and population was 2.97 million. Armenia's real GDP per person in 2012 was A) $1,545 B) $380 C) $1,413 D) $132 Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 8) During 2014, the country of Economia had a real GDP of $115 billion and the population was 0.9 billion. In 2013, real GDP was 105 billion and the population was 0.85 billion. In 2014, real GDP per person was A) $128 B) $124 C) $135 D) $117 Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 9) During 2014, the country of Economia had a real GDP of $115 billion and the population was 0.9 billion. In 2013, real GDP was 105 billion and the population was 0.85 billion. In 2013, real GDP per person was A) $128 B) $124 C) $135 D) $117 Answer: B Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

10) Suppose real GDP for a country is $13 trillion in 2010, $14 trillion in 2011, $15 trillion in 2012, and $16 trillion in 2013. Over this time period, the real GDP growth rate is A) increasing. B) decreasing. C) constant. D) negative. Answer: B Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 11) Suppose that in 2013 a country has a population of 1 million and real GDP of $1 billion. In 2014, the population is 1.1 million and the real GDP is $1.1 billion. The real GDP per person growth rate is A) $1000. B) positive. C) negative. D) zero. Answer: D Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 12) During 2013, the country of Economia had a real GDP of $115 billion and the population was 0.9 billion. In 2012, real GDP was 105 billion and the population was 0.85 billion. Economia's growth rate of real GDP per person is A) 3.23 percent B) 5 percent C) 5.88 percent D) 9.52 percent Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

13) Suppose a nation's population grows by 2 percent and, at the same time, its GDP grows by 5 percent. Approximately how fast will real GDP per person increase? A) 3 percent per year B) 2 percent per year C) 5 percent per year D) 10 percent per year Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Old AACSB: Analytical Skills 14) Which of the following is used to calculate the standard of living? A) real GDP/population B) ((real GDP in the current year - real GDP in previous year)/real GDP in previous year) × 100 C) the one-third rule D) real GDP/aggregate hours Answer: A Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 15) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP since 1997. Which of the following is true? A) India's PPF has been shifting rightward since 1997. B) India's PPF has been shifting leftward since 1997. C) India has been moving from a point within its PPF to points beyond its PPF. D) India's PPF has not shifted since 1997. Answer: A Topic: Growth vs. Cyclical Expansion Skill: Analytical Status: New AACSB: Analytical Skills

16) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP since 1997. Based on this story, it is most likely that the slowdown reflects a A) temporary business cycle slowdown. B) temporary business cycle expansion. C) change to India's long-term economic growth rate. D) shrinkage of India's economy. Answer: A Topic: Growth vs. Cyclical Expansion Skill: Analytical Status: New AACSB: Analytical Skills 17) The Rule of 70 is used to A) estimate how much of an economy's growth rate is due to increases in capital per hour of labor B) calculate the standard of living C) calculate the economy's growth rate D) estimate how long it will take the level of any variable to double Answer: D Topic: Rule of 70 Skill: Conceptual Status: Old AACSB: Analytical Skills 18) Using the Rule of 70, if China's current growth rate of real GDP per person was 7 percent a year, how long would it take the country's real GDP per person to double? A) 35 years B) 14 years C) 10 years D) 49 years Answer: C Topic: Rule of 70 Skill: Analytical Status: Revised AACSB: Analytical Skills

19) Using the Rule of 70, if the country of Huttodom's current growth rate of real GDP per person was 10 percent a year, how long would it take the country's real GDP per person to double? A) 0.7 years B) 20 years C) 7 years D) 10 years Answer: C Topic: Rule of 70 Skill: Analytical Status: Revised AACSB: Analytical Skills 20) Slowdonia's current growth rate of real GDP per person is 2 percent a year. How long will it take to double real GDP per person? A) half a year B) approximately 10 years C) 28.6 years D) 35 years Answer: D Topic: Rule of 70 Skill: Analytical Status: Old AACSB: Analytical Skills 21) Slowdonia's current growth rate of real GDP per person is 1 percent a year. Approximately how long will it take to double real GDP per person? A) 10 years B) 35 years C) 70 years D) 100 years Answer: C Topic: Rule of 70 Skill: Analytical Status: Old AACSB: Analytical Skills

22) If real GDP per person is growing at 4 percent per year, approximately how many years will it take to double? A) 17.5 B) 25 C) 4 D) 8 Answer: A Topic: Rule of 70 Skill: Analytical Status: Old AACSB: Analytical Skills 23) Suppose a country is producing $20 million of real GDP. If the economy grows at 10 percent per year, approximately how many years will to take for real GDP to grow to $80 million? A) 14 B) 7 C) 4 D) 30 Answer: A Topic: Rule of 70 Skill: Analytical Status: Old AACSB: Analytical Skills 24) Real GDP per person in the country of Flip is $10,000, and the growth rate is 10 percent a year. Real GDP per person in the country of Flap is $20,000 and the growth rate is 5 percent a year. When will real GDP per person be greater in Flip than in Flap? A) in 2 years B) in 15 years C) never D) in 10 years Answer: B Topic: Rule of 70 Skill: Analytical Status: Old AACSB: Analytical Skills

25) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP since 1997. Which of the following is true? A) India's PPF has been shifting rightward since 1997. B) India's PPF has been shifting leftward since 1997. C) India has been moving from a point within its PPF to points beyond its PPF. D) India's PPF has not shifted since 1997. Answer: A Topic: Growth vs. Cyclical Expansion Skill: Analytical Status: New AACSB: Analytical Skills 26) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP since 1997. Based on this story, it is most likely that the slowdown reflects a A) temporary business cycle slowdown. B) temporary business cycle expansion. C) change to India's long-term economic growth rate. D) shrinkage of India's economy. Answer: A Topic: Growth vs. Cyclical Expansion Skill: Analytical Status: New AACSB: Analytical Skills

2 Long-Term Growth Trends 1) Over the last 100 years, the average U.S. growth rate in real GDP per person was about A) 2 percent per year. B) 6 percent per year. C) 12.5 percent per year. D) 1 percent per year. Answer: A Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 2) Over the past 100 years, real GDP per person in the United States has grown at an average of ________ percent a year. A) 1 B) 2 C) 3 D) 4 Answer: B Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 3) The growth rate of real GDP per person in the United States has A) averaged approximately 2 percent per year over the past century. B) has consistently been 2 percent per decade over the past century. C) has been the highest in the world over the past 5 decades. D) has increased every year over the past century. Answer: A Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 4) Over the past 100 years real GDP per person in the United States, on average, has A) decreased by about 5 percent per year. B) increased by about 2 percent per year. C) increased by about 5 percent per year. D) increased by about 10 percent per year. Answer: B Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 10 Copyright © 2014 Pearson Education, Inc.

5) Over the past 100 years, in the United States the average growth rate of ________ grew at a faster rate than ________. A) real GDP; nominal GDP B) the population; real GDP C) real GDP; the population D) inflation; real GDP Answer: C Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 6) Over the past four decades, A) the growth rate of real GDP per person in the United States has been increasing. B) U.S. real GDP per person has fallen below that of the other rich industrial countries. C) U.S. real GDP per person has increased. D) Both answers A and C are correct. Answer: C Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 7) The historical record for the United States for the past 100 years shows A) growth in real GDP per person during most years. B) economic growth for about half the years and economic decline for the other half. C) growth until 1970 and then a period of constant per person real GDP. D) continuous economic growth, although at different rates, throughout the entire century. Answer: A Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 8) Which of following was a period of below-average economic growth in the United States? A) the 1920s B) the 1960s C) the 1930s D) all of the above Answer: C Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills

9) Which of the following statements are correct? I. The average economic growth rate in real GDP per person in the United States over the last century was 5 percent per year. II. The United States has the highest economic growth rate of any nation. A) I only B) II only C) both I and II D) neither I nor II Answer: D Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 10) The historical record for the United States over the last 100 years shows A) mostly positive economic growth, though the Great Depression caused actual GDP to dip well below potential GDP. B) economic growth for about half the years and economic decline for the other half. C) growth until 1970 and then a period of constant per person real GDP. D) continuous economic growth for each year, although at different rates, throughout the entire century. Answer: A Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Revised AACSB: Analytical Skills 11) Which of the following statements regarding U.S. economic growth is NOT correct? A) Over the past 100 years, on the average real GDP per person grew 2 percent a year. B) The average annual growth rate of real GDP per person in the United States was rapid during World War II. C) In the 1930s, real GDP fell well below its trend. D) The growth rate of real GDP per person accelerated between 1973 to 1984. Answer: D Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills

12) In 2010, of the following which nations had the highest level of real GDP per person? A) Japan B) Europe Big 4 C) Canada D) China Answer: C Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 13) In 2012, of the following ________ had the highest real GDP per person. A) Japan B) Canada C) the Europe Big 4 countries D) the United States Answer: D Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Revised AACSB: Analytical Skills 14) During the last 50 years, which of the following had the lowest level of real GDP per person? A) Africa B) Central and South America C) United States D) Central Europe Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Revised AACSB: Analytical Skills 15) During the 1990s, which of the following experienced the slowest rate of growth in real GDP per person? A) Japan B) The big 4 nations of Europe C) United States D) Canada Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills

16) Countries or regions in which real GDP per person has not grown as fast as in the United States since 1960 include A) Japan. B) countries in Africa. C) Hong Kong. D) Canada. Answer: B Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 17) Which of the following statements about world growth during the last half of the 20th century is correct? A) In every decade, Japan has experienced faster growth than the United States. B) Growth rates in South American countries have exceeded those in North America. C) Real GDP per person in Hong Kong and Singapore are approaching or surpassing that in the United States. D) Due to rapid growth, real GDP per person in China is now about 50 percent of that in the United States. Answer: C Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 18) Since 1960, which of the following countries had average growth rates in real GDP per person higher than that of the United States? A) Singapore B) Hong Kong C) South Korea D) All of the above answers are correct. Answer: D Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills

19) Of the following Asian countries, which has the lowest level of real GDP per person? A) China B) Korea C) Singapore D) Hong Kong Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 20) The gap between real GDP per person in Africa and real GDP per person in the United States has been A) increasing. B) decreasing. C) remaining fairly constant. D) there is no gap in real GDP per person between Africa and the United States. Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 21) Over the past fifty years, there has been substantial closure of the gap in real GDP per person between which of the following groups of countries? A) the United States and Central and South America B) Africa and Western Europe C) Central and South America and Africa D) the United States and Japan Answer: D Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 22) Between which pair of countries or continents listed below has real GDP per person converged the most since 1960? A) Canada and Japan B) United States and Africa C) United States and South America D) Canada and South America Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 15 Copyright © 2014 Pearson Education, Inc.

23) If a rich country grows at a faster rate than a poor one, then A) the gap in their standard of living will widen over time. B) the gap in their standard of living will close over time. C) the difference in their living standards will not change over time. D) whether or not the living standards gap widens or closes over time depends on the absolute size of the relative growth rates. Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 24) Convergence of the income gap has been most dramatic between A) Hong Kong and the United States. B) the Central European countries and the United States. C) Africa and the United States. D) South America and the United States. Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 25) The gaps between the United States and the Asian countries of Honk Kong, Singapore, Korea and China have been A) decreasing B) increasing C) remaining fairly constant D) there are no gaps between these Asian countries and the United States Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 26) By measuring ________ we can see that the economies of Hong Kong and Singapore are catching up to the economies of North America but that the economies of Central and South America are not. A) inflation per person B) real GDP per person C) the population D) real GDP Answer: B Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 16 Copyright © 2014 Pearson Education, Inc.

3 How Potential GDP Grows 1) Moving along the aggregate production function shows the relationship between ________, holding all else constant. A) capital input and real GDP B) labor input and real GDP C) labor input, capital input and real GDP D) technology and real GDP Answer: B Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 2) The aggregate production function shows how ________ varies with ________. A) leisure time; labor B) labor; leisure time C) real GDP; labor D) labor; capital Answer: C Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 3) An aggregate production function shows the relationship between A) real GDP and leisure. B) real GDP and the quantity of labor employed. C) leisure and unemployment. D) real GDP and unemployment. Answer: B Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 4) The aggregate production function describes the relationship between A) real GDP and the quantity of labor employed. B) real GDP and the price level. C) the rate of growth of real GDP and inflation. D) real GDP and the unemployment rate. Answer: A Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 17 Copyright © 2014 Pearson Education, Inc.

5) A movement along the aggregate production function is the result of a change in A) the quantity of labor B) technology C) capital D) interest rates Answer: A Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 6) Along the aggregate production function, as the quantity of labor rises, real GDP A) rises B) falls C) stays the same D) may fall, rise, or stay the same Answer: A Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 7) The aggregate production function shows that an economy increases its real GDP in the short run by A) developing new technologies. B) increasing its physical capital stock. C) using more labor. D) exploring for new deposits of natural resources. Answer: C Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 8) Moving along the aggregate production function, all of the following are held constant EXCEPT A) labor B) capital C) human capital D) technology Answer: A Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills

9) An increase in labor hours will lead to A) a shift of the aggregate production function but no movement along it. B) a movement along the aggregate production function but no shift in it. C) both a movement along and a shift in the aggregate production function. D) neither a movement along nor a shift in the aggregate production function. Answer: B Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 10) The aggregate production function is graphed as A) a downward sloping curve. B) an upward sloping straight line. C) an upward sloping line that becomes flatter as the quantity of labor increases. D) an upward sloping line that becomes steeper as the quantity of labor increases. Answer: C Topic: Aggregate Production Function Skill: Graphing Status: Old AACSB: Analytical Skills 11) The aggregate production function A) measures the productivity of labor as leisure decreases. B) increases only with increases in productivity. C) shows that real GDP can increase because of increased productivity as well as increased labor hours. D) cannot show the impacts of productivity improvements. Answer: C Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 12) The aggregate production function relating real GDP to labor hours A) has a constant slope. B) has a negative slope. C) has a positive slope and becomes steeper as employment increases. D) has a positive slope and becomes less steep as employment increases. Answer: D Topic: Aggregate Production Function, Diminishing Returns Skill: Graphing Status: Old AACSB: Analytical Skills

13) The curvature of the production function shows that as employment increases, the productivity of labor A) remains positive and increases. B) remains positive but decreases. C) decreases and becomes negative. D) remains constant. Answer: B Topic: Aggregate Production Function, Diminishing Returns Skill: Graphing Status: Old AACSB: Analytical Skills 14) The decreasing slope of a production function reflects A) diminishing returns. B) rising unemployment. C) decreasing costs. D) increasing aggregate demand. Answer: A Topic: Aggregate Production Function, Diminishing Returns Skill: Conceptual Status: Old AACSB: Analytical Skills 15) As labor increases, there is a A) shift of the aggregate production function, but no movement along it. B) movement along the aggregate production function, but no shift in it. C) movement along the aggregate production function and real GDP will increase less with each additional increase in labor. D) movement along the aggregate production function and real GDP will decrease less with each additional increase in labor. Answer: C Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 16) 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) labor produces more output than the previous unit. D) labor produces less output than the previous unit. Answer: D Topic: Law of Diminishing Returns Skill: Conceptual Status: Old AACSB: Analytical Skills 20 Copyright © 2014 Pearson Education, Inc.

17) In the illustration above, which figure shows an aggregate production function? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Aggregate Production Function Skill: Graphing Status: Old AACSB: Analytical Skills

18) The country of Kemper is on its aggregate production function at point W in the above figure. The government of Kemper passes a law that makes 4 years of college mandatory for all citizens. After all citizens have their education, the economy will A) move to point such as Y. B) remain at point W. C) move to point such as X. D) move to point such as Z. Answer: D Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 19) The country of Kemper is on its aggregate production function at point W in the above figure. If the population increases with no change in capital or technology, the economy will A) move to point such as Y. B) remain at point W. C) move to point such as X. D) move to point such as Z. Answer: C Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills

20) The real wage rate measures the A) quantity of goods and services that an hour of work will buy. B) average weekly earnings in dollars of a worker. C) dollar value of an hour of work. D) dollar value of what a worker could earn in another job. Answer: A Topic: Real Wage Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 21) Which of the following is TRUE regarding the real wage rate? The real wage rate I. is always greater than the money wage. II. measures the quantity of goods and services an hour's work can buy. A) only I B) only II C) both I and II D) neither I nor II Answer: B Topic: Real Wage Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 22) The real wage rate equals A) (money wage rate)/(price level). B) (price level)/(money wage rate). C) (money wage rate) × (price level). D) (money wage) + (number of hours worked)/(price level). Answer: A Topic: Real Wage Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 23) The relationship between the labor employed by a firm and the real wage rate is shown by the A) supply of labor curve. B) supply of jobs curve. C) demand for jobs curve. D) demand for labor curve. Answer: D Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 23 Copyright © 2014 Pearson Education, Inc.

24) The quantity of labor demanded depends on the A) money wage rate not the real wage rate. B) real wage rate not the money wage rate. C) price of output not the money wage rate nor the real wage rate. D) money wage rate AND the real wage rate. Answer: B Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 25) Because the productivity of labor decreases as the quantity of labor employed increases, A) the quantity of labor a firm demands increases as the real wage rate decreases. B) the quantity of labor a firm demands increases as the money wage rate decreases. C) the labor demand curve shifts right as the real wage rate decreases. D) the aggregate production function shifts upward as the real wage rate decreases. Answer: A Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 26) Which of the following is TRUE regarding the labor market? I. The labor supply curve slopes upward because firms maximize profits as they hire more workers. II. If the real wage rate falls, the quantity of labor firms demand increases. III. The demand for labor curve slopes downward because as the real wage rate falls, workers demand to work fewer hours. A) I and II B) I and III C) II only D) I, II and III Answer: C Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

27) Which of the following statements are TRUE regarding the demand for labor? I. The quantity of labor demanded depends on the real wage rate. II. If the money wage rate increases and the price level remains the same, the quantity of labor demanded decreases. A) I only B) II only C) I and II D) neither I nor II Answer: C Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 28) If the price level falls by 5 percent and workers' money wage rates remain constant, firms' A) quantity of labor demanded will decrease. B) quantity of labor demanded will increase. C) supply of jobs will increase. D) None of the above answers are correct. Answer: A Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 29) If the price level rises by 5 percent and workers' money wage rates remain constant, firms' A) quantity of labor demanded will decrease. B) quantity of labor demanded will increase. C) supply of jobs will decrease. D) None of the above answers are correct. Answer: B Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 30) Suppose there is a rise in the price level, but no change in the money wage rate. As a result, the quantity of labor demanded A) increases. B) decreases. C) does not change because there is no change in the real wage rate. D) decreases only if the money wage rate also decreases. Answer: A Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 25 Copyright © 2014 Pearson Education, Inc.

31) Suppose there is a rise in the real wage rate. As a result, the quantity of labor demanded A) increases. B) decreases. C) does not change because there is no change in the money wage rate. D) increases only if the price level also decreases. Answer: B Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 32) Suppose the money wage rate and the price level both fall by 5 percent. As a result, A) the quantity of labor demanded increases. B) the quantity of labor demanded decreases. C) the quantity of labor demanded does not change because there is no change in the real wage. D) people are worse off and there is more unemployment. Answer: C Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 33) If the price level rises by 3 percent and workers' money wage rates increase by 2 percent, then the A) quantity of labor demanded will decrease. B) quantity of labor demanded will increase. C) quantity of labor demanded does not change because there is no change in the real wage rate. D) real wage rate increases. Answer: B Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 34) If the price level rises by 3 percent and workers' money wages increase by 3 percent, then the A) quantity of labor demand will decrease. B) quantity of labor demand will increase. C) quantity of labor demanded does not change because there is no change in the real wage rate. D) Any of the above could occur depending on the magnitude on the dollar increase in the price level versus the dollar increase in the wage rate. Answer: C Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 26 Copyright © 2014 Pearson Education, Inc.

35) The demand for labor curve is A) upward sloping at potential GDP and downward sloping elsewhere. B) vertical at potential GDP. C) downward sloping. D) upward sloping because firms demand labor. Answer: C Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 36) The labor demand curve slopes downward because A) the firm maximizes profits by hiring more labor when the real wage rate rises. B) workers supply more hours of work when the real wage rate rises. C) the firm maximizes profits by hiring more labor when the real wage rate falls. D) workers supply fewer hours of work when the real wage rate rises. Answer: C Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 37) If the price level increases, but workers' money wage rates remain constant, which of the following is TRUE? I. The quantity of labor demanded will increase. II. The real wage rate will decrease. III. The demand for labor curve shifts rightward. A) I only B) I and II C) II and III D) I, II and III Answer: B Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 38) The quantity of labor supplied depends on the A) money wage rate not the real wage rate. B) real wage rate not the money wage rate. C) price of output not the money wage rate nor the real wage rate. D) level of profits. Answer: B Topic: Supply of Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 27 Copyright © 2014 Pearson Education, Inc.

39) People base their labor supply on the ________ because they care about ________. A) real wage; what their earnings will buy B) real wage; the equality of money wages and the price level C) money wage; a surplus of labor D) money wage; the amount of labor firms demand Answer: A Topic: Supply of Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 40) If workers' money wage rates increase by 5 percent and the price level remains constant, workers' A) quantity of labor supplied will decrease. B) quantity of labor supplied will increase. C) quantity of labor supplied will not change. D) demand for jobs will decrease. Answer: B Topic: Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 41) If the price level rises by 4 percent and workers' money wage rates increase by 2 percent, then the A) quantity of labor supplied decreases. B) quantity of labor supplied increases. C) quantity of labor supplied does not change because there is no change in the real wage rate. D) the supply curve of labor shifts rightward. Answer: A Topic: Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 42) If the price level rises by 2 percent and workers' money wages increase by 2 percent, then the A) quantity of labor supply decreases. B) quantity of labor supply increases. C) quantity of labor supplied does not change because there is no change in the real wage rate. D) More information about the dollar change in the price level and money wage rate are needed to answer the question. Answer: C Topic: Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 28 Copyright © 2014 Pearson Education, Inc.

43) If the price level rises by 3 percent and workers' money wage rate increase by 1 percent, then the A) quantity of labor supplied decreases. B) quantity of labor supplied increases. C) quantity of labor supplied does not change because there is no change in the real wage rate. D) real wage rate increases. Answer: A Topic: Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 44) The labor force participation rate A) does not change when the real wage rate changes. B) decreases as the real wage rate rises. C) increases as the real wage rate increases. D) has an inverse effect of the supply of labor. Answer: C Topic: Supply of Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 45) The supply of labor curve A) has a negative slope. B) is independent of the wage rate. C) shows how much labor workers are willing to supply at various real wage rates. D) is usually vertical. Answer: C Topic: Supply of Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 46) The supply of labor curve is A) vertical at potential GDP. B) upward sloping. C) downward sloping. D) horizontal at the equilibrium wage rate. Answer: B Topic: Supply of Labor Curve Skill: Graphing Status: Old AACSB: Analytical Skills

47) Which of the following statements is correct? A) When the real wage increases, the labor supply curve shifts rightward. B) When the real wage increases, the labor supply curve shifts leftward. C) When the real wage decreases, the labor supply curve shifts leftward. D) None of the above statements are correct. Answer: D Topic: Supply of Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 48) As the real wage rate increases, the A) quantity of labor supplied increases. B) supply of labor curve shifts rightward. C) supply of labor curve shifts leftward. D) quantity of labor supplied increases and the supply of labor shifts rightward. Answer: A Topic: Supply of Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 49) If the price level increases and workers' money wage rates remain constant, which of the following will occur? I. The quantity of labor supplied will decrease. II. The real wage rate will decrease. III. The labor supply curve will shift rightward. A) I only B) I and II C) II and III D) I, II and III Answer: B Topic: Supply of Labor Curve Skill: Analytical Status: Old AACSB: Analytical Skills 50) Greater labor force participation for households at higher real wage rate is one reason that A) the demand for labor curve is upward sloping. B) the demand for labor curve is downward sloping. C) the supply of labor curve is upward sloping. D) the supply of labor curve is downward sloping. Answer: C Topic: Supply of Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 30 Copyright © 2014 Pearson Education, Inc.

51) If the money wage rate rises relative to the price level, firms ________ the quantity of labor they demand and workers ________ the quantity of labor they supply. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Topic: Demand for Labor and Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 52) If the price level rises relative to the money wage rate, firms ________ the quantity of labor they demand and workers ________ the quantity of labor they supply. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: Demand for Labor and Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 53) If the real wage rate is such that the quantity of labor supplied equals the quantity of labor demanded, A) a full-employment equilibrium occurs. B) actual GDP equals potential GDP. C) the supply curve of labor is vertical. D) Both answers A and B are correct. Answer: D Topic: Labor Market Equilibrium Skill: Conceptual Status: Revised AACSB: Analytical Skills

54) If at the prevailing real wage rate, the quantity of labor supplied exceeds the quantity demanded, A) there is a shortage of labor. B) the real wage rate will rise to restore equilibrium. C) the real wage rate is greater than the equilibrium real wage rate. D) None of the above answers is correct. Answer: C Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills 55) If the real wage rate is such that the quantity of labor supplied is greater than the quantity of labor demanded, A) the economy is at full employment. B) actual real GDP will not equal potential GDP. C) job search decreases. D) labor resources are allocated efficiently. Answer: B Topic: Labor Market Equilibrium Skill: Conceptual Status: Revised AACSB: Analytical Skills 56) If the real wage rate is such that the quantity of labor supplied by workers is less than the quantity of labor demanded by firms, A) the economy is at full employment. B) there is a shortage of labor. C) the real wage rate will fall to restore equilibrium. D) actual real GDP equals potential GDP because firms make the decision about how many workers to hire. Answer: B Topic: Labor Market Equilibrium Skill: Conceptual Status: Revised AACSB: Analytical Skills 57) At the full-employment equilibrium in the labor market, A) there is no unemployment. B) there are no job vacancies. C) there is neither a shortage nor a surplus of labor. D) the money wage rate equals the real wage rate. Answer: C Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills 32 Copyright © 2014 Pearson Education, Inc.

58) Equilibrium in the labor market A) cannot occur if the production function is shifting upward. B) can happen only when actual GDP exceeds potential GDP. C) means that resources are allocated inefficiently D) occurs when actual GDP is equal to potential GDP Answer: D Topic: Labor Market Equilibrium Skill: Conceptual Status: Revised AACSB: Analytical Skills 59) When the quantity of labor demanded exceeds the quantity of labor supplied, the real wage rate A) rises to eliminate the labor-market shortage. B) falls to eliminate the labor-market surplus. C) rises to eliminate the labor-market surplus. D) falls to eliminate the labor-market shortage. Answer: A Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills 60) If the labor market is in equilibrium and then the labor supply curve shifts rightward, A) there will be a shortage of labor at the original equilibrium wage rate. B) there will be a surplus of labor at the original equilibrium wage rate. C) the equilibrium wage rate will rise. D) there will be a surplus of jobs at the new equilibrium. Answer: B Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills 61) In the labor market, an increase in labor productivity ________ the real wage rate and ________ the level of employment. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases Answer: A Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills 33 Copyright © 2014 Pearson Education, Inc.

Quantity of labor Real wage rate Quantity of labor demanded (2005 dollars supplied (billions (billions of hours per hour) of hours per year) per year) 15 70 10 20 60 20 25 50 30 30 40 40 35 30 50 62) The table above shows the labor market for the country of Pickett. When the labor market is in equilibrium, the real wage rate is ________ and ________ of labor a year are employed. A) any value less than $25 an hour; any value greater than 40 billion hours B) any value greater than $30 an hour; any value more than 40 billion hours C) any value greater than or equal to $25 an hour; any value less than 40 billion hours D) $30 an hour; 40 billion hours Answer: D Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

63) In the above figure, at the real wage rate of $50 A) there is a surplus of 100 billion hours per year. B) there is a shortage of 100 billion hours per year. C) there is a surplus of 60 billion hours per year. D) there is shortage of 20 billion hours per year. Answer: C Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 64) In the above figure, what is the full-employment real wage rate and quantity of hours per year? A) $40 and 60 billion hours per year B) $50 and 100 billion hours per year C) $35 and 100 billion hours per year D) $50 and 40 billion hours per year Answer: A Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

65) In the above figure, at a wage rate of $20 per hour, A) there is a shortage of labor. B) there is a surplus of labor. C) the labor supply curve will shift rightward. D) the labor demand curve will shift rightward. Answer: B Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 66) In the figure, when the real wage rate is $10 an hour, ________. A) a shortage of labor exists and the real wage rate will rise B) the demand for labor will increase C) the demand for labor will decrease D) a surplus of labor exists and the real wage rate will fall Answer: A Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

67) In the above figure, the equilibrium real wage rate is A) $10 per hour. B) $15 per hour. C) $20 per hour. D) none of the above Answer: B Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 68) In the above figure, the equilibrium level of labor is A) 100 billion hours. B) 150 billion hours. C) 200 billion hours. D) none of the above Answer: B Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 69) In the above figure, if the real wage is $20 per hour, a labor A) shortage will occur and the real wage will rise. B) shortage will occur and the real wage will fall. C) surplus will occur and the real wage will rise. D) surplus will occur and the real wage will fall. Answer: D Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 70) In the above figure, if the real wage is $10 per hour, a labor A) shortage will occur and the real wage will rise. B) shortage will occur and the real wage will fall. C) surplus will occur and the real wage will rise. D) surplus will occur and the real wage will fall. Answer: A Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

71) Full employment corresponds to A) equilibrium in the labor market, with actual GDP being equal to potential GDP. B) labor demand being greater than labor supply and actual GDP being equal to potential GDP. C) being at the point where the marginal product of labor equals zero. D) equilibrium in the labor market, and actual GDP exceeding potential GDP. Answer: A Topic: The Labor Market and Full Employment Skill: Conceptual Status: Revised AACSB: Analytical Skills Quantity of labor Real wage rate Quantity of labor demanded (2005 dollars supplied (billions (billions of hours per hour) of hours per year) per year) 15 70 10 20 60 20 25 50 30 30 40 40 35 30 50 Real GDP Quantity of labor (trillions of 2005 (billions of hours dollars per year) per year) 3 20 9 30 14 40 18 50 21 60 72) The tables above show the labor market and the production function schedule for the country of Pickett. Potential GDP is ________. A) $40 trillion B) $9 trillion C) $14 trillion D) $25 trillion Answer: C Topic: Labor Market and Full Employment Skill: Analytical Status: Revised AACSB: Analytical Skills

73) The tables above show the labor market and the production function schedule for the country of Pickett. An increase in population changes the labor supply by 20 billion hours at each real wage rate. Potential GDP ________. A) does not change B) decreases to $3 trillion C) increases to $50 trillion D) increases to $18 trillion Answer: D Topic: Labor Market and Full Employment Skill: Analytical Status: Old AACSB: Analytical Skills 74) Real GDP grows when I. the quantities of the factors of production grow II. persistent advances in technology make factors of production increasingly productive III. human capital grows A) Only I. B) Both I and III. C) Only II. D) I, II, and III. Answer: D Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 75) If the labor and capital grow more quickly, then real GDP will A) not grow fast enough. B) grow more quickly. C) grow more slowly. D) stay fixed at potential GDP. Answer: B Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Analytical Skills

76) The real wage rate will fall if the A) labor supply curve shifts rightward and the labor demand curve does not shift. B) labor supply curve shifts leftward and the labor demand curve does not shift. C) labor demand curve shifts rightward and the labor supply curve does not shift. D) labor demand curve shifts rightward more than the labor supply curve shifts rightward. Answer: A Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 77) The U.S. employment-to-population ratio peaked in 2000 and in 2012 fell to 58 percent, a level not seen since the early 1980s. This fall in the employment-to-population ratio shifts the ________ curve ________. A) labor supply; leftward B) labor supply; rightward C) labor demand; leftward D) labor demand; rightward Answer: B Topic: Labor Market Equilibrium Skill: Conceptual Status: New AACSB: Analytical Skills 78) The U.S. employment-to-population ratio peaked in 2000 and in 2012 fell to 58 percent, a level not seen since the early 1980s. This fall in the employment-to-population ratio ________ the equilibrium quantity of labor and ________ potential GDP. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Topic: Labor Market Equilibrium Skill: Conceptual Status: New AACSB: Analytical Skills 79) An increase in a nation's population results in A) an upward shift in the production function. B) a movement along the production function. C) a leftward shift in the labor supply curve. D) Both answers A and C are correct. Answer: B Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 40 Copyright © 2014 Pearson Education, Inc.

80) An increase in a nation's population results in A) a rightward shift in the labor demand curve. B) a movement along the nation's production function. C) a decrease in the full-employment quantity of labor. D) an upward shift of the nation's production function. Answer: B Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 81) An increase in the population and hence the supply of labor causes a A) shortage of labor at the original real wage rate and the real wage rate will fall. B) surplus of labor at the original real wage rate and the real wage rate will rise. C) surplus of labor at the original real wage rate and the real wage rate will fall. D) shortage of labor at the original real wage rate and the real wage rate will rise. Answer: C Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 82) Employment and (total) potential GDP increase if the A) labor supply curve shifts rightward and the labor demand curve does not shift. B) labor demand curve shifts leftward more than the labor supply curve shifts rightward. C) labor demand curve shifts leftward and the labor supply curve does not shift. D) None of the above answers are correct. Answer: A Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 83) When the population increases with no change in labor productivity, employment ________ and potential GDP ________. A) decreases; decreases B) increases; increases C) decreases; increases D) increases; decreases Answer: B Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills

84) If the population increases, then potential GDP ________ and employment ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 85) An increase in the working-age population results in a A) rightward shift of demand for labor curve and an increase in potential GDP. B) rightward shift of the demand for labor curve and no change in potential GDP. C) rightward shift of the supply of labor curve and an increase in potential GDP. D) leftward shift of the supply of labor curve and a decrease in potential GDP. Answer: C Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 86) Potential GDP per labor hour can increase due to A) increases in labor productivity. B) increases in the quantity of money. C) increases in population. D) decreases in the quantity of capital. Answer: A Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 87) Labor growth depends mainly on ________ and labor productivity growth depends mainly on ________. A) population growth; increases in real GDP B) population growth; technological advances C) growth in real GDP per person; growth rate of capital D) growth in real GDP per person; technological advances Answer: B Topic: Labor Productivity Skill: Conceptual Status: Revised AACSB: Analytical Skills

88) Labor productivity is A) real GDP per hour of labor times the hours of work. B) real GDP per hour of labor times the number of people. C) real GDP per hour of labor. D) the rate of change in real GDP per hour of labor. Answer: C Topic: Labor Productivity Skill: Definition Status: Old AACSB: Analytical Skills 89) Dividing the value of real GDP by aggregate labor hours gives A) the net domestic product. B) labor productivity. C) the size of the labor force. D) the rate of capital accumulation. Answer: B Topic: Labor Productivity Skill: Definition Status: Old AACSB: Analytical Skills 90) Labor productivity is defined as A) total output attributable to labor. B) total real GDP. C) the growth rate of the labor force. D) real GDP per hour of labor. Answer: D Topic: Labor Productivity Skill: Definition Status: Old AACSB: Analytical Skills 91) Labor productivity equals A) real GDP divided by the capital stock. B) real GDP divided by the working-age population. C) total wages divided by real GDP. D) real GDP divided by aggregate labor hours. Answer: D Topic: Labor Productivity Skill: Definition Status: Old AACSB: Analytical Skills

92) If real GDP is $800 million and aggregate labor hours are 20 million, labor productivity is ________. A) $40 per hour B) $16,000 million C) $40 million D) $160 per hour Answer: A Topic: Labor Productivity Skill: Analytical Status: Old AACSB: Analytical Skills 93) If real GDP is $13,000 billion and aggregate hours are 270 billion, labor productivity equals A) $6.50 per hour. B) $45 per hour. C) $48 per hour. D) $650 per hour. Answer: C Topic: Labor Productivity Skill: Analytical Status: Old AACSB: Analytical Skills 94) If real GDP is $13,500 billion and aggregate hours are 110 billion, labor productivity equals A) $6.75 per hour. B) $104 per hour. C) $123 per hour. D) $675 per hour. Answer: C Topic: Labor Productivity Skill: Analytical Status: Old AACSB: Analytical Skills 95) If real GDP is $11,750 billion and aggregate hours are 175 billion, labor productivity equals A) $23.50 per hour. B) $52 per hour. C) $67 per hour. D) $235 per hour. Answer: C Topic: Labor Productivity Skill: Analytical Status: Old AACSB: Analytical Skills

96) An increase in labor productivity relates to A) working harder over time. B) working longer over time. C) producing the same output with fewer labor hours. D) producing the same output with more labor hours. Answer: C Topic: Labor Productivity Skill: Conceptual Status: Revised AACSB: Analytical Skills 97) When labor productivity increases, the demand for labor curve ________ and the supply of labor curve ________. A) shifts rightward; shifts rightward B) shifts rightward; does not shift C) shifts leftward; shifts rightward D) shift s leftward; does not shift Answer: B Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 98) If the nation's capital stock increases so that workers become more productive, the A) demand for labor will increase B) supply of labor will increase C) demand for labor will decrease D) supply of labor will decrease Answer: A Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 99) Which of the following statements is correct? A) When workers become more productive, the demand for labor curve shifts rightward. B) When technology decreases, the supply of labor curve shifts leftward. C) When labor force participation increases, the supply of labor curve shifts leftward. D) When human capital increases, the demand for labor curve shifts leftward. Answer: A Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

100) If both the supply of labor and the demand for labor increase, then A) potential GDP decreases. B) potential GDP increases. C) full employment decreases. D) the impact on potential GDP is uncertain Answer: B Topic: Shifts in Labor Demand and Labor Supply Skill: Conceptual Status: Revised AACSB: Analytical Skills 101) An increase in labor productivity ________ the real wage rate and an increase in population ________ the real wage rate. A) raises; lowers B) raises; raises C) lowers; lowers D) lowers; raises Answer: A Topic: Shifts in Labor Demand and Labor Supply Skill: Conceptual Status: Old AACSB: Analytical Skills 102) If the demand for labor increases I. employment increases. II. the real wage rate increases. A) Only I is correct. B) Only II is correct. C) Both I and II are correct. D) Neither I nor II is correct. Answer: C Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 103) An advance in technology that results in increased productivity results in a A) rightward shift of the labor supply curve. B) rightward shift of the labor demand curve. C) rightward shift of both the labor supply and labor demand curves. D) no change to the production function. Answer: B Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Revised AACSB: Analytical Skills 46 Copyright © 2014 Pearson Education, Inc.

104) An advance in technology that increases productivity and an increase in the working-age population results in a A) rightward shift of the labor supply curve. B) rightward shift of the labor demand curve. C) rightward shift of the labor demand curve and of the labor supply curve. D) no change to the production function. Answer: C Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Revised AACSB: Analytical Skills 105) An advance in technology increases the productivity of labor. As a result, the nation's production function shifts ________ and the ________ labor curve shifts rightward. A) upward; demand for B) downward; demand for C) upward; supply of D) downward; supply of Answer: A Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 106) An increase in physical capital or a technological advance A) raises the real wage rate. B) decreases the quantity of labor employed. C) shifts the production function downward. D) decreases demand for labor. Answer: A Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 107) An advance in technology will A) not shift the production function but will lead to a movement down along the production function. B) shift the production function downward. C) not shift the production function but will lead to a movement up along the production function. D) shift the production function upward. Answer: D Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 47 Copyright © 2014 Pearson Education, Inc.

108) An advance in technology shifts the production function upward and shifts the labor A) demand curve leftward. B) supply curve leftward. C) demand curve rightward. D) supply curve rightward. Answer: C Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 109) An increase in labor productivity shifts the labor ________ curve ________. A) demand; rightward B) demand; leftward C) supply; rightward D) supply; leftward Answer: A Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 110) If new capital increases labor productivity, the supply of labor ________ and the demand for labor ________. A) stays the same; increases B) increases; increases C) increases; decreases D) decreases; stays the same Answer: A Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills

111) As a result of the rightward shift in the demand curve for labor from LD0 to LD1, the equilibrium level of employment ________ and potential GDP ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Graphing Status: Old AACSB: Analytical Skills

112) The figure above shows the U.S. production function. From 1986 to 2008 the United States experienced major advances in technology as well as an increase in the working-age population. The combined effect can best be shown by a A) movement from point W to point X. B) movement from point Y to point Z. C) movement from point Y to point X. D) movement from point W to point Z. Answer: D Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Analytical Status: Old AACSB: Analytical Skills 113) A decrease in the real wage rate A) shifts the labor demand curve rightward. B) shifts the labor demand curve leftward. C) shifts the labor supply curve leftward. D) none of the above because a change in the real wage rate does not shift either the labor demand or labor supply curve. Answer: D Topic: Study Guide Question, Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

114) The demand for labor curve A) is downward sloping because productivity of labor diminishes as more workers are employed. B) is upward sloping and the supply curve of labor is downward sloping. C) is upward sloping because productivity of labor diminishes as more workers are employed. D) shifts rightward when the real wage rate rises. Answer: A Topic: Study Guide Question, Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 115) An increase in labor productivity shifts the A) labor demand curve rightward. B) labor demand curve leftward. C) labor supply curve rightward. D) labor supply curve leftward Answer: A Topic: Study Guide Question, Increase in Productivity Skill: Conceptual Status: Revised AACSB: Analytical Skills 116) A decrease in population shifts the A) labor demand curve rightward. B) labor demand curve leftward. C) labor supply curve rightward. D) labor supply curve leftward Answer: D Topic: Study Guide Question, Population Skill: Conceptual Status: Old AACSB: Analytical Skills

4 Why Labor Productivity Grows 1) The Industrial Revolution in England in large was the result of A) growth in human capital. B) technological innovations encouraged by the patent system. C) population growth. D) technological innovations that were financed mainly by government spending. Answer: B Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 2) Which of the following is NOT an important factor affecting growth in labor productivity? A) the saving rate B) the speed with which prices fall C) the growth rate of physical capital D) the growth rate of labor productivity Answer: B Topic: Factors Creating Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 3) All of the following contribute to labor productivity growth EXCEPT: A) population growth. B) physical capital growth. C) human capital growth. D) technological advancements. Answer: A Topic: Factors Creating Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 4) Technological change A) lowers the real wage rate. B) decreases labor productivity. C) has no effect on employment. D) increases potential GDP. Answer: D Topic: Factors Creating Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills

5) A recent survey by India's central bank reported that spending plans by firms on large new projects fell by 46 percent in the year ending March 2012, compared with the prior year. This decrease will most directly impact A) physical capital growth. B) human capital growth. C) technological change. D) population growth. Answer: A Topic: Factors Creating Economic Growth Skill: Conceptual Status: New AACSB: Analytical Skills 6) Factors that influence labor productivity include ________. A) the inflation rate, the real wage rate, and the exchange rate B) the labor demand curve C) physical capital, the real wage rate, and technology D) physical capital, human capital, and technology Answer: D Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 7) Labor productivity, real GDP per labor hour, increases if A) saving and investment cause an increase in the quantity of capital per worker. B) there is an increase in the accumulation of human capital. C) new technologies are continuously discovered. D) All of the above answers are correct. Answer: D Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills

8) Which of the following directly creates growth in labor productivity? I. Growth in capital per hour of labor. II. Technological change. III. Population growth. A) I only B) II only C) I and II D) I and III Answer: C Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 9) Labor productivity rises A) if the amount of capital per worker increases. B) in the absence of technological progress. C) if firms invest in hiring more workers rather than buying more capital. D) if the amount of capital per worker decreases. Answer: A Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 10) Which of the following contributes to an increase in labor productivity? A) increased consumption expenditure B) decreased investment C) increased capital stock D) All of the above contribute to an increase in labor productivity. Answer: C Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 11) Which of the following does NOT increase labor productivity? A) increases in aggregate hours B) physical capital growth C) human capital growth D) technological advances Answer: A Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 54 Copyright © 2014 Pearson Education, Inc.

12) If capital per worker rises, A) labor productivity decreases. B) no technological progress occurs. C) labor productivity increases. D) firms respond by raising their prices. Answer: C Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 13) If the quantity of capital per worker in the economy increases, A) the amount of money held by workers increases. B) labor productivity increases. C) the stock of human capital necessarily increases. D) the stock of financial assets held by the public increases. Answer: B Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 14) Saving and investment that increase a nation's capital lead to A) slower growth because there is a lack of consumption. B) a decrease in labor productivity as capital is used to replace labor. C) a decrease in the amount of capital per worker. D) an increase in labor productivity. Answer: D Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 15) An increase in saving that leads to more capital accumulation ________ labor productivity. A) increases B) does not change C) decreases D) probably changes but in an ambiguous direction Answer: A Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills

16) A higher savings rate that leads to an increase in the capital stock A) leads to higher interest rates. B) leads to increases in labor productivity. C) immediately decreases investment. D) is associated with a decrease in the rate of growth of the population. Answer: B Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 17) Labor productivity increases with A) increases in consumption expenditure. B) increases in depreciation. C) increases in capital. D) All of the above answers are correct. Answer: C Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 18) If capital per hour of labor increases, real GDP per hour of labor A) decreases for a given level of technology. B) increases because the level of technology increases. C) increases for a given level of technology. D) decreases because the level of technology decreases. Answer: C Topic: Labor Productivity, Changes in Capital Stock Skill: Analytical Status: Old AACSB: Analytical Skills 19) 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. Answer: D Topic: Labor Productivity, Changes in Capital Stock Skill: Analytical Status: Old AACSB: Analytical Skills

20) An increase in education and training A) increases labor productivity. B) increases aggregate hours. C) decreases real GDP growth. D) increases the employment-to-population ratio. Answer: A Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills 21) ________ is the knowledge and skill that people have obtained from education and on-thejob training. A) Labor productivity B) Human capital C) Capital D) Technology Answer: B Topic: Human Capital Skill: Definition Status: Old AACSB: Analytical Skills 22) Human capital is the A) machinery used by humans to produce GDP. B) technology used by humans to produce GDP. C) skill and knowledge accumulated by humans. D) plant and equipment produced by humans and not by machines. Answer: C Topic: Human Capital Skill: Definition Status: Old AACSB: Analytical Skills 23) Human capital is A) the saving done by human beings. B) people's knowledge and skills. C) a measure of the labor productivity of workers. D) the investment people make in industries that make capital goods. Answer: B Topic: Human Capital Skill: Definition Status: Old AACSB: Analytical Skills

24) Human capital is, in part, the A) amount of money held by a worker. B) stock of knowledge of a worker. C) stock of plant and equipment. D) stock of financial assets held by the public. Answer: B Topic: Human Capital Skill: Definition Status: Old AACSB: Analytical Skills 25) A worker's stock of knowledge is known as A) monetary capital. B) human capital. C) physical capital. D) financial capital. Answer: B Topic: Human Capital Skill: Definition Status: Old AACSB: Analytical Skills 26) On-the-job-training is an example of A) increasing labor force participation. B) investment in human capital. C) investment in physical capital. D) technological change. Answer: B Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills 27) The more education that workers have, the ________ is their human capital and the ________ is their productivity. A) larger; higher B) larger; smaller C) smaller; higher D) smaller; smaller Answer: A Topic: Human Capital Skill: Conceptual Status: Revised AACSB: Analytical Skills

28) During World War II, the increasing productivity of workers who built ships was due primarily to A) human capital accumulation through schooling and training. B) human capital accumulation by repeatedly doing the same tasks. C) discoveries of new and better technologies. D) investments by shipyards in new capital equipment. Answer: B Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills 29) Which of the following statements regarding human capital is INCORRECT? A) Human capital is the accumulated skill and knowledge of human beings. B) Education is the only vehicle for the creation of human capital because training simply reinforces what has already been learned. C) The accumulation of human capital is the source of both increased productivity and technological advance. D) Writing and mathematics, the most basic of human skills, are crucial elements in economic progress. Answer: B Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills 30) Workers who pursue an education directly increase their A) financial capital. B) physical capital. C) human capital. D) saving. Answer: C Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills

31) In addition to saving and investment in capital, making an even larger contribution to longterm economic growth in real GDP per person A) are technological advances. B) is lower current consumption. C) is higher current consumption. D) is a larger work force. Answer: A Topic: Labor Productivity, Technological Advance Skill: Conceptual Status: Old AACSB: Analytical Skills 32) Most ________ is embodied in physical capital. A) human capital B) technological change C) labor productivity D) economic growth Answer: B Topic: Labor Productivity, Technological Advance Skill: Conceptual Status: Old AACSB: Analytical Skills 33) In developing nations, microloans A) have increased the indebtedness of impoverished people, thereby slowing economic growth. B) are primarily used to finance consumption expenditure, thereby leading to economic growth. C) have enabled small businesses with limited access to credit to purchase capital and expand, thus allowing greater economic growth. D) are far too small to have any discernible effect. Answer: C Topic: Microloans Skill: Conceptual Status: Old AACSB: Analytical Skills

5 Growth Theories, Evidence, and Policies 1) Which of the following is associated with classical growth theory? I. Growth in real GDP can continue indefinitely. II. Technological growth increases as the population grows. III. Population explosions bring real GDP per person back to subsistence levels. A) I B) II C) III D) I and III Answer: C Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 2) The view that population growth occurs when real GDP per person exceeds the amount necessary to sustain life is part of the ________. A) classical growth theory B) modern theory of population growth C) neoclassical growth theory D) new growth theory Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 3) An assumption of classical growth theory is that when ________ the population growth rate ________. A) real GDP per person exceeds the subsistence level; increases B) people become more skilled; decreases C) the real wage rate falls; increases D) saving declines; decreases Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

4) Classical growth theory asserts that A) an increase in the labor supply raises real wage rates. B) the economy can grow indefinitely. C) real wage rates fall over time and, as they fall, they increase the population growth rate. D) population growth is determined by the level of real GDP per person. Answer: D Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 5) Which of the following is consistent with the classical theory of growth? A) permanent increases in real wages B) permanent growth in productivity C) rapid population growth in poor countries D) permanent increases in living standards Answer: C Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 6) Classical growth theory states that A) growth is maximized when everyone is fully employed. B) growth is followed by increases in the population, eventually leaving real GDP per person unchanged. C) growth in real GDP per person is difficult in the beginning but easier in the later stages. D) advances in technology will always insure a permanent increase in real GDP per person. Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 7) Which of the following predicts that there can be no sustained rise in real GDP per person above the subsistence level? A) classical growth theory B) neoclassical growth theory C) new growth theory D) None of the above because all predict that there will be a sustained rise above the subsistence level. Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 62 Copyright © 2014 Pearson Education, Inc.

8) Classical growth theory argues that when real GDP per person rises above the subsistence level, A) technological change slows down, stagnating the economy. B) population growth increases, driving real GDP per person back to subsistence level. C) people don't want to work as much, decreasing labor supply. D) the economy enjoys a period of permanent growth. Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 9) What best explains why real GDP per person is always driven to the subsistence level in the classical model? A) Population growth occurs, increasing the supply of labor. B) Population growth occurs, shifting the labor supply curve leftward. C) Growth is not possible so the demand for labor never changes. D) Investment in capital decreases labor demand, decreasing the demand for labor. Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 10) Which of the following ideas are included in classical growth theory? I. Subsistence real GDP per person II. Growth in real GDP per person is temporary. III. Technological change induces investment. A) I only B) I and II C) II and III D) I, II and III Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

11) The assumption that population growth will lead to a fall in real GDP per person rate back to subsistence level is A) accepted by all economists today. B) associated with Malthusians. C) part of the neoclassical school of growth theory. D) central to the new growth theory. Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 12) According to the classical growth theory of Thomas Malthus, A) labor productivity increases continuously. B) the population growth rate is fixed. C) technological advances lead to permanent increases in real GDP per person. D) increases in real GDP per person are only temporary. Answer: D Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 13) Population increases are the limiting factor in the growth process in A) classical growth theory. B) neoclassical growth theory. C) the new growth theory. D) real growth theory. Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 14) Classical growth theory proposes that real GDP growth is ________ and that real GDP per person will ________ the subsistence level. A) permanent; temporarily be above B) permanent; always be above C) temporary; temporarily be above D) temporary; be above and below Answer: C Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

15) Classical economists believed that A) real GDP per person would rise above its subsistence level in the long run. B) real GDP per person would never rise above its subsistence level in the long run. C) the demand for labor increases when the population increases. D) population growth decreases as real GDP per person rises. Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 16) Classical growth theory asserts that A) growth in real GDP per person is temporary. B) only some countries can have economic growth. C) real GDP growth will eventually be a constant 3 percent per year. D) nominal GDP growth is most important. Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 17) The classical model of Malthus predicted that economies would A) continue to grow indefinitely. B) experience rapid technological progress. C) reach a state where the growth of real GDP per person stopped. D) experience significant productivity growth. Answer: C Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 18) Which of the following is consistent with classical growth theory? A) Real GDP per person will increase because technological change induces investment. B) Real GDP per person will never permanently increase. C) Competition destroys innovation and decreases profit. D) As real GDP increases, there will be a decrease in the rate of population growth. Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

19) According to the neoclassical growth theory, A) increases in labor productivity are only temporary. B) technological change depends on people's choices. C) forces other than GDP growth determine population growth. D) higher saving rates generate permanently faster growth in GDP per person. Answer: C Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 20) Neoclassical growth theory predicts that A) population growth rates slow as employment opportunities for women increase. B) population explosions decrease real GDP per person. C) economic growth leads to technological change. D) the pursuit of profit creates perpetual growth. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 21) Which of the following ideas apply to the neoclassical growth theory? I. The rate of technological change influences the rate of economic growth. II. Technological change promotes saving and investment. III. Convergence of economic growth rates across countries. A) I only B) III only C) I and II D) I, II and III Answer: D Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

22) Which of the following ideas apply to the neoclassical growth theory? I. Technological change results from chance. II. Growth in real GDP stops if technology stops advancing. A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 23) Neoclassical growth theory attributes economic growth to A) technological change. B) fiscal policy. C) the law of diminishing returns. D) increasing population growth. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills A recent article states that "...gains from two centuries of rapid technological innovation are largely exhausted, and new discoveries lack the same revolutionary quality....{Further}, 80 percent of the growth between 1950 and 1993 came from the new application of old ideas, and these old ideas are now mostly wrung dry." (The Economist, 03/03/2011) 24) If this quote is true, what would the neoclassical growth theory predict? A) Economic growth stops because most technological advances have already been made. B) Economic growth is temporary regardless of technological change and GDP per person returns to subsistence levels. C) Economic growth will persist indefinitely because technological change will accelerate again as firms seek profits. D) Economic growth will accelerate because these technological changes are permanent. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: New AACSB: Analytical Skills

25) The neoclassical growth theory says, in part, that A) a population explosion driven by economic growth will end economic growth. B) technological change leads to economic growth. C) the differences in nation's growth rates will persist indefinitely. D) technology does not play a role in economic growth. Answer: B Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 26) In neoclassical growth theory, technological change ________. A) occurs by chance B) is influenced by population growth C) is influenced by the rate of economic growth D) occurs at a steady rate Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 27) An assumption of neoclassical growth theory is that A) technological change is random. B) technological change can be influenced by savings. C) more growth encourages more technological change. D) None of the above answers is correct. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 28) Neoclassical growth theory assumes that technological progress A) is determined by investment. B) is determined by saving. C) responds to economic incentives. D) is a purely chance event. Answer: D Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

29) Neoclassical growth theory proposes that A) technological progress increases the population growth rate and drives down real wages. B) real GDP per person grows because technological change increases profit opportunities. C) real GDP growth is caused by growth in the population. D) discoveries result from choices that increase profits. Answer: B Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 30) Within neoclassical growth theory, technological change ________ saving and ________ investment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 31) Neoclassical growth theory is based on the proposition that real GDP per person grows when A) the population growth rate increases. B) the population growth rate decreases. C) technological advances occur. D) saving decreases. Answer: C Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 32) According to neoclassical growth theory, the higher real GDP per person from economic growth will A) not last because the population will increase. B) last because there is no link between growth and population. C) last indefinitely regardless of any other factor. D) last as long as technological change continues. Answer: B Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

33) Neoclassical growth theory predicts that A) advances in technology increase the productivity of capital, which leads to an increase in investment and rising real GDP per person. B) advances in technology are a result of discoveries motivated by the pursuit of profits. C) growth in real GDP can increase without any increase in investment. D) growth in real GDP can continue indefinitely. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 34) Neoclassical growth theory A) predicts that growth rates and incomes per person throughout the world will converge. B) predicts that the faster growing underdeveloped nations will overtake and then surpass the industrial nations. C) predicts that nations that enjoy a technological advantage will maintain that advantage. D) makes no predictions about the relative growth or incomes among countries. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 35) Neoclassical growth theory predicts that China's economic growth rate will ________. A) decrease when the interest rate increases B) continue at around 10 percent a year C) always remain above the U.S. economic growth rate D) eventually converge to the U.S. economic growth rate. Answer: D Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 36) A problem with the neoclassical growth theory is its A) prediction that population growth lowers the real wage rate. B) inability to explain persistent differences between countries' GDP growth rates. C) prediction that population growth raises the real wage rate. D) comparison of the economy to a perpetual motion machine. Answer: B Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

37) The notion that technological change is not random but instead is driven by the pursuit of profits is an essential element of A) classical growth theory. B) neoclassical growth theory. C) the new growth theory. D) perpetual growth theory. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 38) According to the new growth theory, competition A) reduces profit. B) increases profit. C) has no impact on real profit, only nominal profit. D) is only theoretical because all firms are growing at some rate. Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 39) According to new growth theory, technological change is driven by A) random chance. B) government policies. C) foreign firms' attempts to increase their sales in the domestic market. D) firms' attempts to increase their profit. Answer: D Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 40) Because of the choices people make in the pursuit of profit, new growth theory argues that A) technology growth slows down in the long-run. B) population growth increases will bring real GDP per person back to subsistence level. C) the capital stock experiences diminishing returns. D) the economy can enjoy persisting economic growth. Answer: D Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

41) ________ predicts that real GDP per person can grow indefinitely. A) New growth theory B) Classical growth theory C) Profit growth theory D) Neoclassical growth theory Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 42) 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. Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 43) A central proposition of the new growth theory is that A) growth will cease but prosperity will persist. B) knowledge is not subject to diminishing returns. C) government direction and oversight is necessary for consistent growth. D) growth is often just an illusion fostered by growth accounting. Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 44) New growth theory assumes that A) all inputs experience diminishing returns. B) only random technological advances produce growth. C) knowledge does not experience diminishing returns. D) None of the above answers is correct. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

45) A key feature of the new growth theory is the assumption of A) diminishing returns to labor. B) diminishing returns to knowledge. C) no diminishing returns to knowledge. D) no diminishing returns to labor. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 46) According to the new growth theory A) the rate of technological progress is determined by chance. B) knowledge is not subject to diminishing returns. C) the labor demand curve does not shift rightward over time. D) the concept of a labor market is not necessary. Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 47) According to new growth theory ________. A) ever-advancing productivity keeps the population growth rate high B) knowledge does not experience diminishing returns C) growth rates and income levels per person around the globe will converge D) knowledge is subject to the law of diminishing returns Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 48) Which theory emphasizes the significance of new discoveries that can be used by many people at the same time? A) neoclassical growth theory B) new growth theory C) classical growth theory D) None of the above answers are correct. Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

49) Which of the following is NOT associated with the new growth theory? A) natural resources B) research C) technology D) innovation Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 50) New growth theory A) dates from the 18th century. B) concludes that economic growth is temporary. C) states that economic growth arises from people's choices. D) asserts that population growth is the source of economic growth. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 51) An important foundation of the new growth theory is that A) we will get more technological advances the more the government is involved in deciding which technology to pursue. B) we will get more technological advances the greater the rewards people receive from making technological advances. C) the growth rate of the capital stock is more important than the growth rate of new knowledge in generating economic growth. D) improvements in labor productivity are poor measures of technological growth. Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

52) New growth theory economists believe that: I. Economic growth can continue as long as we keep finding new ideas. II. The marginal product of capital diminishes very rapidly, so we must rely upon technological advances to create economic growth. A) I only B) II only C) both I and II D) neither I nor II Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 53) New growth theory proposes that real GDP per person grows because of ________ and that growth ________. A) the pursuit of profit; can persist indefinitely B) productivity shocks; can persist indefinitely C) technological change; can only increase above the subsistence level temporarily D) productivity shocks; occurs randomly Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 54) Which growth theory models growth as a perpetual motion machine? A) new growth theory B) classical growth theory C) neoclassical growth theory D) all growth theories model growth as a perpetual motion machine Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 55) Which growth theory predicts perpetual growth? A) classical growth theory B) neoclassical growth theory C) new growth theory D) None of the above answers is correct. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 75 Copyright © 2014 Pearson Education, Inc.

56) The growth theory that predicts perpetual economic growth is A) classical growth theory. B) neoclassical growth theory. C) the new growth theory. D) real growth theory. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 57) Which one of the following statements about growth theories is correct? A) In the new growth theory, knowledge is not subject to diminishing returns. B) In neoclassical growth theory, technological progress is the result of rapid increases in saving and investment in capital per person. C) In classical growth theory, real GDP per person is unrelated to the subsistence real GDP. D) In classical growth theory physical resources are unlimited. Answer: A Topic: Sorting Out the Growth Theories Skill: Conceptual Status: Old AACSB: Analytical Skills 58) Ongoing economic growth in real GDP per person requires all of the following except ________. A) investment in human capital B) the discovery of new technologies C) saving and investment in new capital D) population growth Answer: D Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 59) Which of the following has NOT been one of the primary sources of economic growth over the last 200 years? A) investment in new capital B) resource conservation C) investment in human capital D) discoveries of new technology Answer: B Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 76 Copyright © 2014 Pearson Education, Inc.

60) Which of the following policy actions could speed productivity growth? I. Tax incentives to encourage saving. II. Encouraging international trade. III. Directing public funds toward financing basic research. A) II only. B) I and III. C) I only. D) I, II, and III. Answer: D Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 61) A higher saving rate leads to faster growth because A) more saving produces greater additions to capital per hour of labor, raising real GDP per person. B) capital would wear out faster. C) people could consume more of an economy's output. D) population growth would accelerate. Answer: A Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills 62) If the saving rate increases, a country's growth rate of real GDP per hour of labor ________ and capital per hour of labor ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills

63) Savings is an important factor influencing economic growth because saving A) can finance new investment and capital formation. B) helps the economy maintain the current level of total expenditures when a recession begins. C) provides a fund for wages needed from any unexpected population growth. D) All of the above answers are correct. Answer: A Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills 64) Which of the following statements is CORRECT? I. Higher savings rates can stimulate economic growth. II. Limiting international trade can stimulate economic growth. A) I only B) II only C) both I and II D) neither I nor II Answer: A Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills 65) One policy that would increase the saving rate would be A) raising taxes on the returns to saving. B) raising taxes on the returns to investment. C) taxing consumption. D) raising taxes on saving. Answer: C Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills 66) To achieve faster growth, one possibility is to tax A) consumption. B) saving. C) hiring. D) immigration. Answer: A Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills

67) Activities that encourage faster growth are A) investment in new capital and 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) developing trade barriers to protect national industries. Answer: A Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 68) Which of the following policies improves prospects for more rapid economic growth? A) policies to increase government expenditure B) limitations on international trade C) policies to increase the educational attainment of the labor force D) encouragement of political instability Answer: C Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 69) All of the following lead to more rapid economic growth EXCEPT A) restricting international trade. B) encouraging higher rates of saving. C) supporting more research and development. D) encouraging higher quality education. Answer: A Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 70) A country would achieve faster growth by ________. A) encouraging free trade B) increasing the cost of education C) increasing union membership D) taxing income and not consumption Answer: A Topic: Achieving Faster Growth, International Trade Skill: Conceptual Status: Old AACSB: Analytical Skills

71) Several factors are important for achieving faster economic growth. Which of the following is one of those factors? A) expansion of international trade B) increased government expenditure C) increased taxes on saving D) promotion of consumption expenditure Answer: A Topic: Achieving Faster Growth, International Trade Skill: Conceptual Status: Old AACSB: Analytical Skills 72) Economic growth tends to be higher in a country that A) has a low savings rate. B) has an economy open to international trade. C) has an undeveloped system of property rights. D) does not grant patents to inventors. Answer: B Topic: Achieving Faster Growth, International Trade Skill: Conceptual Status: Old AACSB: Analytical Skills 73) The relationship between education and economic growth can best be summarized by saying that A) educated people are less apt to consume goods that deplete economic resources, which encourages economic growth. B) educational expenditures tend to divert funds from productive investments, which discourages economic growth. C) educational expenditures tend to be inflationary, which discourages economic growth. D) education has benefits beyond those who receive the education, which encourages economic growth. Answer: D Topic: Achieving Faster Growth, Education Skill: Conceptual Status: Old AACSB: Analytical Skills

74) All of the following would increase the growth rate of the economy EXCEPT A) raising the saving rate. B) stimulating research and development. C) discouraging international trade. D) None of the above answers is correct because they all would increase the growth rate. Answer: C Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 75) Which of the following will NOT work to increase the rate of economic growth? A) increase saving B) limit competition from international trade C) improve the quality of education D) All of the above will work to increase the rate of economic growth. Answer: B Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 76) All of the following would stimulate economic growth EXCEPT A) decreasing taxes on consumption (for instance, decreasing a sales taxes) and increasing income taxes. B) subsidizing basic research. C) decreasing tuition charges at state universities. D) encouraging international trade. Answer: A Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 77) According to empirical evidence, A) providing international aid to developing nations stimulates economic growth. B) providing international aid to developing nations does not have a positive effect on economic growth. C) international trade stimulates economic growth in richer nations, but actually slows economic growth in developing economies. D) international trade stimulates economic growth in developing economies, but actually slows economic growth in richer nations. Answer: B Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 81 Copyright © 2014 Pearson Education, Inc.

78) Which theory of economic growth concludes that in the long run real GDP per person will be at its subsistence level? A) the classical theory B) the neoclassical theory C) the new growth theory D) all of the theories Answer: A Topic: Study Guide Question, Classical Theory Skill: Conceptual Status: Revised AACSB: Analytical Skills 79) A factor that turned out to be a weakness of the classical theory of growth is its A) emphasis on saving and investment. B) assumption that the growth rate of the population increases when income increases. C) reliance on constant growth in technology. D) neglect of the subsistence real wage. Answer: B Topic: Study Guide Question, Classical Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 80) An assumption of the neoclassical theory of growth is that A) people receive only subsistence real GDP per person. B) all technological advances are the result of chance. C) the marginal product of all types of capital increases as more capital is accumulated. D) knowledge has diminishing returns. Answer: B Topic: Study Guide Question, Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 81) In the neoclassical theory of growth, growth in ________ is the result of luck. A) saving B) income C) technology D) the real interest rate Answer: C Topic: Study Guide Question, Neoclassical Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

82) A key assumption of new growth theory is that A) all technological change is the result of luck. B) higher incomes lead to a higher birth rate. C) a successful innovator has the opportunity to earn a temporary, above-average profit. D) the population growth rate is lower than the real interest rate. Answer: C Topic: Study Guide Question, New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 83) Which theory of economic growth concludes that growth can continue indefinitely? A) the classical theory B) the neoclassical theory C) the new theory D) all of the theories Answer: C Topic: Study Guide Question, New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

6 News Based Questions 1) The table below shows data for China.

2000 2003 2006

Population (millions) 1267 1292 1315

Real GDP (yuan, billions) 4999 6498 8776

Nominal GDP (yuan, billions) 9921 13582 21087

The economic growth rate in China between 2000 and 2003 was ________ percent. A) 30 B) 37 C) 1.97 D) 98 Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Old AACSB: Analytical Skills 2) The table below shows data for China.

2000 2003 2006

Population (millions) 1267 1292 1315

Real GDP (yuan, billions) 4999 6498 8776

Nominal GDP (yuan, billions) 9921 13582 21087

The standard of living between 2003 and 2006 increased by ________. A) 55.3 percent B) 1.8 percent C) 35 percent D) 32.7 percent Answer: D Topic: Economic Growth Rate Skill: Analytical Status: Old AACSB: Analytical Skills

3) "IT Policy Can Spur Economic Growth, Industry Says" As staffers on Capitol Hill know all too well, the growth of technology has created an economy increasingly reliant on energy consumption, as BlackBerrys, laptops, and other devices become everyday necessities. The right policies, however, can make IT growth a part of the energy solution rather than the problem, IT representatives said Monday at a forum, in a congressional office, hosted by the Information Technology & Innovation Foundation. Information technology could reduce the expected growth in carbon emissions by one third over 10 years, said Daniel Castro, a senior analyst with the ITIF. Information and communication technology has "great promise in driving economic growth as well as reducing emissions," added David Isaacs, director of government affairs for HewlettPackard, but "policy should drive these results." www.news.cnet.com 11/17/2008 In order to drive economic growth in real GDP per person, the changes in information technology that the article addresses must A) cause a movement along the aggregate production function. B) increase labor productivity. C) increase labor supply. D) decrease the demand for labor. Answer: B Topic: Increase in Productivity Skill: Conceptual Status: Old AACSB: Communication 4) "Premier Liu Chao-shiuan announced Tuesday a government plan to distribute NT$82.9 billion (US$2.51 billion) in consumption coupons to Taiwan's citizens in a bid to stimulate ... economic growth." www.etaiwannews.com 11/18/2008 The Premier's plan to boost economic growth by boosting consumption A) will work because employment will increase. B) will work because there will be a movement out along Taiwan's aggregate production function. C) will not work because real GDP per person will decrease. D) will not work because economic growth is boosted by labor productivity, not consumption. Answer: D Topic: Increase in Productivity Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) Hu Tells Leaders China Growth Will Help World Economy Chinese President Hu Jintao told world leaders that his country "has taken an active part in the international cooperation to deal with the financial crisis'' by providing a "$586 billion economic stimulus, focused on building low-rent housing, roads, railways and airports. The package also allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will also benefit from more subsidies." Hu stated that "China is in itself an important contribution to international financial stability and world economic growth.'' www.bloomberg.com 11/15/2008 If the fiscal stimulus spending does generate economic growth, we can expect to see A) growth in labor productivity. B) growth China's price level. C) an excess supply of labor in China's labor market. D) growth in the supply of labor. Answer: A Topic: Increase in Productivity Skill: Conceptual Status: Old AACSB: Communication

6) Hu Tells Leaders China Growth Will Help World Economy Chinese President Hu Jintao told world leaders that his country "has taken an active part in the international cooperation to deal with the financial crisis'' by providing a "$586 billion economic stimulus, focused on building low-rent housing, roads, railways and airports. The package also allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will also benefit from more subsidies." Hu stated that "China is in itself an important contribution to international financial stability and world economic growth.'' www.bloomberg.com 11/15/2008 Which of the following will occur if China's spending generates economic growth in real GDP per person? I. There will be an upward shift in China's aggregate production function. II. There will be a rightward shift in China's labor demand curve. III. There will be an increase in the real wage. A) I and II only. B) I, II and III. C) I and III only. D) II and III only. Answer: B Topic: Increase in Productivity Skill: Analytical Status: Old AACSB: Analytical Skills

7) Hu Tells Leaders China Growth Will Help World Economy Chinese President Hu Jintao told world leaders that his country "has taken an active part in the international cooperation to deal with the financial crisis'' by providing a "$586 billion economic stimulus, focused on building low-rent housing, roads, railways and airports. The package also allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will also benefit from more subsidies." Hu stated that "China is in itself an important contribution to international financial stability and world economic growth.'' www.bloomberg.com 11/15/2008 China wants to increase investment because this change will A) increase the growth in physical capital and speed up economic growth. B) increase human capital. C) cause an increase in the supply of labor. D) not cause the real wage rate to increase so employment will increase. Answer: A Topic: Why Labor Productivity Grows Skill: Conceptual Status: Old AACSB: Analytical Skills 8) Strategy to Address Dependence on Foreign Workers, Labour Market Demands The prime minister of Malaysia announced his government's "immediate focus would be to enhance skills development and improve the quality of education." By "the constant upgrading of skills of the country's workforce" he hoped to improve the country's "global competitiveness and raise average incomes of workers." www.thestar.com.my 11/21/2008 The story describes A) a plan increase physical capital. B) improvements in Malaysia's incentive system. C) a consequence of economic growth. D) a plan to increase human capital. Answer: D Topic: Human Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) Strategy to Address Dependence on Foreign Workers, Labour Market Demands The prime minister of Malaysia announced his government's "immediate focus would be to enhance skills development and improve the quality of education." By "the constant upgrading of skills of the country's workforce" he hoped to improve the country's "global competitiveness and raise average incomes of workers." www.thestar.com.my 11/21/2008 The long-run benefit of enhancing "skill development and improve....education" is to A) improve property rights. B) increase labor supply. C) speed economic growth. D) smooth the growth of labor productivity. Answer: C Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) "Why India Cannot Sustain High Economic Growth", by Kunal KumarKundu In his article about India's prospects for growth, the author notes that "Per capita availability of food grain is falling as population is growing faster than food grain production. Deplorable rural infrastructure leads to India wasting an amount of food grain ... . India's agriculture is still so very highly monsoon dependent..." www.rediff.com 5/29/2008 This view of India's economic growth is best reflected in the ________. A) classical growth theory. B) new growth theory. C) neoclassical growth theory. D) aggregate production theory. Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

11) "Why India Cannot Sustain High Economic Growth", by Kunal KumarKundu In his article about India's prospects for growth, the author notes that "Per capita availability of food grain is falling as population is growing faster than food grain production. Deplorable rural infrastructure leads to India wasting an amount of food grain ... . India's agriculture is still so very highly monsoon dependent..." www.rediff.com 5/29/2008 If the author is suggesting that India's growth prospects are explained by the classical growth theory, we also expect that A) real GDP per worker will increase. B) the subsistence wage will increase. C) the economy will perpetually grow. D) labor productivity, which has risen in recent years, will eventually decline. Answer: D Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 12) Use the table below to answer this question. The data show national savings rates as a percentage of GDP; the growth rate of real GDP per person; and birth rates in 2006. Growth rate National Saving of real GDP Country (% of GDP) per person Birth Rate Japan 28 1.6 9.96 Canada 24 2.6 11.4 Germany 23 1.9 9.35 U.S. 14 1.9 14.2 www.econstats.com; www.os-connect.com If the data support the neoclassical growth theory, we would expect to see A) Japan with the highest economic growth rate because the high saving means that more capital is accumulated. B) the United States with the highest economic growth rate because a lower savings rate means more income is spent on consumption. C) Canada with the highest economic growth rate because it has the highest real GDP per person. D) the United States with the highest economic growth rate because it has the highest birth rate. Answer: A Topic: Neoclassical Growth Theory Skill: Analytical Status: Old AACSB: Analytical Skills

13) "Global Innovation 1000—Money Isn't Everything." The report by Booz Allen Hamilton Consulting claims that "There is no direct relationship between R&D spending and significant measures of corporate success such as growth, profitability, and shareholder return. ...However, the pace of corporate R&D spending continues to accelerate, as many executives continue to believe that enhanced innovation is required to fuel their future growth. www.boozallen.com 10/11/2005 The report provides ________ evidence of the ________. A) conflicting; new growth model which claims that profits are linked to innovation. B) supporting; new growth model which claims that innovation is indirectly related to profit. C) conflicting; neoclassical growth model which claims that population growth spurs technology. D) supporting; neoclassical growth model which claims that technology advances are random. Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 14) According to UNESCO reporting, "Governments in North America and Western Europe invested the highest shares of national resources in education: 5.6 percent of GDP." As a result, we would expect ________, all else held constant. www.worldometers.info A) higher economic growth rates in these countries compared to other countries B) lower economic growth rates in the countries because fewer resources can be devoted to innovation. C) lower research and development spending and lower economic growth unless the governments can raise taxes. D) lower saving rates and slower economic growth. Answer: A Topic: Achieving Faster Growth, Education Skill: Conceptual Status: Old AACSB: Analytical Skills

15) Cuba spends the highest percentage of GDP (18.7 percent) on education while the United States is the 38th highest spender with 5.7 percent of GDP. If spending on education is important for economic growth, which of the following statements explain why Cuba's economic growth rate is lower than the U.S. economic growth rate? (data from United Nations Human Development Programme) A) Cuba trades with many more countries than does the United States. B) Cuba doesn't offer property rights that promote innovation. C) Cuba's population is smaller than the U.S. population. D) all of the above explain why Cuba's economic growth rate is lower than the U.S. economic growth rate. Answer: D Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 7 Essay Questions 1) How has U.S. real GDP per person changed over the last 100 years? Answer: Although the U.S. economy usually displays growth in real GDP per person, there have been periods of time when real GDP per person has fallen. The decline is usually mild, although this was not the case during the Great Depression, which had a severe decrease in real GDP per person. Overall, the average yearly growth rate was higher after World War II than prior to the Great Depression. Prior to the Great Depression, the yearly U.S. growth rate of real GDP per person averaged only about 1.4 percent per year, while after World War II it averaged 2 percent per year. And, over the entire 100 years, the U.S. growth rate of real GDP per person has averaged about 2 percent per year. Topic: U.S. Economic Growth Skill: Conceptual Status: Old AACSB: Communication 2) Briefly explain how growth in real GDP differs across economies including the United States, Japan, Africa, Central America, Hong Kong, Korea, and Singapore. Answer: Over the past 100 years, growth in real GDP per person in the United States has averaged 2 percent per year. The growth rate has varied from one period to the next. Some rich nations, such as Japan, are catching up to the U.S. level of real GDP per person. Many poor nations, especially those in Africa and Central America are not catching up. But Hong Kong, Korea, Singapore, and Taiwan are generally growing more rapidly than the United States and so they are catching up. Topic: Real GDP Growth in the World Economy Skill: Recognition Status: Old AACSB: Communication 92 Copyright © 2014 Pearson Education, Inc.

3) How has the U.S. growth experience compared to that of Central Europe and Africa? How has compared to the recent experience of Asian nations such as Hong Kong and Singapore. Answer: A persistent gap in the level of real GDP per person has existed between the United States and most other nations in the world. Nations from Central Europe and Africa have consistently grown at a slower rate and have therefore fallen further behind in real GDP per person. An exception to this rule has been the experience of several Asian nations such as Hong Kong and Singapore. These and other Asian nations have experienced, on average, higher growth rates than the United States and so have (partially) closed the gap in real GDP per person. Topic: Real GDP Growth in the World Economy Skill: Recognition Status: Old AACSB: Communication 4) Discuss the aggregate production function. How does the aggregate production function relate to the labor market and potential GDP? Answer: The aggregate 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 aggregate production. As the quantity of labor increases, real GDP increases but at a decreasing rate, that is, the aggregate production function shows diminishing returns. The aggregate production function "stands between" the labor market and potential GDP. In particular, the quantity of employment is determined in the labor market. The aggregate 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: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Communication 5) Define the aggregate production function. Discuss why the aggregate production function exhibits diminishing returns. Answer: The aggregate 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 aggregate production remain the same. The aggregate 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: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Communication

6) What is the real wage rate? Answer: The real wage rate is the money wage rate "corrected" for changes in the price level. It is calculated by dividing the money wage rate by the price level. The real wage rate is the quantity of goods and services that can be purchased by an hour's worth of work. Topic: Real Wage Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 7) 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. Intuitively, 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: Labor Market and Potential GDP Skill: Conceptual Status: Old AACSB: Communication 8) How will an increase in physical capital affect labor productivity, labor demand, and potential GDP? Answer: An increase in capital increases labor productivity. It shifts the production function upward and, because productivity has increased, it increases the demand for labor. Equilibrium employment increases because of the increase in demand for labor. Potential GDP increases because employment increases and because the production function has shifted upward. Topic: Labor Market and Potential GDP Skill: Conceptual Status: Old AACSB: Communication 9) What happens to the real wage rate and potential GDP if population increases? Answer: An increase in population increases the supply of labor. As a result, the labor supply curve shifts rightward. The labor demand curve does not shift. The increase in the supply of labor means that employment increases and the real wage rate falls. The economy moves along its (unchanged) production function to a higher level of potential GDP. Topic: Labor Market and Potential GDP Skill: Conceptual Status: Old AACSB: Communication

10) With no change in labor productivity, what would happen to the real wage rate and potential GDP if the population increased? Answer: An increase in population increases the supply of labor. As a result, the labor supply curve shifts rightward. Neither the labor demand curve not the production function shifts. The increase in the supply of labor means that employment increases and the real wage rate falls. The economy moves along its (unchanged) production function to a higher level of potential GDP. Topic: Labor Market and Potential GDP Skill: Conceptual Status: Old AACSB: Communication 11) What is the effect on real GDP per person if labor productivity increases? 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. Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Communication 12) 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: Labor Productivity Skill: Conceptual Status: Old AACSB: Communication 13) What factors raise the productivity of labor? Answer: The productivity of labor is affected by the amount physical capital, the amount of human capital, and the level of technology. An increase in either physical capital or human capital means that more goods and services can be produced with a given amount of labor, so that the productivity of labor increases. Similarly a technological improvement also increases the productivity of labor. Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) List and explain the 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: Labor Productivity Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) 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: Human Capital Skill: Recognition Status: Old AACSB: Reflective Thinking 16) What are the basic arguments of the classical growth theory? Answer: The classical growth theory originated during the late 18th century. Although proposed by many leading economists of the time, it has most often associated with Malthus. The classical theory states that economic growth will be temporary. The reason why the growth is temporary is because any economic growth will lead to a population explosion. The growth in population increases labor hours, which lead to a reduction in capital per labor hour. Productivity declines until real GDP per person falls to the subsistence level where life is just sustained. At this point, economic growth ceases. Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Communication

17) What is the main difference between classical economists' ideas about economic growth versus what modern evidence suggests? Answer: Classical economists assumed that as real GDP per person rises, the population growth rate increased. But, contrary to this assumption, the data show that population growth rate is approximately independent of the economic growth rate. Classical economists concluded that the increase in population, which increases labor supply, would drive real GDP per person back to the subsistence level. But the data show that in advanced nations real GDP per person is well above the subsistence wage rate. Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Communication 18) 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: Conceptual Status: Old AACSB: Communication 19) What are the basic arguments of the neoclassical growth theory? Answer: The neoclassical growth theory explains economic growth as the result of technological change. Technological change leads to a level of saving and investment that makes capital per hour of labor grow. Growth, therefore, only ends if technological change ends. However the theory looks at technological change as being the result of chance and luck and so offers no explanation for how or why technological change occurs. Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Communication

20) "According to the neoclassical growth theory, national incentives to save, invest, accumulate human capital, and develop new technology influence the country's growth rate of real GDP." Comment on the accuracy of the previous statement. Answer: The sentence is inaccurate. The neoclassical growth theory says that a nation's growth rate of real GDP depends on the growth rate of technology. The neoclassical growth theory assumes that the growth rate of technology is the result of chance and luck. It is the new growth theory that asserts that growth depends on people's incentives, so it is the new growth theory that predicts that a nation's growth rate depends on its national incentives to save, invest, accumulate human capital, and develop new technology. Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Communication 21) What is the role of profits in the neoclassical growth theory versus the new growth theory? Answer: Profits play essentially no role in the neoclassical growth theory. In the new growth theory, they are key because it is based on the idea that technological change results from the choices that people make in the pursuit of profit. Discoveries result from people's choices, such as whether to look for something new and, if so, how intensively to look. Profit affects these choices. A new discovery brings the discovered high profits but eventually competitors emerge and the above-average profit is competed away. Topic: Neoclassical and New Growth Theory Skill: Conceptual Status: Old AACSB: Communication 22) What is the main shortcoming of the neoclassical growth model and how does the new growth theory address this shortcoming? Answer: One difficulty with the neoclassical model is that it predicts all nations will converge to the same level of per capita income. The new growth theory is based on the idea that technological change results from the choices that people make in the pursuit of profit. So if people in different nations face different incentives to innovate, technological progress and hence economic growth can differ among nations. Topic: Neoclassical and New Growth Theory Skill: Conceptual Status: Old AACSB: Communication

23) How does the new growth theory explain economic growth? Answer: The new growth theory explains growth as the result of choices made in the pursuit of profit. If people choose to look intensively for new technologies they will be found more quickly. Profit is the motive to look for technological change. The reason is that competition squeezes profits. Firms are constantly looking for ways to reduce costs and increase profits through technological change. The economy can grow forever as long as people make the choices that encourage the search for new technologies. Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Communication 24) Of the three 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: Growth Theories Skill: Conceptual Status: Old AACSB: Communication

25) Explain the role played by technological change in classical growth theory, neoclassical growth theory, and new growth theory. Answer: Technology plays a secondary role in classical growth theory. While technology might increase real GDP in the classical growth model, population changes drive real GDP per person back to a subsistence level of income. Technology also plays a secondary role in neoclassical growth theory. Neoclassical theory has technological change bringing about an increase in real GDP but diminishing returns brings an end to economic growth. The new growth theory emphasizes the role of technological change in creating continuous growth because entrepreneurs have an incentive to develop new technologies as a means of generating profits for themselves. Topic: Growth Theories Skill: Conceptual Status: Old AACSB: Communication 26) Suppose the President asks you to write him a letter suggesting ways the government might help the economy achieve permanently higher rates of economic growth. Based on your understanding of growth theory and growth accounting, what would you suggest? Answer: According to both neoclassical and new growth theories, the key to faster growth is generating higher rates of technological progress. Because many technological advances are embodied in new capital, sustaining a high rate of saving and investment is important. Government might help stimulate saving supply by tax incentives such as IRAs and stimulate investment demand by offering investment tax credits, accelerated depreciation and reductions in corporate profit tax rates. New ideas are also embodied in human capital. Government can finance education and training directly and provide low-interest loans to students and training tax credits to businesses. Finally, we need to generate more new ideas, by stimulating research and development efforts. This includes government funding of basic research and tax credits to businesses for R&D expenses. Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Communication 27) Describe ways that governments can promote faster economic growth. Answer: Policies for increasing the economic growth rate are 1) Stimulate saving (for instance, tax incentives could be directed at increasing saving which will then increase the capital stock); 2) Stimulate research and development (inventions can be copied, so government subsidies can lead to more inventions that spread throughout the economy); 3) Encourage international trade (free international trade encourages economic growth because free trade extracts all the possible gains from specialization and exchange); 4) Improve the quality of education (education creates benefits beyond the ones enjoyed by the students who receive education). Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Communication

8 Numeric and Graphing Questions

Labor demand Labor supply (billions of Real wage rate (billions of hours per (2005 dollars) hours per year) year) 0 30 6 1 25 5 2 20 4 3 15 3 4 10 2 Employment (billions of Real GDP hours per (billions of year) 2005 dollars) 6 95 5 90 4 80 3 60 2 30 1) The first table above gives the labor demand and labor supply schedules for a nation. The second table gives its production function. a) What is 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: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Labor demand Labor supply Real wage rate (billions of (billions of (2005 dollars) hours per hours per year) year) 30 100 700 25 200 600 20 300 500 15 400 400 10 500 300 Employment (billions of Real GDP hours per (trillions of year) 2005 dollars) 200 3.0 300 4.0 400 4.8 500 5.4 600 5.8 2) The first table above gives the labor demand and labor supply schedules for a nation. The second table gives its production function. a) What is 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: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Labor demand Labor supply Real wage rate (billions of (billions of (2005 dollars) hours per hours per year) year) 5 360 260 10 325 275 15 300 300 20 280 330 Employment (billions of Real GDP hours per (trillions of year) 2005 dollars) 100 2.0 200 3.0 300 3.8 400 4.4 3) The first table above gives the labor demand and labor supply schedules for a nation. The second table gives its production function. a) What is 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: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 4) Real GDP equals $12 trillion and aggregate hours equals 300 billion hours. What does labor productivity equal? Answer: Labor productivity is (real GDP)/(aggregate hours), so labor productivity equals ($12 trillion)/(300 billion hours) = $40 per hour. Topic: Labor Productivity Skill: Analytical Status: Old AACSB: Analytical Skills

9 True or False 1) Economists are interested in long-term economic growth because growth increases real GDP per person and improves our standard of living. Answer: TRUE Topic: Economic Growth Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 2) Over the last 100 years, real GDP per person in the United States has grown at an average rate of approximately 2 percent per year. Answer: TRUE Topic: Growth in the U.S. Economy Skill: Recognition Status: Old AACSB: Reflective Thinking 3) The United States had the largest real GDP per person until the 2012 when the China's real GDP per person overtook and then exceeded that in the United States. Answer: FALSE Topic: Real GDP Growth in the World Economy Skill: Recognition Status: Revised AACSB: Reflective Thinking 4) Because the United States is a developed economy, every other country is catching up to the level of U.S. real GDP per person. Answer: FALSE Topic: Real GDP Growth in the World Economy Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) The gap between real GDP per person in the United States and South America has been narrowing since 1980. Answer: FALSE Topic: Real GDP Growth in the World Economy Skill: Recognition Status: Old AACSB: Reflective Thinking

6) Real GDP per person is slowly converging around the world. Answer: FALSE Topic: Real GDP Growth in the World Economy Skill: Recognition Status: Old AACSB: Reflective Thinking 7) Labor productivity has grown at almost the same rate each year over the last 40 years in the United States. Answer: FALSE Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) If the price level rises faster than the money wage rate, the real wage rate falls. Answer: TRUE Topic: Real Wage Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) The real wage rate measures the quantity of goods and services an hour's work will buy. Answer: TRUE Topic: Real Wage Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) The demand curve for labor shows how many hours workers demand to work. Answer: FALSE Topic: Demand for Labor Skill: Recognition Status: Old AACSB: Reflective Thinking 11) In general, a higher real wage rate decreases the quantity of labor supplied because fewer people enter the labor force. Answer: FALSE Topic: Labor Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

12) The higher the real wage rate, the higher the labor force participation rate. Answer: TRUE Topic: Labor Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 13) To achieve faster growth, economies can increase income tax rates in order to increase saving rates. Answer: FALSE Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) Faster long-term growth can be achieved by discouraging saving and encouraging consumption. Answer: FALSE Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) All else equal, an increase in population decreases potential GDP. Answer: FALSE Topic: An Increase in Population Skill: Conceptual Status: Old AACSB: Reflective Thinking 16) The classical growth theory shows how technology changes continually generate economic growth. Answer: FALSE Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) The classical growth theory's view of the economy and its ability to achieve growth can be compared to a perpetual motion machine. Answer: FALSE Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) The neoclassical growth theory is based on a subsistence real wage rate. Answer: FALSE Topic: Neoclassical Growth Theory Skill: Recognition Status: Old AACSB: Reflective Thinking 19) The neoclassical growth theory concluded that economic growth is temporary because of a population explosion that occurs as a result of economic growth. Answer: FALSE Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) In neoclassical growth theory, technological progress is the key to continuous growth in labor productivity. Answer: TRUE Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) New growth theory claims that economic growth occurs because firms reap profits from research and add to the stock of capital. Answer: TRUE Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) New growth theory holds that choices, and the discoveries that result from them, result in growth that is temporary in nature. Answer: FALSE Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking

10 Extended Problems Leisure (hours) 0 40 80 120 160 200

Real GDP (2005 dollars) 2,000 1,920 1,680 1,280 720 0

1) The people of Palm Island are willing to work 80 hours a day for a real wage rate of $4 an hour. Then each dollar increase in the real wage, they are willing to work 10 additional hours a day. Palm Island's production possibilities are in the table above. a) Draw Palm Island's demand for labor curve. b) Draw Palm Island's supply of labor curve. c) What are the full-employment equilibrium real wage rate and quantity of labor in Palm Island's economy? d) What is Palm Island's potential GDP? Answer:

a) See the figure above. Palm Island's demand for labor curve is the marginal product of labor curve. The marginal product of labor for each quantity of labor employed is the change in real GDP divided by the change in quantity of labor employed. For example, 100 hours of labor employed is the midpoint between 80 and 120 hours on the production function. The 40 hors of additional labor between 80 and 100 hours produce of additional real GDP. So for these 40 hours of labor, one hour will produce additional real GDP of So the marginal product of labor is $10 per hour when 100 hours of labor are employed. The rest of the marginal products are calculated similarly and are in the figure above. 108 Copyright © 2014 Pearson Education, Inc.

b) The figure above shows the labor supply curve. c) The full-employment equilibrium real wage rate is the one at which the quantity of labor demanded equals the quantity of labor supplied so that real GDP is at its full-employment level. In the economy of Palm Island, the figure above shows that the full-employment equilibrium real wage rate is $8 per hour and the full-employment quantity of labor is 120 hours per day. d) Potential GDP is the level of real GDP at full employment. As the figure above shows, Palm Island's full employment is 120 hours per day. And the production function shows that 120 hours of labor can produce a real GDP of $1,280. So Palm Island's potential GDP is $1,280 per day. Topic: Labor Market and Potential GDP Skill: Analytical Status: Old AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 7 Finance, Saving, and Investment 1 Financial Institutions and Financial Markets 1) The term "capital," as used in macroeconomics, refers to A) the plant, equipment, buildings, and inventories of raw materials and semi-finished goods. B) financial wealth. C) the sum of investment and government purchases of goods. D) investment. Answer: A Topic: Capital Skill: Recognition Status: Old AACSB: Reflective Thinking 2) The term capital, as used in macroeconomics, refers to A) the amount of money that someone can invest in a new venture. B) the amount of money a firm can raise in the stock market. C) physical capital. D) All of the above answers are correct. Answer: C Topic: Capital Skill: Recognition Status: Old AACSB: Reflective Thinking 3) Which of the following items are considered physical capital? I. shares of Ford stock traded on the New York Stock Exchange II. the Taco Bell store nearest you III. the rental cars owned by Hertz Rental-A-Car IV. the salaries paid to Intel executives A) II and III. B) I and IV. C) I, II and III. D) I, II and IV. Answer: A Topic: Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) Gross investment A) is the purchase of new capital. B) includes only replacement investment. C) does not include additions to inventories. D) Both answers A and B are correct. Answer: A Topic: Gross Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 5) The total amount spent on new capital in a time period is equal to A) wealth. B) gross investment. C) depreciation. D) net investment. Answer: B Topic: Gross Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 6) In January 2013, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2013, Tim spent $200,000 on new machines. During 2013, Tim's gross investment totalled A) $1 million. B) $300,000. C) $200,000 D) $900,000. Answer: C Topic: Gross Investment Skill: Analytical Status: Old AACSB: Analytical Skills 7) Net investment equals A) capital stock minus depreciation. B) gross investment minus depreciation. C) the total quantity of plant, equipment and buildings. D) gross investment/depreciation. Answer: B Topic: Net Investment Skill: Recognition Status: Old AACSB: Reflective Thinking

8) The increase in the capital stock equals the amount of A) gross investment. B) depreciation. C) net investment. D) private sector spending. Answer: C Topic: Net Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 9) The capital stock increases whenever A) gross investment is exceeds net investment. B) net investment exceeds gross investment. C) gross investment is negative. D) net investment is positive. Answer: D Topic: Net Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) If the economy's capital stock increases over time, A) net investment is positive. B) depreciation is less than zero. C) depreciation exceeds gross investment. D) gross investment equals depreciation. Answer: A Topic: Net Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) If the economy's capital stock decreases over time, A) net investment is positive. B) depreciation is less than zero. C) depreciation exceeds gross investment. D) gross investment equals net investment. Answer: C Topic: Net Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) In January 2013, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2013, Tim spent $200,000 on new machines. During 2013, Tim's net investment totalled A) $1 million. B) -$300,000. C) $200,000. D) -$100,000. Answer: D Topic: Net Investment Skill: Analytical Status: Revised AACSB: Analytical Skills 13) The Acme Stereo Company had a capital stock of $24 million at the beginning of the year. At the end of the year, the firm had a capital stock of $20 million. Thus its A) net investment was some amount but we need more information to determine the amount. B) net investment was $4 million for the year. C) gross investment was zero. D) net investment was -$4 million for the year. Answer: D Topic: Capital and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 14) At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's net investment for the year totaled A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines. Answer: A Topic: Capital and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

15) At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's gross investment for the year totaled A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines. Answer: C Topic: Capital and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 16) At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's capital stock at the end of year equals A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines. Answer: D Topic: Capital and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 17) Which of the following is FALSE about saving? A) Saving adds to wealth. B) Income left after paying taxes can either be consumed or saved. C) Saving equals wealth minus consumption expenditures. D) Saving is the source of funds used to finance investment. Answer: C Topic: Wealth and Saving Skill: Recognition Status: Old AACSB: Reflective Thinking 18) An increase in the ________ is an example of a capital gain. A) value of a share of stock B) wage rate of a federal employee C) amount of income not spent on consumption or taxes D) after-tax wage rate as a result of a decrease in income tax rates Answer: A Topic: Wealth and Saving Skill: Definition Status: New AACSB: Reflective Thinking 5 Copyright © 2014 Pearson Education, Inc.

19) Facebook sold shares of stock for the first time in an IPO on May 18, 2012. The stock originally sold for $38 per share. As of October 19, 2012, a share of Facebook stock was valued at $19 per share. The decrease in the value of a share of Facebook purchased in May and still owned in October is called A) a capital gain. B) a capital loss. C) gross investment. D) net investment. Answer: B Topic: Wealth and Saving Skill: Definition Status: New AACSB: Reflective Thinking 20) At the beginning of the year, your wealth is $10,000. During the year, you have an income of $90,000 and you spend $80,000 on consumption. You pay no taxes. Your wealth at the end of the year is A) $20,000.00. B) $0. C) $90,000.00. D) $100,000.00. Answer: A Topic: Wealth and Saving Skill: Analytical Status: Old AACSB: Analytical Skills 21) At the beginning of the year, your wealth is $10,000. During the year, you have an income of $80,000 and you spend $90,000 on consumption. You pay no taxes. Your wealth at the end of the year is A) $20,000.00. B) $0. C) $90,000.00. D) $100,000.00. Answer: B Topic: Wealth and Saving Skill: Analytical Status: Old AACSB: Analytical Skills

22) In January, suppose that a share of stock in Meyer, Inc. had a price of $50 and that each share entitled its owner to $2 of Meyer, Inc.'s profit. During the year, the price of a share of Meyer's stock rose to $100. The interest rate paid on the share in January was ________ percent. A) 2 B) 0.02 C) 4 D) 25 Answer: C Topic: Interest Rate and Price of Asset Skill: Analytical Status: Old AACSB: Analytical Skills 23) Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increases from $1,000 to $1,250, then the interest rate on the bond A) falls from 10 percent to 8 percent. B) rises from 8 percent to 10 percent. C) does not change because it is not affected by the price of the bond. D) falls from 10 percent to 6 percent. Answer: A Topic: Interest Rate and Price of Asset Skill: Analytical Status: Old AACSB: Analytical Skills 24) Suppose a bond promises to pay its holder $100 a year forever. The interest rate on the bond rises from 4 percent to 5 percent. The price of the bond A) falls from $2,500 to $2,000. B) does not change because it is not affected by the interest rate. C) falls from $25,000 to $20,000. D) rises from $2,000 to $2,500. Answer: A Topic: Interest Rate and Price of Asset Skill: Analytical Status: Old AACSB: Analytical Skills

25) The Restoring American Financial Stability Act of 2010 A) cut the federal government's ties with Fannie Mae and Freddy Mac. B) prohibits banks from selling mortgage backed securities, which were largely to blame for the financial market crisis in 2007-2008. C) eliminated the Federal Deposit Insurance Corporation. D) had restrictions that try to limit risky investment by banks. Answer: D Topic: The Financial Crisis and the Fix Skill: Recognition Status: Old AACSB: Reflective Thinking 26) All of the following are points of the Restoring American Financial Stability Act of 2010 EXCEPT: A) creating a Consumer Financial Protection Bureau. B) requiring mortgage lenders to review income and credit histories of applicants to ensure they can afford payments. C) imposing tighter restrictions on banks to limit risky investments. D) requiring firms that create mortgage backed securities to keep at least 50 percent of their value as reserves. Answer: D Topic: The Financial Crisis and the Fix Skill: Recognition Status: Old AACSB: Reflective Thinking 27) The funds used to buy and operate physical capital are A) depreciation. B) financial capital. C) saving. D) wealth. Answer: B Topic: Study Guide Question, Financial Capital Skill: Recognition Status: Old AACSB: Reflective Thinking

28) This year Pizza Hut makes a total investment of $1.3 billion in new stores. Its depreciation in this year is $300 million. Pizza Hut's gross investment is ________ and its net investment is ________. A) $1.3 billion; $1.6 billion B) $1.0 billion; $1.3 billion C) $1.3 billion; $1.0 billion D) $1.0 billion; $0.7 billion Answer: C Topic: Study Guide Question, Gross and Net Investment Skill: Analytical Status: Old AACSB: Analytical Skills 29) If a bank's net worth is negative, then the bank definitely is A) liquid. B) insolvent. C) illiquid. D) solvent. Answer: B Topic: Study Guide Question, Insolvent Skill: Recognition Status: Old AACSB: Reflective Thinking

2 The Loanable Funds Market 1) Investment is financed by which of the following? I. Government spending II. National saving III. Borrowing from the rest of the world A) I, II, and III B) I and II only C) I and III only D) II and III only Answer: D Topic: How Investment is Financed Skill: Recognition Status: Old AACSB: Reflective Thinking 2) U.S. investment is financed from A) private saving, government budget surpluses, and borrowing from the rest of the world. B) private saving, government budget deficits, and borrowing from the rest of the world. C) private borrowing, government budget deficits, and lending to the rest of the world. D) private saving and borrowing from the rest of the world only. Answer: A Topic: Financing Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 3) A nation's investment must be financed by A) national saving only. B) the government's budget deficit. C) borrowing from the rest of the world only. D) national saving plus borrowing from the rest of the world. Answer: D Topic: Financing Investment Skill: Recognition Status: Old AACSB: Reflective Thinking

4) National saving is defined as the amount of A) business saving. B) household saving. C) business saving and household saving. D) private saving and government saving. Answer: D Topic: National Saving Skill: Recognition Status: Old AACSB: Reflective Thinking 5) National saving equals A) household saving + business saving. B) household saving + business saving + government saving. C) household saving + business saving + net taxes - government expenditure. D) Both answers B and C are correct. Answer: D Topic: National Saving Skill: Recognition Status: Old AACSB: Reflective Thinking 6) If the government runs a budget deficit, then A) national saving is negative. B) household but not business saving must pay for the deficit. C) part of household and business saving finances the deficit. D) national saving cannot fund investment. Answer: C Topic: National Saving Skill: Analytical Status: Old AACSB: Analytical Skills 7) If national saving (S) is $100,000, net taxes (T) equal $100,000 and government expenditure (G) is $25,000, how much are households and businesses saving? A) $25,000. B) $225,000. C) -$25,000. D) none of the above Answer: A Topic: National Saving Skill: Recognition Status: Old AACSB: Analytical Skills

8) Suppose the United States spends more on foreign goods and services than foreigners spend on our goods and services and the United States sells no foreign assets. Then the A) United States must borrow an amount equal to national saving. B) United States must borrow an amount equal to imports minus exports. C) rest of the world may or may not finance the U.S. trade deficit. D) United States must borrow an amount equal to consumption expenditure plus investment. Answer: B Topic: Borrowing from the Rest of the World Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) If foreigners spend more on U.S.-made goods and services than we spend on theirs, A) foreigners must borrow from the United States or sell U.S. assets to make up the difference. B) all U.S. national saving remains in the United States C) we must borrow from foreigners because of low imports. D) funds flow in from abroad to help finance U.S. investment. Answer: A Topic: Borrowing from the Rest of the World Skill: Analytical Status: Old AACSB: Analytical Skills 10) If U.S. exports are $2.2 billion and our imports are $2.7 billion, A) the United States is lending to the rest of the world. B) U.S. national saving is too high. C) the United States is borrowing from the rest of the world. D) U.S. investment must decrease. Answer: C Topic: Borrowing from the Rest of the World Skill: Analytical Status: Old AACSB: Analytical Skills 11) Suppose Country A had net taxes of $30 million and government expenditures of $35 million. In addition, household saving in Country A totalled $5 million while consumption was $80 million. The government of Country A is running a budget ________ and national saving is ________ million. A) surplus; $5 B) deficit; -$5 C) deficit; $0 D) surplus; $25 Answer: C Topic: Financing Investment Skill: Analytical Status: Revised AACSB: Analytical Skills 12 Copyright © 2014 Pearson Education, Inc.

Item Personal consumption expenditure Government expenditure on goods and services Net taxes Gross private domestic investment Imports of goods and services Exports of goods and services

Millions of dollars 80 30 35 20 10 20

12) Use the information in the table above to calculate the value of national saving. A) -$15 million B) $40 million C) $25 million D) $20 million Answer: C Topic: Financing Investment Skill: Analytical Status: Revised AACSB: Analytical Skills 13) Use the information in the table above to calculate the value of government saving. A) $15 million B) -$5 million C) $5 million D) $45 million Answer: C Topic: Financing Investment Skill: Analytical Status: Old AACSB: Analytical Skills 14) Which of the following is TRUE regarding the real interest rate? I. The real interest rate is the opportunity cost of borrowed funds. II. The real interest rate equals the nominal interest rate adjusted for inflation. A) I B) II C) both I and II D) neither I nor II Answer: C Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 13 Copyright © 2014 Pearson Education, Inc.

15) Approximately, the real interest rate ________ the inflation rate ________ the nominal interest rate. A) plus; equals B) equals; plus C) equals; minus D) minus; equals Answer: A Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 16) The ________ interest rate approximately equals the ________ interest rate minus ________. A) nominal; real; depreciation B) nominal; real; the inflation rate C) real; nominal; depreciation D) real; nominal; the inflation rate Answer: D Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 17) The real interest rate A) can never be negative. B) is approximately equal to the nominal interest rate plus the inflation rate. C) is approximately equal to the nominal interest rate minus the inflation rate. D) is positively related to the inflation rate. Answer: C Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 18) The nominal interest rate minus the real interest rate approximately equals the A) rate of increase in the amount of investment. B) inflation rate. C) the rate of increase in the income. D) the rate the bank receives to cover lending costs. Answer: B Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

19) The nominal interest rate approximately equals which of the following? A) the real interest rate minus the inflation rate B) the real interest rate plus the inflation rate C) the real interest rate minus the growth rate of real GDP D) the real interest rate plus the growth rate of real GDP Answer: B Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 20) If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent, A) the purchasing power of your loan has risen over the year regardless of the interest rate at which you lent it. B) the purchasing power of your loan has remained constant over the year regardless of the interest rate at which you lent it. C) you must have earned a nominal interest rate of 10 percent to maintain the purchasing power of your loan. D) you must have earned a nominal interest rate of 5 percent to maintain the purchasing power of your loan. Answer: C Topic: Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) When the inflation rate is zero, the A) real interest rate is greater than the nominal interest rate. B) real interest rate is less than the nominal interest rate. C) nominal interest rate is zero. D) real interest rate equals the nominal interest rate. Answer: D Topic: Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

22) When the inflation rate is positive, the A) real interest rate is greater than the nominal interest rate. B) real interest rate is less than the nominal interest rate. C) nominal interest rate is zero. D) real interest rate equals the nominal interest rate. Answer: B Topic: Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) When the inflation rate is negative, the A) real interest rate is greater than the nominal interest rate. B) real interest rate is less than the nominal interest rate. C) nominal interest rate is zero. D) real interest rate equals the nominal interest rate. Answer: A Topic: Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) People expect an inflation rate of 5 percent and the real interest rate is positive. Consequently the nominal interest rate will be A) more than 5 percent. B) 5 percent. C) less than 5 percent. D) Without more information it is impossible to tell if the nominal interest rate will be more than, less than, or equal to 5 percent. Answer: A Topic: Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) People know that the inflation rate will increase from 3 percent to 5 percent. As a result A) the nominal interest rate falls by 2 percentage points. B) the nominal interest rate is constant. C) the nominal interest rate rises by 2 percentage points. D) the real interest rate rises by 2 percentage points. Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

26) Suppose that you took out a $1000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is correct? A) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent. B) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent. C) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent. D) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent. Answer: A Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 27) People know that the inflation rate will decrease from 7 percent to 3 percent. As a result A) the nominal interest rate falls by 4 percentage points. B) the nominal interest rate is constant. C) the nominal interest rate rises by 4 percentage points. D) the nominal interest rate equals 3 percent. Answer: A Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 28) If people expect an inflation rate of 3.3 percent, and the real interest rate is 3 percent, the nominal interest rate equals (approximately) A) 0.3 percent. B) 8.6 percent. C) 6.3 percent. D) 9.9 percent. Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 29) If the nominal interest rate is 8 percent and inflation is 3 percent, approximately what is the real interest rate? A) 11 percent B) 8 percent C) 5 percent D) 3 percent Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 17 Copyright © 2014 Pearson Education, Inc.

30) If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately A) 7 percent. B) 6 percent. C) 8 percent. D) -6 percent. Answer: B Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 31) If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate is approximately A) 4 percent. B) 6 percent. C) 0.25 percent. D) 10 percent. Answer: B Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 32) If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest rate is approximately A) 2 percent. B) 20 percent. C) 4 percent. D) 18 percent. Answer: A Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 33) If the nominal interest rate is 8 percent and the current inflation rate is 3 percent, approximately what is the real interest rate? A) 11 percent B) 8 percent C) 5 percent D) 3 percent Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 18 Copyright © 2014 Pearson Education, Inc.

34) Assume you save $1,000 in a bank account that pays 8 percent interest per year and the inflation rate is 3 percent. At the end of the year you have earned A) a nominal return of $50. B) a negative real return. C) a real return of $50. D) a real return of $80. Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 35) The real interest rate is 4 percent a year. When the inflation rate is zero, the nominal interest rate is approximately ________ percent a year; and when the inflation rate is 2 percent a year, the nominal interest rate is approximately ________ percent a year. A) 0; 2 B) 4; 6 C) 6; 8 D) 6; 4 Answer: B Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 36) Initially the nominal interest rate is 8 percent and the inflation rate is 5 percent. People know that the inflation rate increases to 10 percent. What is the new nominal interest rate? A) 8 percent B) 3 percent C) 13 percent D) 11 percent Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

37) Suppose that, initially, the nominal interest rate is 6 percent and the inflation rate is 3 percent. If the inflation rate increases to 6 percent, what will be the new nominal interest rate? A) 6 percent B) 1 percent C) 11 percent D) 9 percent Answer: D Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 38) A firm's decision to invest in a project is based on the A) real interest rate and expected total revenue. B) nominal interest rate and expected total revenue. C) nominal interest rate and the expected profit. D) real interest rate and the expected profit. Answer: D Topic: Investment Decisions Skill: Recognition Status: Old AACSB: Reflective Thinking 39) Suppose a firm has an investment project which will cost $200,000 and result in $30,000 profit. The firm will not undertake the project if the interest rate is ________. A) greater than 15 percent. B) greater than 10 percent. C) greater than 5 percent. D) positive. Answer: A Topic: Investment Demand Skill: Analytical Status: Old AACSB: Analytical Skills 40) Other things remaining the same, the greater the expected profit, A) the less the amount of investment. B) the greater the amount of investment. C) the steeper is the investment demand curve. D) the flatter is the investment demand curve. Answer: B Topic: Expected Profit Skill: Recognition Status: Old AACSB: Reflective Thinking

41) Which of the following are major influences on the expected profit from an investment? I. technology advances II. stock market behavior III. accounting practices A) I only B) I and II C) I and III D) II and III Answer: A Topic: Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) The expected profit from an investment will change with A) a change in the real interest rate. B) a change in technology. C) Both A and B are correct. D) Neither A nor B is correct. Answer: B Topic: Expected Profit Skill: Recognition Status: Old AACSB: Reflective Thinking 43) The ________ the expected profit, the greater is the ________. A) lower; investment demand B) higher; investment demand C) lower; capital stock D) None of the above answers is correct Answer: B Topic: Expected Profit Skill: Recognition Status: Old AACSB: Reflective Thinking 44) As the ________ interest rate increases, the quantity of loanable funds demanded ________. A) real; increases B) real; decreases C) nominal; increases D) nominal; decreases Answer: B Topic: The Real Interest Rate and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 21 Copyright © 2014 Pearson Education, Inc.

45) Which of the following explains why the demand for loanable funds is negatively related to the real interest rate? A) A lower real interest rate makes more investment projects profitable. B) Consumers are willing to spend less and hence save more at higher real interest rates. C) Interest rate flexibility in financial markets assures an equilibrium in which saving equals investment. D) All of the above are reasons why the demand for loanable funds is negatively related to the real interest rate. Answer: A Topic: The Real Interest Rate and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 46) The demand for loanable funds is the relationship between loanable funds and the ________ other things remaining the same. A) real interest rate B) nominal interest rate C) inflation rate D) price level Answer: A Topic: Demand for Loanable Funds Skill: Recognition Status: Old AACSB: Reflective Thinking 47) The demand for loanable funds curve is A) downward sloping when plotted against the real interest rate. B) vertical at the full employment level of investment. C) constant at the maximum expected profit rate. D) upward sloping when plotted against the real interest rate. Answer: A Topic: Demand for Loanable Funds Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

48) The demand for loanable funds curve shows that as the ________ interest rate increases, there will be ________ the curve. A) nominal; a rightward shift in B) real; a rightward shift in C) nominal; movement down along D) real; movement up along. Answer: D Topic: Demand for Loanable Funds Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 49) If the real interest rate increases from 3 percent to 5 percent, A) the nominal interest rate will also increase. B) the demand for loanable funds curve will shift rightward. C) there will be a movement up along the demand for loanable funds curve. D) the supply of loanable funds curve will shift rightward. Answer: C Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 50) A rise in the real interest rate A) shifts the demand for loanable funds curve rightward. B) shifts the demand for loanable funds curve leftward. C) creates a movement upward along the demand for loanable funds curve. D) creates a movement downward along the demand for loanable funds curve. Answer: C Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 51) A decrease in the real interest rate leads to A) an increase in investment demand so that the demand for loanable funds curve shifts rightward. B) a fall in the capital stock. C) an increase in the expected profit. D) a movement downward along the demand for loanable funds curve. Answer: D Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

52) When the real interest rate rises A) there is a downward movement along the demand for loanable funds curve. B) there is an upward movement along the demand for loanable funds curve. C) the demand for loanable funds curve shifts rightward. D) the demand for loanable funds curve shifts leftward. Answer: B Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 53) A movement downward along the demand for loanable funds curve occurs when A) the expected profit from investment increases. B) business expectations become more optimistic. C) the real interest rate falls. D) the supply of loanable funds decreases. Answer: C Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Revised AACSB: Reflective Thinking 54) A rise in the real interest rate A) decreases the demand for loanable funds. B) increases the demand for loanable funds. C) decreases the quantity of loanable funds demanded. D) increases the quantity of loanable funds demanded. Answer: C Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 55) A decrease in the real interest rate leads to a ________ the demand for loanable funds curve, and a decrease in the expected profit leads to a ________ the demand for loanable funds curve. A) rightward shift in; leftward shift in B) movement down along; movement up along C) rightward shift in; movement up along D) movement down along; leftward shift in Answer: D Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

56) A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from A) an increase in the real interest rate. B) technological improvements. C) tax cuts. D) decreases in the expected profit. Answer: D Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 57) Greater optimism about the expected profits from investment projects A) shifts the demand for loanable funds curve rightward. B) shifts the demand for loanable funds curve leftward. C) causes a movement upward along the demand for loanable funds curve. D) causes a movement downward along the demand for loanable funds curve. Answer: A Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 58) Due to the recession in 2008, firms decreased their profit expectations. As a result, there was a ________ shift in the ________ loanable funds curve. A) rightward; supply of B) leftward; demand for C) rightward; demand for D) rightward, supply of Answer: B Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 59) Which of the following shifts the demand for loanable funds curve leftward? A) a fall in the real interest rate B) a rise in the real interest rate C) a decrease in the taxes paid by the business D) a decrease in the expected profit Answer: D Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

60) In the above figure, the economy is at point a on the initial demand for loanable funds curve DLF0. What happens if the real interest rate rises? A) There is a movement to a point such as b on the demand for loanable funds curve DLF0. B) The demand for loanable funds curve shifts rightward to a curve such as DLF2. C) The demand for loanable funds curve shifts leftward to a curve such as DLF1. D) none of the above Answer: A Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills

61) In the above figure, a decrease in the real interest rate will result in a movement from point E to A) point F. B) point G. C) point H. D) point I. Answer: B Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 62) In the above figure, an increase in the expected profit will result in a movement from point E to A) point F. B) point G. C) point H. D) point I. Answer: A Topic: Demand for Labor Curve Skill: Analytical Status: Old AACSB: Analytical Skills

63) In the above figure, a decrease in the expected profit will result in a movement from point E to A) point F. B) point G. C) point H. D) point I. Answer: C Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills

64) In the above figure, if the real interest rate is 6 percent, the quantity of loanable funds demanded is A) $150 billion. B) $300 billion. C) $450 billion. D) $600 billion. Answer: C Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills

65) In the above figure, the demand for loanable funds curve is drawn for the average expected profit. If the real interest rate is constant at 6 percent and the expected profit falls, the amount of loanable funds demanded will be A) less than $450 billion. B) $450 billion. C) between $450 billion and $600 billion. D) greater than $600 billion. Answer: A Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 66) In the above figure, the demand for loanable funds curve is drawn for the average expected profit. If the real interest rate is constant at 6 percent and the expected profit rises, the amount of loanable funds demanded will be A) less than $450 billion. B) $450 billion. C) between $300 billion and $450 billion. D) greater than $450 billion. Answer: D Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 67) In the above figure, new expectations of booming business conditions and a higher expected profit will A) shift the demand for loanable funds curve leftward. B) shift the demand for loanable funds curve rightward. C) have no effect on the demand for loanable funds curve. D) make the demand for loanable funds curve become horizontal. Answer: B Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

68) In the above figure, technological progress that increases the expected profit will A) shift the demand for loanable funds curve leftward. B) shift the demand for loanable funds curve rightward. C) have no effect on the demand for loanable funds curve. D) make the demand for loanable funds curve become horizontal. Answer: B Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 69) All of the following are sources of loanable funds except A) business investment. B) private saving. C) government budget surplus. D) international borrowing. Answer: A Topic: Supply of Loanable Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 70) Which of the following are included in the supply of loanable funds? I. private saving II. government budget surplus III. international borrowing A) I, II and III. B) I and III. C) II and III. D) I and II. Answer: A Topic: Supply of Loanable Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 71) In the loanable funds market, the supply comes from A) saving, the government budget surplus and international borrowing B) only saving and the government budget surplus C) only saving D) only the government budget surplus and international borrowing Answer: A Topic: Supply of Loanable Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 30 Copyright © 2014 Pearson Education, Inc.

72) Which of the following influences household saving? I. The real interest rate. II. Disposable income. III. Expected future income. A) I only B) I and II C) I and III D) I, II, and III Answer: D Topic: Saving Decisions Skill: Recognition Status: Old AACSB: Reflective Thinking 73) Which of the following is NOT a determinant of household saving? A) the nominal interest rate B) disposable income C) the household's wealth D) expected future income Answer: A Topic: Household Saving Skill: Recognition Status: Old AACSB: Reflective Thinking 74) Saving by households A) decreases when the real interest rate rises. B) increases when the real interest rate rises. C) increases when the real interest rate falls. D) is unaffected by the real interest rate. Answer: B Topic: The Real Interest Rate and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 75) The quantity of ________ by households will be less ________. A) saving; the higher is disposable income B) saving; the lower is the real interest rate C) consumption; the lower is the inflation rate D) consumption; the higher is disposable income Answer: B Topic: The Real Interest Rate and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 31 Copyright © 2014 Pearson Education, Inc.

76) If the real interest rate rises, people A) save more. B) save less. C) earn a higher real wage rate. D) decrease their expected future income. Answer: A Topic: The Real Interest Rate and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) If households' disposable income decreases, then A) households' saving will decrease. B) households' saving will increase. C) investment will increase. D) Both B and C are correct. Answer: A Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 78) Households will choose to save more if A) income is expected to decrease in the future. B) current disposable income increases. C) Both answers A and B are correct. D) Neither answer A nor B is correct. Answer: C Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 79) Which of the following have a positive relationship with household saving? I. the real interest rate II. disposable income III. expected future income A) I and II B) II only C) II and III D) I, II and III Answer: A Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 32 Copyright © 2014 Pearson Education, Inc.

80) Which of the following is correct? A) As disposable income increases, the real interest rate increases. B) As disposable income decreases, saving decreases. C) As saving decreases, disposable income increases. D) As saving increases, investment by households decreases. Answer: B Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 81) ________ increases households' saving. A) A decrease in the real interest rate B) A tax cut that increases disposable income C) Higher expected future income D) A stock market boom that increases the purchasing power of households' wealth Answer: B Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 82) The greater a household's ________ the less is its saving. A) return from saving B) wealth C) disposable income D) expected future profits Answer: B Topic: Wealth and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 83) Suppose Molly has an income of $35,000 annually and has inherited a savings account of $20,000. Wyatt has a job that pays $35,000 annually, but has debts totaling $6,000. Which of the following is true? A) We can expect Wyatt and Molly to save the same proportion of their incomes this year. B) We can expect Molly to save more than Wyatt this year. C) We can expect Wyatt to save more than Molly this year. D) We can expect Wyatt and Molly to have equal amounts of consumption this year. Answer: C Topic: Wealth and Saving Skill: Recognition Status: Old AACSB: Reflective Thinking

84) If households expect an increase in their future incomes, they will save A) less and consume more today B) more and consume less today C) and consume more today D) and consume less today Answer: A Topic: Expected Future Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 85) Which of the following is true regarding the effect expected future income has on saving? I. As expected future income increases, saving increases. II. Young people typically save very little. III. Middle aged people, earning higher incomes, are not very big savers. A) I and III B) II only C) III only D) II and III Answer: B Topic: Expected Future Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 86) Sarah and Diane are both billing clerks for the local trucking company earning $17,000 per year. Sarah is attending college, plans to graduate in one year and earn $55,000 as an economist. Diane is not in college or undergoing any specialized training and will have the same job next year. According to economic theory, which of the two individuals would tend to have a higher current savings rate? A) Diane B) Sarah C) Both will have the same saving rate D) Economic theory sheds no light on this question Answer: A Topic: Expected Future Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking

87) If two households have the same disposable income in the current year, the household with the A) higher expected future income will consume a larger portion of its current income today. B) lower expected future income will consume more today while it has the money. C) lower expected future income will spend a larger portion of its current income on consumption today because it will increase its saving in the future. D) none of the above Answer: A Topic: Expected Future Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 88) The supply of loanable funds is the relationship between loanable funds and ________ other things remaining the same. A) real GDP B) the price level C) the real interest rate D) the inflation rate Answer: C Topic: Supply of Loanable Funds Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 89) Changes in all of the following shift the supply curve of loanable funds EXCEPT A) the real interest rate. B) wealth. C) disposable income. D) expected future income. Answer: A Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 90) Which of the following will shift the supply of loanable funds curve leftward? A) a decrease in the real interest rate B) a decrease in real wealth C) a decrease in disposable income D) a decrease in expected future income Answer: C Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 35 Copyright © 2014 Pearson Education, Inc.

91) An increase in ________ will shift the supply of loanable funds curve ________. A) expected future income; rightward B) wealth; leftward C) disposable income; leftward D) default risk; rightward Answer: B Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) As a result of the recession in 2008, the default risk increased. How did this change affect the loanable funds market? A) There was a movement up along the supply of loanable funds curve. B) There was a leftward shift in the supply of loanable funds curve. C) There was a movement down along the demand for loanable funds curve. D) There was a rightward shift in the supply of loanable funds curve. Answer: B Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 93) When the real interest rate increases, A) the supply of loanable funds curve shifts rightward. B) the supply of loanable funds curve shifts leftward. C) there is a movement upward along the supply of loanable funds curve. D) there is a movement downward along the supply of loanable funds curve. Answer: C Topic: Supply of Loanable Funds Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 94) An increase in the real interest rate results in a A) rightward shift in the supply of loanable funds curve. B) leftward shift in the supply of loanable funds curve. C) movement along the supply of loanable funds curve. D) None of the above. Answer: C Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

95) Which of the following is true? I. As the real interest rate increases, people increase the quantity they save. II. The supply of loanable funds curve is downward sloping. III. As disposable income increases, the supply of loanable funds curve becomes steeper. A) I and III B) II and III C) I only D) III only Answer: C Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 96) In the loanable funds market, an increase in wealth shifts the ________ loanable funds curve ________. A) supply of; rightward B) supply of; leftward C) demand for; rightward D) demand for; leftward Answer: B Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Revised AACSB: Reflective Thinking 97) A increase in disposable income ________. A) has no effect on the supply of loanable funds curve B) shifts the supply of loanable funds curve rightward C) shifts the supply of loanable funds curve leftward D) results in movement up the supply of loanable funds curve Answer: B Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Revised AACSB: Reflective Thinking 98) If households believe their incomes will fall in the future, the result is a A) rightward shift in the supply of loanable funds curve. B) leftward shift in the supply of loanable funds curve. C) movement along the supply of loanable funds curve. D) movement along the demand for loanable funds curve. Answer: A Topic: Supply of Loanable Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 37 Copyright © 2014 Pearson Education, Inc.

99) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if disposable income decreases? A) Nothing; the economy would remain at point a. B) There would be a movement to a point such as b on supply of loanable funds curve SLF0. C) The supply of loanable funds curve would shift rightward to a curve such as SLF2. D) The supply of loanable funds curve would shift leftward to a curve such as SLF1. Answer: D Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 100) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if the real interest rate rises? A) Nothing; the economy would remain at point a. B) There would be a movement to a point such as b on supply of loanable funds curve SLF0. C) The supply of loanable funds curve would shift rightward to a curve such as SLF2. D) The supply of loanable funds curve would shift leftward to a curve such as SLF1. Answer: B Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills

101) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if the interest rate rises? A) There is a movement to a point such as b on supply of loanable funds curve SLF0. B) The supply of loanable funds curve shifts rightward to a curve such as SLF2. C) The supply of loanable funds curve shifts leftward to a curve such as SLF1. D) none of the above Answer: A Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 102) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if real wealth decreases? A) Nothing; the economy would remain at point a. B) There would be a movement to a point such as b on supply of loanable funds curve SLF0. C) The supply of loanable funds curve would shift rightward to a curve such as SLF2. D) The supply of loanable funds curve would shift leftward to a curve such as SLF1. Answer: C Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 103) In the loanable funds market, as the interest rate rises the ________ and the ________. A) quantity of loanable funds supplied increases; quantity of loanable funds demanded decreases B) quantity of loanable funds supplied decreases; quantity of loanable funds demanded increases C) supply of loanable funds increases; demand for loanable funds decreases D) supply of loanable funds decreases; demand for loanable funds increases Answer: A Topic: Equilibrium in the Loanable Funds Market Skill: Recognition Status: Old AACSB: Reflective Thinking 104) Suppose the current real interest rate is 4 percent and the equilibrium real interest rate is 3 percent. Then A) prices rise and inflation occurs. B) there is a surplus of loanable funds. C) there is a shortage of loanable funds. D) there is neither a shortage nor surplus of loanable funds. Answer: B Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 39 Copyright © 2014 Pearson Education, Inc.

105) An increase in the real interest rate ________ 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 Answer: B Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 106) When the actual real interest rate is less than the equilibrium real interest rate, A) the equilibrium real interest rate will rise. B) borrowers find it difficult to borrow. C) there is a shortage of loanable funds. D) Both answers B and C are correct. Answer: D Topic: Determining the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 107) If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, then ________. A) the real interest rate will rise B) firms will decrease their investment demand C) people will save more D) the real interest rate will fall Answer: D Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

108) If the real interest rate is above the equilibrium real interest rate, A) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall. B) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will rise. C) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will rise. D) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will fall. Answer: A Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 109) If the real interest rate is below the equilibrium real interest rate, A) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall. B) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will rise. C) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will rise. D) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will fall. Answer: B Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 110) If the real interest rate is below the equilibrium real interest rate, A) lenders will be unable to find borrowers willing to borrow all of the available funds and the supply of loanable funds curve will shift leftward. B) borrowers will be unable to borrow all of the funds they want to borrow and the demand for loanable funds curve will shift rightward. C) a shortage of loanable funds will cause the real interest rate to rise. D) borrowers will be unable to borrow all of the funds they want to borrow and the demand for loanable funds curve will shift leftward. Answer: C Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

111) In the loanable funds market, if the interest rate is above the equilibrium level A) there is a shortage of loanable funds. B) there is a surplus of loanable funds. C) expected profit falls. D) government expenditure decreases. Answer: B Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

112) In the above figure, if the real interest rate is 8, there is A) underproduction in this economy. B) a surplus of loanable funds. C) a shortage of loanable funds. D) a shortage in available funds for investment. Answer: B Topic: Determining the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

113) In the above figure, if the real interest rate is 4 percent, then there A) there is a surplus of loanable funds. B) is equilibrium in the loanable funds market. C) the real interest rate will rise. D) the demand curve for loanable funds will shift rightward. Answer: C Topic: Determining the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 114) An increase in disposable income shifts the supply of loanable funds curve A) leftward and decreases the real interest rate. B) leftward and increases the real interest rate. C) rightward and decreases the real interest rate. D) rightward and increases the real interest rate. Answer: C Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 115) Technological progress that increases the expected profit shifts the demand for loanable funds curve A) leftward and reduces the real interest rate. B) rightward and increases the real interest rate. C) rightward and reduces the real interest rate. D) leftward and increases the real interest rate. Answer: B Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 116) Suppose that expected profit decreases. This change means A) the demand curve for loanable funds shifts leftward and the real interest rate falls. B) the supply curve for loanable funds shifts rightward and the nominal interest rate rises. C) there is a movement down along the demand curve for loanable funds. D) the real interest rate rises as saving increases. Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

117) If disposable income increases, people will decide to ________ saving, the supply of loanable funds will ________ and the real interest rate will ________. A) increase; decrease; rise B) decrease; decrease; rise C) increase; increase; fall D) decrease; increase; fall Answer: C Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 118) Suppose the real interest rate rises and the quantity of loanable funds decreases. These changes could have been the result of A) firms expecting higher future profits. B) an increase in disposable income. C) an increase in household wealth. D) a decrease in the default risk. Answer: C Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 119) Suppose the real interest rate rises and the quantity of loanable funds increases. These changes could have been the result of A) firms expecting higher future profits. B) firms expecting lower future profits. C) households expecting higher future income. D) in increase in the default risk. Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

120) The U.S. personal savings rate for the first quarter of 2012 dropped to its lowest level since the start of the recession. Americans stashed away 3.6 percent of personal income in the first quarter, down from 4.2 percent in the fourth quarter and a near-term peak of 6.2 percent in the second quarter of 2009. Which of the following could explain this drop in savings? A) a decrease in wealth from a fall in stock prices B) a rise in the real interest rate C) a increase in disposable income as the job market recovers D) a rise in consumer confidence that their incomes will be higher in the future Answer: D Topic: Changes in the Real Interest Rate Skill: Analytical Status: New AACSB: Analytical Skills 121) Suppose the market for loanable funds is in equilibrium. If disposable income increases, the equilibrium real interest rate ________ and the quantity of loanable funds ________. A) falls; increases B) falls; decreases C) rises; decreases D) rises; increases Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 122) According to the Bureau of Economic Analysis, household disposable income fell by 0.3 percent of August, 2012. If all else remains the same, what is the likely impact of this fall on the real interest rate? A) the real interest rate will rise B) the real interest rate will fall C) a change in household disposable income will have no impact on the real interest rate D) the impact on the real interest rate is ambiguous Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: New AACSB: Analytical Skills

123) Suppose the market for loanable funds is in equilibrium. If the expected profit falls, the equilibrium real interest rate ________ and the quantity of loanable funds ________. A) falls; decreases B) falls; increases C) rises; increases D) rises; decreases Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

124) In the above figure, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An economic expansion that raises disposable income and the expected profit would A) only shift the supply of loanable funds curve rightward to a curve such as SLF1. B) shift the supply of loanable funds curve rightward to a curve such as SLF1, and shift the demand for loanable funds curve rightward to a curve such as DLF1. C) only shift the demand for loanable funds curve rightward to a curve such as DLF1. D) have no effect on either the demand for loanable funds curve or the supply of loanable funds curve. Answer: B Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

125) In the above figure, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An increase in the expected profit would A) only shift the supply of loanable funds curve rightward to a curve such as SLF1. B) shift the supply of loanable funds curve rightward to a curve such as SLF1, and shift the demand for loanable funds curve rightward to a curve such as DLF1. C) only shift the demand for loanable funds curve rightward to a curve such as DLF1. D) have no effect on either the demand for loanable funds curve or the supply of loanable funds curve. Answer: C Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 126) In the above figure, the initial supply of loanable funds curve is SLF0 and the demand for loanable funds investment curve is DLF0. An increase in the real interest rate to 7 percent could be caused by A) an increase in investment demand. B) a decrease in the expected profit. C) an increase in people's disposable incomes. D) an expansion that increased both saving and investment by the same amount. Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 127) A fall in the real interest rate A) results in a movement along the demand for loanable funds curve. B) shifts the demand for loanable funds curve rightward. C) shifts the demand for loanable funds curve leftward. D) has no effect on the demand for loanable funds curve Answer: A Topic: Study Guide Question, Investment Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

128) A decrease in disposable income shifts the ________. A) demand for loanable funds curve rightward B) demand for loanable funds curve leftward C) supply of loanable funds curve leftward D) supply of loanable funds curve rightward Answer: C Topic: Study Guide Question, Saving Supply Curve Skill: Recognition Status: Revised AACSB: Analytical Skills 3 Government in the Loanable Funds Market 1) If net taxes exceed government expenditures, the government sector has a budget ________ and government saving is ________. A) surplus; positive B) surplus; negative C) deficit; positive D) deficit; negative Answer: A Topic: Government Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) When a government has a budget surplus, the surplus A) helps finance investment. B) crowds-out private saving. C) must be subtracted from private saving to get total saving. D) increases the world real interest rate. Answer: A Topic: Government Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) If the government's budget deficit increases and the Ricardo-Barro effect does not apply, A) the real interest rate rises. B) investment increases C) investment decreases D) Both answers A and C are correct. Answer: D Topic: Direct Effect of Government Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 48 Copyright © 2014 Pearson Education, Inc.

4) The idea that a government budget deficit decreases investment is called A) government dissaving. B) the crowding-out effect. C) the Ricardo-Barro effect. D) the capital investment effect. Answer: B Topic: Crowding-Out Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 5) The term "crowding out" relates to the decrease in A) consumption expenditure from an increase in investment. B) the real interest rate from a government budget deficit. C) private investment from a government budget deficit. D) saving from an increase in disposable income. Answer: C Topic: Crowding-Out Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 6) The crowding-out effect refers to A) government spending crowding out private spending. B) private saving crowding out government saving. C) government investment crowding out private investment. D) private investment crowding out government saving. Answer: C Topic: Crowding-Out Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 7) If the government has a budget deficit, crowding out might occur. Crowding out leads to all of the following EXCEPT A) a higher real interest rate. B) a decreased quantity of investment. C) a smaller capital stock in the future. D) decreased private saving. Answer: D Topic: Crowding-Out Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) If the government begins to run a larger budget deficits, then assuming there is no RicardoBarro effect, the demand for loanable funds ________ and the real interest rate ________. A) decreases; falls B) decreases; rises C) increases; rises D) increases; falls Answer: C Topic: Crowding-Out Effect Skill: Analytical Status: Old AACSB: Analytical Skills 9) In the absence of a Ricardo-Barro effect, a government budget deficit ________ the demand for loanable funds and ________ investment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Crowding-Out Effect Skill: Analytical Status: Old AACSB: Analytical Skills 10) In the absence of the Ricardo-Barro effect, an increase in the government deficit results in a ________ real interest rate and a ________ equilibrium quantity of investment. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: B Topic: Crowding-Out Effect Skill: Analytical Status: Old AACSB: Analytical Skills 11) In the absence of a Ricardo-Barro effect, a government budget deficit ________ the demand for loanable funds, ________ the real interest rate, and ________ investment. A) increases; increases; crowds out B) increases; decreases; increases C) decreases; increases; increases D) decreases; increases; crowds out Answer: A Topic: Crowding-Out Effect Skill: Analytical Status: Revised AACSB: Analytical Skills 50 Copyright © 2014 Pearson Education, Inc.

12) If China's government runs a budget surplus and there is no Ricardo-Barro effect, there will be ________ in the supply of loanable funds, private saving ________ and investment ________. A) an increase; decreases; increases B) a decrease; increases; increases C) an increase; increases; increases D) a decrease; decrease; increases Answer: A Topic: Crowding-Out Effect Skill: Analytical Status: Old AACSB: Analytical Skills 13) France's government is running a budget deficit. With no Ricardo-Barro effect, which of the following events will occur? I. The supply curve of loanable funds will shift leftward. II. A higher real interest rate crowds out investment. III. Saving increases. A) I and II. B) II and III. C) I only. D) III only. Answer: B Topic: Crowding-Out Effect Skill: Analytical Status: Old AACSB: Analytical Skills 14) The tendency for private saving to increase in response to growing government deficits is known as the A) crowding out effect. B) money illusion effect. C) Keynes effect. D) Ricardo-Barro effect. Answer: D Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking

15) According to the Ricardo-Barro effect, A) government deficits raise the real interest rate. B) taxpayers fail to foresee that government deficits imply higher future taxes. C) households increase their personal saving when governments run budget deficits. D) government budget deficits increase households' expected future disposable income. Answer: C Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 16) The Ricardo-Barro effect of a government budget deficit refers to A) a change in private savings supply. B) a large crowding out effect from a government budget deficit. C) a large crowding out effect from a government budget surplus. D) the international impact of government deficits. Answer: A Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 17) The Ricardo-Barro effect holds that A) equal increases in taxes and government expenditures have no effect on equilibrium real GDP. B) government budget deficits have no effect on the real interest rate. C) a government budget deficit crowds out private investment. D) a government budget deficit induces a decrease in saving that magnifies the crowding out effect. Answer: B Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking

18) The Ricardo-Barro effect says that A) government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government. B) government budget deficits crowd out private investment and thereby lower the real interest rate. C) government budget deficits resulting from an increase in government expenditure have no effect on investment but government deficits resulting from a decrease in taxes crowd out investment. D) government budget deficits cause households to save more in anticipation of higher taxes, which causes higher real interest rates. Answer: A Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 19) According to the Ricardo-Barro effect, government deficits A) lead to a rise in the equilibrium real interest rate, crowding out investment. B) lead to simultaneous increases in private saving and no effect on the equilibrium real interest rate and investment. C) lead to simultaneous decreases in private saving and decreases in the equilibrium real interest rate and investment. D) lead to a fall in the equilibrium real interest rate and a rise in investment. Answer: B Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 20) According to the Ricardo-Barro effect, A) the government budget has no effect on the real interest rate. B) a government budget deficit crowds out private investment. C) financing government spending with taxes has a smaller effect on private investment than financing through government borrowing. D) None of the above answers are correct. Answer: A Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking

21) The Ricardo-Barro effect asserts that A) government saving affects private saving. B) government budget deficits crowd out private borrowing. C) government expenditure affects private expenditure. D) taxation raises interest rates. Answer: A Topic: Ricardo-Barro Effect Skill: Conceptual Status: Revised AACSB: Reflective Thinking 22) If the Ricardo-Barro effect occurs, an ________ in saving finances the government budget deficit and the real interest rate ________. A) increase; remains the same B) decrease; increases C) increase; falls D) decrease; remains the same Answer: A Topic: Ricardo-Barro Effect Skill: Analytical Status: Old AACSB: Analytical Skills 23) If the Ricardo-Barro effect is present, a government budget deficit raises the equilibrium real interest rate by ________ and decreases the equilibrium quantity of investment by ________ than if the Ricardo-Barro effect is absent. A) more; more B) more; less C) less; more D) less; less Answer: D Topic: Ricardo-Barro Effect Skill: Analytical Status: Old AACSB: Analytical Skills 24) A decrease in the government budget deficit decreases the ________ loanable funds and an increase in the government budget surplus increases the ________ loanable funds. A) demand for; demand for B) demand for; supply of C) supply of; demand for D) supply of; supply of Answer: B Topic: Study Guide Question, Government Saving Skill: Conceptual Status: Old AACSB: Analytical Skills 54 Copyright © 2014 Pearson Education, Inc.

4 The Global Loanable Funds Market 1) In the global loanable funds market, A) funds flow into countries with the highest risk-adjusted interest rates and out of countries with the lowest risk-adjusted interest rates. B) funds flow into countries with the lowest risk-adjusted interest rates and out of countries with the highest risk-adjusted interest rates. C) when funds leave a country, a shortage of funds lowers the real interest rate. D) when funds enter a country, a surplus of funds raises the real interest rate. Answer: A Topic: World Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) Real interest rates around the world tend to A) be quite different because no two countries are exactly the same. B) be equal after adjusting for differences in risk because financial capital seeks the highest possible return. C) differ because inflation rates differ across countries. D) be equal because trading partners would not do business otherwise. Answer: B Topic: World Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) In the global loanable funds market, A) loans of equal risk will have equal interest rates. B) riskier loans will have lower real interest rates than safer loans. C) interest rates for all types of loans will be equal. D) safer loans will have higher real interest rates than riskier loans. Answer: A Topic: World Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) In May, 2011, the interest rate in North Korea was 5.4 percent. For the same month, the interest rate in the United States was slightly more than 1 percent. Suppose the risks in North Korea were the same as in the United States. If North Korea were integrated into the global economy, then A) funds would flow into North Korea and the equilibrium quantity of loanable funds in North Korea would increase. B) funds would flow out of North Korea and the equilibrium quantity of loanable funds in North Korea would decrease. C) funds would flow into North Korea and world interest rates would rise. D) funds would flow into North Korea and world interest rates would fall. Answer: A Topic: World Real Interest Rate Skill: Analytical Status: New AACSB: Analytical Skills 5) The real interest rate is ________ in the United States compared to Zimbabwe because ________. A) lower; there is a lower risk premium in the United States. B) higher; more firms want to borrow financial capital in the United States. C) lower; the United States is a net borrower. D) higher; Zimbabwe is a net borrower. Answer: A Topic: World Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) The free international mobility of financial capital pulls real interest rates around the world toward equality. Why then might interest rates in Greece and Spain in 2012 be much higher than in other western economies? A) Greece and Spain are considered risky borrowers and their interest rates reflect a sizable risk premium. B) Greece and Spain are considered large borrowers and their interest rates reflect a sizable transaction cost. C) Greece and Spain are not fully integrated into the global economy. D) Greece and Spain are considered small borrowers and do not attract many interested lenders because the potential profit is so small. Answer: A Topic: World Real Interest Rate Skill: Conceptual Status: New AACSB: Reflective Thinking

7) Suppose that Country A (a small country) has exports of $40 million and imports of $50 million. As a result, Country A will ________ funds from the rest of the world and engage in net foreign ________. A) receive; lending B) send; lending C) receive; borrowing D) send; borrowing Answer: C Topic: International Lending and Borrowing Skill: Analytical Status: Old AACSB: Analytical Skills 8) The United States' August, 2012 exports were $181.3 billion and its imports were $225.5 billion. During this month, the United States was A) an international borrower of funds from the rest of the world. B) an international lender of funds to the rest of the world C) neither an international borrower or lender because the U.S. government lends money for any trade imbalance D) Not enough information is provided to determine whether the United States was an international borrower or lender Answer: A Topic: International Lending and Borrowing Skill: Conceptual Status: New AACSB: Reflective Thinking 9) A small country is a net foreign borrower if its real interest rate without foreign borrowing is ________ the world real interest rate. A) higher than B) equal to C) lower than D) not comparable to Answer: A Topic: International Lending and Borrowing Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) A small country is a net foreign borrower and its domestic supply of loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________. A) does not change; decreases B) does not change; does not change C) does not change; increases D) increases; does not change Answer: A Topic: International Lending and Borrowing Skill: Analytical Status: Revised AACSB: Analytical Skills 11) A small country is a net foreign borrower and its domestic demand for loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________. A) does not change; increases B) does not change; does not change C) increases; increases D) increases; does not change Answer: C Topic: International Lending and Borrowing Skill: Analytical Status: Revised AACSB: Analytical Skills 12) A small country is a net foreign lender and its domestic supply of loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign lending ________. A) increases; decreases B) does not change; does not change C) does not change; increases D) increases; does not change Answer: C Topic: Study Guide Question, International Lending and Borrowing Skill: Analytical Status: Revised AACSB: Analytical Skills

13) If the world real interest rate falls, then a country that is a net foreign lender A) increases the amount of its lending. B) does not change the amount of its lending. C) decreases the amount of its lending. D) None of the above answers is correct because lending might increase, decrease, or not change. Answer: C Topic: Study Guide Question, International Lending and Borrowing Skill: Analytical Status: Old AACSB: Analytical Skills 14) The free international mobility of financial capital pulls real interest rates around the world toward equality. Why then might interest rates in Greece and Spain in 2012 be much higher than in other western economies? A) Greece and Spain are considered risky borrowers and their interest rates reflect a sizable risk premium. B) Greece and Spain are considered large borrowers and their interest rates reflect a sizable transaction cost. C) Greece and Spain are not fully integrated into the global economy. D) Greece and Spain are considered small borrowers and do not attract many interested lenders because the potential profit is so small. Answer: A Topic: International Lending and Borrowing Skill: Conceptual Status: New AACSB: Reflective Thinking

5 News Based Questions 1) In November 2008, automobile executives from Ford, GM and Chrysler testified to Congress that their firms needed a $25 billion bailout to prevent bankruptcies. The executives stated that part of the cash would be used to re-design production lines. The $25 billion is ________ and the re-designed production lines are ________. A) financial capital; physical capital B) gross investment; physical capital C) physical capital; financial capital D) net investment; gross investment Answer: A Topic: Financial Capital and Physical Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) In 2007, France's GDP totaled $1.9 trillion and in 2006 GDP was $1.8 trillion. The total amount spent on new capital in 2007 was $357 billion and in 2006 was $335 billion. To calculate the amount of net investment in France for these years, you need to know ________. A) saving B) depreciation C) the amount of financial capital available. D) the aggregate production function. Answer: B Topic: Net Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) In 2007, France's GDP totalled $1.9 trillion and in 2006 GDP was $1.8 trillion. The total amount spent on new capital in 2007 was $357 billion and in 2006 was $335 billion. Suppose that depreciation is 12 percent of GDP. ________ investment in 2006 was ________ billion. A) Gross; $357 B) Gross; $216 C) Gross; $335 D) Net; $216 Answer: C Topic: Net Investment Skill: Analytical Status: Old AACSB: Analytical Skills

4) In 2007, France's GDP totalled $1.9 trillion and in 2006 GDP was $1.8 trillion. The total amount spent on new capital in 2007 was $357 billion and in 2006 was $335 billion. Suppose that depreciation is 12 percent of GDP. ________ investment in 2007 was ________ billion. A) Gross; $216 B) Gross; $129 C) Net; $228 D) Net; $129 Answer: D Topic: Net Investment Skill: Analytical Status: Old AACSB: Analytical Skills 5) In November 2008, Grand Canyon Education chose to finance expansion by offering ownership in its firm. These owners of Grand Canyon Education the are entitled to a share of the firm's profits. This financing is an example of ________. A) a mortgage B) a bond C) issuing stock. D) gross investment Answer: C Topic: Financial Institutions & Financial Markets Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) The University of Central Florida (UCF) wanted "to create a town center where students can live, eat, study and revel in college traditions like football." In addition, the university needed funding to build dorms that would house 2000 students. UCF was able to secure financing by promising to pay a lender a specific amount of money on specific dates. This transaction takes place in the ________ market for ________ capital. www.sptimes.com 10/14/2007 A) loan; physical B) bond; financial C) stock; financial D) loan; financial. Answer: B Topic: Financial Institutions & Financial Markets Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) A share of Apple stock has a price of $430 and gives $43 of Apple profit to its owner. The interest rate on this share A) 10 percent. B) $430. C) 15.4 percent D) $43 Answer: A Topic: Interest Rate and Price of Asset Skill: Analytical Status: Revised AACSB: Analytical Skills 8) In 2007, the interest rate banks in France charge each other for loans was 4.86 percent. The inflation rate in France in 2007 was 2.8 percent. The real interest rate in France is A) 7.62 percent B) 2.06 percent. C) 0.58 percent. D) 13.6 percent. Answer: B Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 9) In January 2013, you can put your savings in a Bank of America account and be paid 2 percent per year. During 2013, suppose the inflation rate is 3.4 percent. In 2013 you earned a real interest rate of A) 0.59 percent. B) 6.8 percent. C) 1.4 percent. D) -1.4 percent. Answer: D Topic: Real Interest Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

10) The table below shows data for the United States.

2011 2012 2013

Nominal Interest Rate Inflation Rate 5.25 4 5 2 4.5 4.3

Between 2011 and 2012, the real interest rate ________ and caused a ________ the demand for loanable funds curve. A) increased; rightward shift B) decreased; leftward C) increased; movement upward along D) decreased; downward along Answer: C Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Revised AACSB: Analytical Skills 11) The table below shows data for the U.S.

2011 2012 2013

Nominal Interest Rate Inflation Rate 5.25 4 5 2 4.5 4.3

Between 2012 and 2013 the real interest rate ________ and caused a ________ the demand for loanable funds curve. A) increased; rightward shift B) decreased; movement down along C) increased; movement up along D) decreased; leftward shift Answer: B Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Revised AACSB: Analytical Skills

12) In 2008, the financial and housing crisis caused firms to decrease their profit expectations. As a result, there was a ________ in the ________ for loanable funds curve. A) leftward shift; demand B) movement upward along; demand C) leftward shift; supply D) movement downward along; supply Answer: A Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 13) In 2010, the United States and foreign economies start to recover from the recession. U.S. firms increase their profit expectations. As a result, the demand for loanable funds curve shifts ________ and the real interest rate ________. A) leftward; decreases B) rightward; decreases C) leftward; increases D) rightward; increases Answer: D Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 14) In 2008, the many people became unable to make payments on their mortgages and instead defaulted on them. As a result, the ________ of loanable funds curve shifts ________ and real interest rate ________. A) supply; leftward; increases B) demand; leftward; increases. C) supply; rightward; falls. D) demand; rightward; decreases. Answer: A Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills

15) During the financial crisis in 2007 and 2008, financial institutions believed that default risks were higher. As a result, there was ________ in the supply of loanable funds and a ________ in the real interest rate. A) a decrease; fall B) an increase; rise C) an increase; fall D) a decrease; rise Answer: D Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 16) In 2007, Singapore's government ran a budget surplus of $4.5 billion. The budget surplus ________ loanable funds and ________ the real interest rate. A) increased the supply of; lowered B) decreased the demand for; lowered C) increased the supply of; raised D) increased the demand for; raised Answer: A Topic: Government in the Market for Loanable Funds Skill: Analytical Status: Old AACSB: Analytical Skills 17) In 2008, Germany had a budget deficit of 37 billion euros. This will budget deficit ________ the supply of loanable funds and ________ the real interest rate. A) increased; lowered B) decreased; raised C) decreased; lowered D) increased; raised Answer: B Topic: Government in the Market for Loanable Funds Skill: Analytical Status: Old AACSB: Analytical Skills 18) In 2008, Germany had a budget deficit of 37 billion euros. This deficit resulted in A) a rightward shift of the supply of loanable funds curve. B) a leftward shift of the demand for loanable funds curve. C) a crowding out effect in which investment decreases. D) the Ricardo-Barro effect and an increase in the interest rate. Answer: C Topic: Government in the Market for Loanable Funds Skill: Analytical Status: Old AACSB: Analytical Skills 65 Copyright © 2014 Pearson Education, Inc.

19) In 2007, France's exports totaled $490 billion and its imports totaled $529 billion. As a result, the I. rest of the world supplies funds to France. II. quantity of loanable funds in France is less than the supply. III. Ricardo-Barro effect occurs in France. A) I only. B) I and II. C) I, II and III. D) II and III only. Answer: A Topic: Global Loanable Funds Market Skill: Analytical Status: Old AACSB: Analytical Skills 20) In 2007, France's exports totalled $490 billion and its imports totalled $529 billion. As a result, France is an international ________ and financial funds from around the world ________ France's market for loanable funds. A) borrower; leaves B) borrower; enters C) lender; leaves D) lender; enters Answer: C Topic: Global Loanable Funds Market Skill: Analytical Status: Old AACSB: Analytical Skills 21) In 2008, Australia had a government budget surplus of $21.7 billion. This budget surplus shifts the demand for loanable funds curve ________ A) leftward and lowers the real interest rate. B) leftward and creates a crowding-out effect. C) rightward and creates a crowding-out effect. D) rightward and creates a Ricardo-Barro effect. Answer: A Topic: Government in the Market for Loanable Funds Skill: Analytical Status: Old AACSB: Analytical Skills

6 Essay Questions 1) Begin with the formula showing how households can divide their income. Then use this formula and the expenditure approach to GDP to show how investment is financed from three sources. Answer: The formula showing how households can divide their income is where Y is income, C is consumption expenditure and T is taxes. According to the expenditure approach income, But income, Y, equals GDP. So, setting the equalities equal to one another and removing C since it is on both sides gives Moving G, X and M to the right hand side gives the final result: Here we see that investment is financed by private saving, S, government saving, and borrowing from the rest of the world, Topic: How Investment is Financed Skill: Conceptual Status: Old AACSB: Communication 2) What is the approximate relationship among the real interest rate, the inflation rate, and the nominal interest rate? Answer: The real interest rate equals the nominal interest rate minus the inflation rate. Topic: The Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) What is the influence of the expected profit and the real interest rate on the amount of investment firms make? Answer: Firms make a decision about whether to undertake an investment based upon the benefit of the investment, the expected profit, versus the opportunity cost of making the investment, the real interest rate. For any particular investment firms compare the expected profit to the real interest rate. If the expected profit exceeds the real interest rate the firm will undertake the investment. If the expected profit is less than the real interest rate the firm will not undertake the investment. Topic: Investment Decisions Skill: Conceptual Status: Old AACSB: Communication

4) "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: The Real Interest Rate and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) Explain the relationship between the real interest rate and the demand for loanable funds. Compare that relationship to the relationship between expected profit and the demand for loanable funds. Answer: The real interest rate determines the quantity of loanable funds demanded. There is an inverse relationship between the real interest rate and the quantity of loanable funds demanded. Expected profit affects investment and, because investment is a major source of the demand for loanable funds, the expected profit rate affects the demand for loanable funds. An increase in the expected profit from investing increases investment and thereby increases the demand for loanable funds. Hence there is a positive relationship between the demand for loanable funds and the expected profit rate. Topic: The Real Interest Rate and Investment Skill: Conceptual Status: Old AACSB: Communication 6) How does an increase in the expected profit affect investment demand and the demand for loanable funds curve? Answer: An increase in the expected profit increases investment. Because investment demand is a large part of the demand for loanable funds, an increase in the expected profit shifts the demand for loanable funds curve rightward. Topic: Expected Profit Skill: Conceptual Status: Old AACSB: Analytical Skills 7) What are the factors that change investment demand and shift the demand for loanable funds curve? Answer: Investment demand changes with the changes in the expected profit. The expected profit depends on technological change. Investment increases and so the demand for loanable funds curve shifts rightward when technology advances. Topic: Investment Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) How does the real interest affect households' decisions about saving? Answer: All disposable income is either used for consumption or saving. The opportunity cost of consumption is the amount of foregone interest you could earn if you saved. The return to saving is the real interest rate, so the higher the real interest rate, the greater the opportunity cost of consuming and not saving. As a result, an increase in the real interest rate leads to an increase in the quantity households save. Topic: Saving Decisions Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) How does expected future income affect saving supply? Answer: Expected future income affects saving supply because the lower a household's expected future income, the greater is its (current) saving supply. Topic: Expected Future Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) What is the relationship between the real interest rate, the supply of loanable funds and the demand for loanable funds? Answer: The supply of loanable funds has a positive relationship between the real interest rate and the quantity of loanable funds supplied. In a figure, a supply of loanable funds curve has a positive slope. Similarly, the demand for loanable funds is the relationship between the real interest rate and the amount of loanable funds demanded. In a figure, a demand for loanable funds curve has a negative slope. Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) 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 Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) What are the factors that change the supply of saving and shift the supply of loanable funds curve? Answer: There are three main factors that influence saving: disposable income, wealth, expected future disposable income, and default risk. The higher disposable income, the more people save, so an increase in disposable income shifts the supply of loanable funds curve rightward. The higher people's wealth, the less they save because they feel richer and do not see the need to save. Thus an increase wealth shifts the supply of loanable funds curve leftward. The higher the expected future disposable income, the less people save today. Thus an increase in the expected future disposable income shifts the supply of loanable funds curve leftward. Finally the higher the default risk, the less people save and so the supply of loanable funds curve shifts leftward. Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Communication 13) Explain how each of the following events 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 the people's wealth is higher. c) Fewer college graduates are finding jobs 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 of loanable funds curve 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: Conceptual Status: Old AACSB: Communication 14) "When there is a shortage of loanable 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 and others attempting to obtain loans who cannot do so. As a result, the real interest rate rises until equilibrium is attained. Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) In the loanable funds market, what variable changes to eliminate a shortage of loanable funds and how is the shortage eliminated? Answer: The real interest rate changes to eliminate the shortage of loanable funds. A shortage of loanable funds means that businesses and others want to borrow more than households and others are willing to loan so that the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied. This shortage means that some businesses are willing to pay a higher interest rate. The real interest rate rises, and as it does so, the quantity of loanable funds demanded decreases and the quantity of loanable funds supplied increases. Both changes help eliminate the shortage of loanable funds and so the real interest rate rises until it reaches its equilibrium value. Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Communication 7 Numeric and Graphing Questions

Real interest rate (percent per year) 10 8 6 4 2

Loanable Loanable funds funds demanded supplied (trillions of (trillions of 2005 dollars) 2005 dollars) 0.7 1.5 0.9 1.3 1.1 1.1 1.4 0.9 1.7 0.7

1) The table above shows the loanable funds supply and demand 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 $1.1 trillion. 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: Determining the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

8 True or False 1) Expected profit and the real interest rate affect investment decisions. Answer: TRUE Topic: Investment Decisions Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) The nominal interest rate is approximately equal to the real interest rate minus the inflation rate. Answer: FALSE Topic: The Real Interest Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 3) There is a positive relationship between the demand for loanable funds and the real interest rate. Answer: FALSE Topic: The Real Interest Rate and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) The real interest rate has a positive relationship with the supply of loanable funds. Answer: TRUE Topic: The Real Interest Rate and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) If Ann's disposable income increases, her saving decreases. Answer: FALSE Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) As the purchasing power of wealth increases, saving decreases. Answer: TRUE Topic: Wealth and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) The supply of loanable funds curve shifts leftward if the real interest rate rises. Answer: FALSE Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 9 Extended Problems Real interest rate (percent per year) 5 7 9 11

Supply of loanable funds (2005 dollars) 2,000 3,000 4,000 5,000

Demand for loanable funds (2005 dollars) 5,000 4,000 3,000 2,000

1) The economy of Dream Island, which is isolated from the rest of the world, has the supply of loanable funds schedule and the demand for loanable funds schedule shown in the table above. As it happens, all of the supply of loanable funds are from households' saving and the entre demand for loanable funds is from firms' investment demand. a) Draw the demand and supply curves. b) What is the equilibrium real interest rate? c) What is equilibrium investment? Equilibrium saving? d) Describe the situation in Dream Island's loanable funds market when the real interest rate is 10 percent. Is there a shortage of loanable funds? A surplus of loanable funds? e) Describe the situation in Dream Island's capital market when the real interest rate is 6 percent. Is there a shortage of loanable funds? A surplus of loanable funds?

Answer:

a) See the figure above. b) The equilibrium real interest rate is the interest rate at which the quantity of loanable funds demanded (which is the quantity of investment demanded) equals the quantity of loanable funds supplied (which is the quantity of saving supplied). As the figure shows, in the economy of Dream Island, the equilibrium real interest rate is 8 percent. c) The equilibrium amount of investment equals 3,500 dollars. The equilibrium amount of saving is the same, $3,500. d) When the real interest rate is 10 percent, the quantity of loanable funds supplied(which is the quantity of saving supplied), $4,500, exceeds the quantity of loanable funds demanded (which is the quantity of investment demanded), $2,500. So there a surplus of loanable funds. Borrowers have an easy time finding the loans they want, but lenders are unable to lend all the funds they have available. As a result, the real interest rate falls until the quantity of loanable funds supplied equals the quantity of loanable funds demanded. e) When the real interest rate is 6 percent, the quantity of loanable funds supplied (which is the quantity of saving supplied) $2,500, is less than the quantity of loanable funds demanded (which is the quantity of investment demanded), $4,500. There is a shortage of loanable funds. Borrowers can't find the loans they want, but lenders are able to lend all the funds they have available. As a result, the real interest rate rises until the quantity of loanable funds supplied equals the quantity of loanable funds demanded. Topic: Determining the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 8 Money, the Price Level, and Inflation 1 What is Money? 1) As a means of payment, the functions of money are A) medium of exchange and the ability to buy goods and services. B) medium of exchange, unit of account, and means of lending. C) pricing, contracts, and store of value. D) medium of exchange, unit of account, and store of value. Answer: D Topic: What Is Money? Skill: Recognition Status: Revised AACSB: Reflective Thinking 2) Which of the following does NOT describe a function of money? A) a unit of account B) a hedge against inflation C) a medium of exchange D) a store of value Answer: B Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 3) Which of the following is a primary function of money? A) to serve as a unit of account B) to serve as an encouragement to work C) to reduce the burden of excessive imports D) to raise funds for the government Answer: A Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking

4) The functions of money are A) interest rates, prices and output. B) M1, M2 or currency. C) currency, deposits, and traveler's checks. D) medium of exchange, unit of account, and store of value. Answer: D Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 5) Which of the following is NOT considered a function of money? A) It facilitates exchange. B) It acts as a means of payment. C) It can be held and exchanged for future goods and services. D) It allows banks to lend out funds. Answer: D Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 6) Which of the following does NOT describe a function of money? A) a unit of account B) barter C) a medium of exchange D) a store of value Answer: B Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 7) Barter is A) another type of money. B) printing too much money. C) the exchange of goods and services directly for other goods and services. D) the exchange of goods and services for any type of money. Answer: C Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking

8) The most direct way in which money replaces barter is through its use as a A) medium of exchange. B) recording device. C) store of value. D) unit of account. Answer: A Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 9) The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a A) medium of exchange. B) standard of deferred payment. C) store of value. D) unit of account. Answer: A Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 10) Which function of money refers to the use of money to solve the problem of a need for a double coincidence of wants? A) medium of exchange B) unit of account C) store of value D) none of the above Answer: A Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 11) A medium of exchange is A) an object that sellers will accept as payment. B) a measure by which prices are expressed. C) an asset that is used to settle future debts. D) the thing traded when barter takes place. Answer: A Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking

12) The "double coincidence of wants" problem is A) resolved under a system of barter. B) always present in all economic systems. C) resolved by the use of money. D) created by the use of money. Answer: C Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The direct exchange of goods and services for other goods and services is known as A) primitive trade. B) nonmarket trade. C) barter. D) purchasing power trading. Answer: C Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 14) Barter occurs when you exchange A) money for goods. B) goods for money. C) goods for other goods. D) one money, such as U.S. dollars, for another money, such as Japanese yen. Answer: C Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 15) The fact that using money avoids the double coincidence of wants necessary in a barter economy illustrates which function of money? A) medium of exchange B) unit of account C) store of value D) source of liquidity Answer: A Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking

16) Money ________. A) is always composed of coins and paper B) loses its value as it becomes older C) requires a double coincidence of wants D) is any commodity that is generally acceptable as a means of payment Answer: D Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 17) If an economy has no money, then all transactions must be conducted through the use of ________. A) credit cards B) barter C) debit cards D) tobacco or wampum Answer: B Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) In a barter system, we would see A) many different units of money. B) money and goods exchanged for each other. C) wide-spread depository institutions. D) goods traded directly for other goods and services. Answer: D Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) When you buy a hamburger for lunch, you are using money as a A) store of value. B) standard of deferred payment. C) medium of exchange. D) unit of accounting. Answer: C Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) When money is accepted as payment in a market transaction, it is functioning as a A) store of value. B) unit of accounting. C) medium of exchange. D) unit of investment. Answer: C Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) Money's function as a medium of exchange means that A) money is a common denominator for expressing the prices of goods and services. B) money can be used to store wealth. C) money serves as an acceptable means of payment. D) money requires a double coincidence of wants. Answer: C Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) Matthew purchases a candy bar with his allowance. This purchase represents using money as A) a medium of exchange. B) a store of value. C) an unit of account. D) none of the above Answer: A Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) When you bought your textbook for this course, you were using money as a A) store of value. B) price mechanism. C) medium of exchange. D) unit of account. Answer: C Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

24) Money as a medium of exchange I. facilitates the exchange of goods. II. reduces or eliminates the need for barter. A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) Suppose prices are quoted in dollars and transactions are conducted in pesos. The peso serves as a A) medium of exchange. B) store of value. C) unit of account. D) all of the above Answer: A Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) Barter is an inefficient means of exchange because A) barter transactions require a double coincidence of wants. B) barter only occurs in relatively primitive economies. C) demand will not necessarily equal supply. D) in a barter transaction only one party needs to want what the other party has to sell. Answer: A Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) The unit of account A) is a type of accounting of how many currency units there are in an economy. B) is an accounting of the total units of goods and services produced in an economy. C) is an agreed measure for stating the prices of goods and services in an economy. D) is a type of value stored within all assets. Answer: C Topic: Unit of Account Skill: Recognition Status: Old AACSB: Reflective Thinking 7 Copyright © 2014 Pearson Education, Inc.

28) Which function of money refers to the use of money to state the prices of goods and services? A) medium of exchange B) unit of account C) store of value D) means of payment Answer: B Topic: Unit of Account Skill: Recognition Status: Old AACSB: Reflective Thinking 29) Which of the following applies to the use of money as a unit of account? I. A unit of account is an agreed measure for stating the prices of goods and services. II. Using money as a unit of account creates a simplified pricing system. III. Economies choose many goods as units of account. A) I only B) II only C) I and III D) I and II Answer: D Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) A $25,000 price tag on a new car is an example of money as A) medium of exchange. B) a unit of account. C) a store of value. D) a time deposit. Answer: B Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking

31) After you finish your degree, suppose your salary is $52,000 per year. This is an example of using the function of money known as A) medium of exchange. B) a unit of account. C) a store of value. D) M1. Answer: B Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) Suppose prices are quoted in dollars and transactions are conducted in pesos. The dollar serves as a A) medium of exchange. B) store of value. C) unit of account. D) all of the above Answer: C Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 33) Suppose that I find out from an L.L. Bean catalogue that a sweater costs $30.00. In this case, money is serving as a A) medium of exchange. B) unit of account. C) store of value. D) double coincidence of want. Answer: B Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) As a unit of account, money is used to A) state prices of all goods and services. B) pay off future debts. C) hold purchasing power over time. D) exchange for goods and services. Answer: A Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 9 Copyright © 2014 Pearson Education, Inc.

35) Cigarettes served as money in some POW camps during World War II. Given this fact, we would expect to observe A) no one ever smoking a cigarette. B) people usually resorting to barter rather than using cigarettes as money. C) prices of other goods expressed in terms of cigarettes. D) only government-issued cigarettes being accepted as money. Answer: C Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 36) Catherine compares the prices of candy bars in order to get the "best buy." This comparison represents using money as a A) medium of exchange. B) store of value. C) unit of account. D) none of the above Answer: C Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 37) Frank spends Saturday afternoon at the Dodge dealership looking at new trucks. The model he is interested in has a sticker price of $29,000. The fact the price is quoted in dollars is an example of money as a A) medium of exchange. B) unit of account C) store of value. D) All of the above answers are correct. Answer: B Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking

38) In a world with no money, costs are expressed in terms of other goods. If one video game costs two hamburgers, and a hamburger costs three sodas, how many sodas would it take to buy a video game? A) 6 B) 5 C) 3 D) 3/2 Answer: A Topic: Unit of Account Skill: Analytical Status: Old AACSB: Analytical Skills 39) Which of the following is an example of using money as a store of value? A) paying for a new dress with a credit card B) paying cash for a new automobile C) paying rent with a check on a demand deposit D) keeping $200 on hand for an emergency Answer: D Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 40) When you toss your spare quarters into a jar so you can use them later at the laundromat, you are using money in its function as a A) medium of exchange. B) unit of account. C) store of value. D) record keeping device. Answer: C Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 41) During periods of inflation, which function of money is most severely affected? A) medium of exchange B) unit of account C) means of payment D) store of value Answer: D Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 11 Copyright © 2014 Pearson Education, Inc.

42) Which of the following applies to an object serving as a store of value? I. If an object can be held and exchanged later for a good or service, it serves as a store of value. II. The less stable an object's value, the better it serves as a store of value. III. A work of art can serve as a store of value. A) I only B) I and II C) I and III D) I, II and III Answer: C Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 43) If an economy tried to use bananas as money, which function would bananas likely have the most difficult time fulfilling? A) a store of value B) a unit of account C) a medium of exchange D) a means of payment Answer: A Topic: Store of Value Skill: Conceptual Status: Old AACSB: Analytical Skills 44) Which of the following applies to money when it serves as a store of value? I. Money is a store of value because it is an agreed measure for stating goods' prices. II. The more stable money's value, the better it serves as a store of value. III. When money serves as a store of value, it requires a double coincidence of wants. A) I only B) II only C) I and II D) II and III Answer: B Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking

45) Nicholas is saving money collected from his paper route in order to purchase a new bicycle. His saving represents using money as A) a medium of exchange. B) a store of value. C) an unit of account. D) none of the above Answer: B Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 46) U.S. currency ________. A) is less efficient than barter B) includes tobacco C) is the sum of M1 and M2 D) is composed of the bills and coins that we use today Answer: D Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 47) In the United States today, money consists of A) currency only. B) deposits at banks only. C) coins only. D) currency and deposits at banks. Answer: D Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 48) Checking deposits are A) not part of money. B) part of money. C) small in volume relative to currency in circulation. D) quite different from checking accounts. Answer: B Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking

49) Which of the following is money? A) checking deposits B) checks in the checkbook C) credit cards D) All of the above are money. Answer: A Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 50) Which of the following counts as part of money? A) $10,000 of gold bars B) $10,000 of government bonds C) $10,000 in a checking account D) $10,000 of corporate bonds Answer: C Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 51) Which of the following correctly completes this statement? Money in the United States includes A) the sum of all money incomes. B) the cash in banks plus the sum of all checks written. C) the currency and bank deposits outside of banks. D) the sum of currency, deposits, and bonds held by the public and by the banking industry. Answer: C Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 52) Checking deposits at banks are A) money. B) not money because they are an intangible. C) money only because they are insured by the FDIC. D) not money until they are converted into currency. Answer: A Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking

53) M1 includes A) currency, checking deposits and traveler's checks. B) money, stocks and bonds. C) money, checking deposits and traveler's checks. D) money market mutual funds, stocks and bonds. Answer: A Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 54) The money aggregate M1 consists of A) currency and savings accounts. B) currency and checking deposits, including traveler's checks. C) only checking deposits and time deposits. D) checking accounts, savings accounts and Treasury bills. Answer: B Topic: Money in the United States Today, M1 Skill: Recognition Status: Revised AACSB: Reflective Thinking 55) M1 is a measure of A) money and includes both currency and checking deposits. B) liquidity and in which the most liquid asset is money. C) money and includes both savings deposits and currency. D) money and includes both savings deposits and money market mutual funds. Answer: A Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 56) Which of the following is NOT included in the M1 definition of money? A) currency held outside banks B) time deposits C) traveler's checks D) checking deposits at savings and loans Answer: B Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking

57) M1 includes all the following items except ________. A) checking deposits owned by individuals and businesses B) traveler's checks C) deposits in money market mutual funds D) currency owned by individuals and businesses Answer: C Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 58) Which of the following is NOT included in M1? A) currency B) checking deposits owned by individuals C) saving deposits D) traveler's checks Answer: C Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 59) Which of the following is NOT included in the M1 measure of money? A) currency held outside banks B) currency held in bank vaults C) checking deposits at commercial banks D) checking deposits at credit unions Answer: B Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 60) Which of the following is NOT included in the M1 measure of money? A) checking deposits B) currency C) traveler's checks D) savings deposits Answer: D Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking

61) Which of the following measures is NOT included in the M1 definition of money? A) currency held by the public B) time deposits C) checking deposits D) travelers checks Answer: B Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 62) Which of the following is included in M1? A) the $200 you charged on your credit card to purchase your textbooks B) the $200 check you wrote to purchase your textbooks C) the $200 in cash you used to purchase your textbooks D) the $200 loan you arranged to purchase your textbooks Answer: C Topic: Money in the United States Today, M1 Skill: Conceptual Status: Old AACSB: Reflective Thinking 63) In an economy, there is $200 million in currency held outside banks, $100 million in traveler's checks, $250 million in currency held inside the banks, $300 million in checking deposits, and $600 million in savings deposits. The value of M1 is ________. A) $750 million B) $1,200 million C) $1,150 million D) $600 million Answer: D Topic: Money in the United States Today, M1 Skill: Analytical Status: Old AACSB: Analytical Skills 64) M2 ________. A) does not include currency B) does not include traveler's checks C) is a broader measure of money than M1 D) does not include checking deposits held at credit unions Answer: C Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking

65) The definition of M2 includes A) M1. B) savings deposits. C) time deposits. D) all of the above Answer: D Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 66) The definition of M2 includes I. M1. II. money market mutual funds. III. currency held outside of banks. A) I and II only B) I and III only C) II and III only D) I, II, and III Answer: D Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 67) Which of the following is NOT included in the M2 definition of money? A) currency held by banks B) money market mutual fund balances C) savings deposits D) checkable deposits Answer: A Topic: Money in the United States Today, M2 Skill: Definition Status: Old AACSB: Reflective Thinking 68) Which of the following is NOT included in the M2 measure of money? A) checking deposits B) traveler's checks C) time deposits D) shares of the stocks of large companies Answer: D Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 18 Copyright © 2014 Pearson Education, Inc.

69) The largest component of M2 is A) savings deposits B) currency C) money market mutual funds D) travelers checks Answer: A Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 70) Which of the following is part of M2? A) checks B) credit cards C) currency held inside a bank D) none of these are part of M1 or M2 Answer: D Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 71) M2 is A) smaller than M1. B) larger than M1. C) equal to M1, given full employment. D) equal to M1, but only when all three functions of money apply. Answer: B Topic: Money in the United States Today, M1 and M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 72) Checking deposits are included in A) M1 only. B) M2 only. C) M1 and M2. D) neither M1 nor M2. Answer: C Topic: Money in the United States Today, M1 and M2 Skill: Recognition Status: Old AACSB: Reflective Thinking

73) Currency held outside the banking system is included A) in M1 but not M2. B) in M2 but not M1. C) in both M1 and M2. D) in neither M1 nor M2. Answer: C Topic: Money in the United States Today, M1 and M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 74) Comparing M1 and M2 we know that A) M1 is larger because it contains currency. B) M2 is approximately equal to M1. C) M2 is larger because it contains M1 and other assets. D) M2 is larger because it contains more liquid assets than does M1. Answer: C Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Reflective Thinking 75) Suppose you cash in a Certificate of Deposit (a small time deposit) to acquire the traveler's checks you'll need for your vacation. What happens to M1 and M2? A) M1 and M2 both increase. B) M1 stays the same and M2 increases. C) M1 increases and M2 decreases. D) M1 increases and M2 stays the same. Answer: D Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Reflective Thinking 76) If you use $500 of currency to make a deposit in a saving deposit, A) M1 decreases, but M2 is unchanged B) M1 decreases and M2 increases C) M1 is unchanged, but M2 increases D) M1 and M2 both increase Answer: A Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Reflective Thinking

77) Sam has $500 in traveler's checks. He cashes a $100 traveler check, deposits $150 into his checking account at a Savings and Loan Association, and deposits the remaining $250 into a savings account at a credit union. Immediately, ________. A) M1 decreases by $250 and M2 does not change B) M1 decreases by $400 and M2 increases by $250 C) M1 does not change and M2 increases by $250 D) M1 and M2 do not change Answer: A Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Analytical Skills 78) A new financial innovation results in people switching their funds from checking deposits to savings accounts. The quantity of M1 ________ and the quantity of M2 ________. A) decreases; decreases B) increases; decreases C) decreases; does not change D) decreases; increases Answer: C Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Reflective Thinking

Component Money market mutual fund deposits Time deposits Savings deposits Checking deposits Currency

Amount (billions of dollars) 4,400 1,237 1,589 752 609

79) Based on the data in the table above, what is the value of M1? A) $2,950 billion B) $1,361 billion C) $752 billion D) $609 billion Answer: B Topic: Money in the United States Today, M1 Skill: Analytical Status: Old AACSB: Analytical Skills 21 Copyright © 2014 Pearson Education, Inc.

80) Based on the data in the table above, what is the value of M2? A) $2,950 billion B) $4,187 billion C) $4,400 billion D) $8,587 billion Answer: D Topic: Money in the United States Today, M2 Skill: Analytical Status: Old AACSB: Analytical Skills

Component Currency Checking deposits Savings deposits Traveler's checks Time deposits Money market mutual funds Available credit on credit cards

Amount (billions of dollars) 235 570 416 8 1,144 930 675

81) According to the table above, the value of M1 is ________ and the value of M2 is ________. A) $813 billion; $2490 billion B) $805 billion; $2490 billion C) $813 billion; $3303 billion D) $1,488 billion; $3978 billion Answer: C Topic: Money in the United States Today, M1 and M2 Skill: Analytical Status: Old AACSB: Analytical Skills

Component Currency Checking deposits Savings deposits Traveler's checks Time deposits Money market mutual funds Available credit on credit cards

Amount (billions of dollars) 300 600 450 10 1,200 1,100 900

82) According to the table above, the value of M1 is ________ and the value of M2 is ________. A) $860 billion; $2,750 billion B) $910 billion; $1,960 billion C) $860 billion; $4,560 billion D) $910 billion; $3,660 billion Answer: D Topic: Money in the United States Today, M1 and M2 Skill: Analytical Status: Old AACSB: Analytical Skills 83) Liquidity is the A) speed with which the price of an asset changes as its intrinsic value changes. B) inverse of the velocity of money. C) same as the velocity of money. D) ease with which an asset can be converted into money. Answer: D Topic: Liquidity Skill: Recognition Status: Old AACSB: Reflective Thinking 84) Liquidity is the A) degree to which an asset acts as money without a loss of value. B) ease with which an asset can be converted into a means of payment with little loss of value. C) degree to which money can be converted into an asset with little loss of value. D) ease with which credit cards are accepted as a means of payment. Answer: B Topic: Liquidity Skill: Recognition Status: Old AACSB: Reflective Thinking 23 Copyright © 2014 Pearson Education, Inc.

85) Liquidity is the same as A) easy conversion of money to an asset, allowing for loss of value. B) diversification of an investor's store of value. C) easy conversion of an asset to a means of payment, allowing for loss of value. D) easy conversion of an asset to a means of payment, with little or no loss of value. Answer: D Topic: Liquidity Skill: Recognition Status: Old AACSB: Reflective Thinking 86) A highly liquid asset A) has high transaction costs associated with its sale. B) is highly leveraged. C) generally has a very limited market for its resale. D) can be converted into a means of payment easily without loss of value. Answer: D Topic: Liquidity Skill: Recognition Status: Old AACSB: Reflective Thinking 87) Liquidity ________. A) increases when a country owns gold B) increases when a consumer has more credit cards C) is how quickly an asset loses its worth D) is the property of being instantly convertible into money Answer: D Topic: Liquidity Skill: Recognition Status: Old AACSB: Reflective Thinking 88) In the list of assets below, which is the most liquid? A) $500 worth of Ford Motors common stock B) $500 worth of Ford Motors bonds C) a $500 traveler's check D) a one-ounce gold coin Answer: C Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking

89) An individual wanting the most liquid asset possible will hold A) currency. B) a savings account. C) gold. D) U.S. government bonds. Answer: A Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking 90) Which of the following is the most liquid? A) the U.S. dollars in your pocket B) the funds in your checking account C) your house D) your friend's house Answer: A Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking 91) Which of the following is the most liquid? A) the U.S. dollars that your professor used this morning to buy breakfast B) your credit card C) gold D) the pencil or pen in your hand right now Answer: A Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) Which of the following is the most liquid asset? A) money B) land C) a government bond D) a share of stock Answer: A Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking

93) Checks ________ money and credit cards ________ money. A) are; are B) are not; are C) are; are not D) are not; are not Answer: D Topic: Checks Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 94) Which of the following is NOT money? A) currency B) checking deposits C) checks in the checkbook D) All of the above are money. Answer: C Topic: Checks Are Not Money Skill: Recognition Status: Old AACSB: Reflective Thinking 95) Checks are A) the largest component of the money supply. B) not money. C) only part of M2 but not part of M1. D) part of M1 but not part of M2. Answer: B Topic: Checks Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 96) Which of the following is true? I. Checks are considered money because they can be used as a medium of exchange. II. Checks represent a transfer of money. A) I only B) II only C) both I and II D) neither I nor II Answer: B Topic: Checks Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

97) Checks ________ money and checking deposits ________ money. A) are; are B) are; are not C) are not; are D) are not; are not Answer: C Topic: Checks Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 98) Checks are NOT money because they A) are issued by banks, not by the government. B) are merely instructions to transfer money. C) have value in exchange but little intrinsic value. D) are not backed by either gold or silver. Answer: B Topic: Checks Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 99) Credit cards are A) money but are not a large part of the money supply. B) not money. C) money and are the largest part of the money supply. D) not money because they are not made of paper. Answer: B Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 100) Credit cards are A) not a part of money because they are not a means of payment. B) a part of M1 but not of M2. C) a part of money because they are used to purchase goods and services. D) a part of M2 but not a part of M1. Answer: A Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

101) Credit cards are A) a part of money because they are used in so many transactions. B) a part of money when the transaction approach is used but not when the liquidity approach is used. C) not part of money because they represent a loan of money to the user. D) not part of money because the government has no control over the amount of credit outstanding. Answer: C Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 102) Using a credit card can best be likened to A) taking out a loan. B) a barter exchange. C) using any other form of money because you immediately get to take the goods home. D) writing a check on your demand deposit account. Answer: A Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 103) Credit cards are NOT money because they A) have a value in exchange but little intrinsic value. B) are not issued by the government. C) do not serve as a unit of account. D) are ID cards that make borrowing easier. Answer: D Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 104) Checks and credit cards are NOT considered money because they A) are issued by banks, not the Federal Reserve. B) are not the means of payment. C) typically require an identification check, such as your driver's license. D) are not backed by all commercial banks. Answer: B Topic: Checks and Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

105) Credit cards were introduced in 1959. In 2009, the U.S. credit card balance was $866 billion. Which of the following is true? A) The $866 billion balance is part of M2 but not part of M1. B) The $866 billion balance is part of both M1 and M2. C) Only that portion of the $866 billion actually charged in 2009 is counted in M1 and M2. D) No part of the $866 billion balance is counted in M1 and M2. Answer: D Topic: Credit Cards Are Not Money Skill: Conceptual Status: New AACSB: Reflective Thinking 106) The balance owed on credit cards in the United States in 2009 was $866 billion. When consumers pay off this balance in full, A) M1 will decrease by $866 billion. B) M1 will remain unchanged but M2 will decrease by $866 billion. C) neither M1 nor M2 will change. D) M1 will increase by $866 billion. Answer: C Topic: Credit Cards Are Not Money Skill: Conceptual Status: New AACSB: Reflective Thinking 107) Which of the following is NOT a function of money? A) medium of exchange B) barter C) unit of account D) store of value Answer: B Topic: Study Guide Question, Barter Skill: Conceptual Status: Old AACSB: Reflective Thinking 108) The fact that money can be exchanged for goods reflects money's role as a A) cause of inflation. B) medium of exchange. C) unit of account. D) store of value. Answer: B Topic: Study Guide Question, Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

2 Depository Institutions 1) Which of the following is considered a depository institution? I. the U.S. Treasury II. a commercial bank like Citibank III. a credit union for federal government employees A) I only B) I and II C) II and III D) I, II and III Answer: C Topic: Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 2) Which of the following institutions is NOT a depository institution? A) the U.S. Treasury B) a commercial bank C) a money market mutual fund D) a thrift institution, such as a savings and loan association Answer: A Topic: Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 3) A depository institution is a firm that takes deposits from ________ and makes loans to ________. A) households and firms; other households and firms B) firms; households C) households; firms D) firms; other firms Answer: A Topic: Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking

4) Depository institutions A) make profit from the spread between the interest rate they pay on deposits and the interest rate they receive on loans. B) make a profit according to how much the Federal Reserve pays them. C) make their profit by charging the government for their services. D) make zero profit but receive compensation by the government because their services are so valuable. Answer: A Topic: Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 5) The major role of a commercial bank is to A) make mortgage loans. B) sell shares and use the proceeds to buy stocks. C) receive deposits and make loans. D) restrain the growth of the quantity of money. Answer: C Topic: Commercial Banks Skill: Recognition Status: Old AACSB: Reflective Thinking 6) Commercial banks do not A) buy U.S. government Treasury bills. B) accept deposits from their customers. C) make loans to creditworthy individuals and businesses. D) determine what assets are money. Answer: D Topic: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) Modern U.S. commercial banks perform all of the following functions EXCEPT A) accept checking deposits. B) issue paper currency. C) make loans to households and business firms. D) accept savings deposits. Answer: B Topic: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) A savings bank is a depository institution that ________. A) sells shares which it uses to purchase shares in U.S. Treasury bills B) makes mostly home-purchase loans C) is owned by a social or economic group D) makes mostly consumer loans Answer: B Topic: Savings Banks Skill: Recognition Status: Old AACSB: Reflective Thinking 9) Examples of thrift institutions include A) savings deposits and checking deposits. B) commercial banks, savings and loan associations, and insurance companies. C) savings and loan associations, savings banks, and credit unions. D) money market mutual funds, commercial banks, and credit unions. Answer: C Topic: Thrift Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 10) A credit union is A) a combination of credit card corporations. B) an depository institution owned by members of a particular group. C) a thrift institution that issues credit cards. D) a commercial bank owned by its depositors. Answer: B Topic: Credit Union Skill: Recognition Status: Old AACSB: Reflective Thinking 11) Money market mutual funds invest in A) residential mortgages. B) commercial real estate. C) long-term government securities. D) highly liquid assets. Answer: D Topic: Money Market Mutual Funds Skill: Recognition Status: Old AACSB: Reflective Thinking

12) Sarah buys shares from a financial institution that uses her funds together with other funds to purchase U.S. treasury bills. Sarah has deposited her money into a ________. A) savings bank B) credit union C) money market mutual fund D) savings and loan association Answer: C Topic: Money Market Mutual Funds Skill: Recognition Status: Old AACSB: Reflective Thinking 13) Money market mutual funds A) are provided by the Federal Reserve as liquidity for private banks. B) have no restrictions on shareholder withdrawals. C) do not provide any checking services to their owners. D) allow shareholders to write check on their funds. Answer: D Topic: Money Market Mutual Funds Skill: Recognition Status: Old AACSB: Reflective Thinking 14) Which of the following is true regarding money market mutual funds? I. Money market mutual funds buy highly liquid assets like Treasury bills. II. Shareholders can obtain loans from money market mutual funds. A) I only B) II only C) both I and II D) neither I nor II Answer: A Topic: Money Market Mutual Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) A money market mutual fund is A) essentially the same as a demand deposit account. B) a time deposit of $100,000 or less. C) a time deposit of more than $100,000. D) a depository institution that sells shares and buys securities such as U.S. Treasury bills. Answer: D Topic: Money Market Mutual Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 33 Copyright © 2014 Pearson Education, Inc.

16) Which of the following explains why a bank holds reserves? I. Banks are required by law to hold reserves. II. To meet depositors' currency withdrawals. III. To use them to make loans to households. A) I only B) II only C) I and II D) I, II, and III E) I and III Answer: C Topic: Banks' Reserves Skill: Conceptual Status: New AACSB: Reflective Thinking 17) For a commercial bank, the term "reserves" refers to A) a banker's concern ("reservation") in making loans to an individual without a job. B) the profit that the bank retains at the end of the year. C) the cash in its vaults and its deposits at the Federal Reserve. D) the net interest that it earns on loans. Answer: C Topic: Banks' Reserves Skill: Recognition Status: Old AACSB: Reflective Thinking 18) Which of the following are part of a commercial bank's reserves? I. cash in the bank's vaults II. loans III. cash in checking accounts A) I only B) I and II C) I and III D) I, II and III Answer: A Topic: Banks' Reserves Skill: Recognition Status: Old AACSB: Reflective Thinking

19) Reserves are ________. A) gold in a bank's vault plus its gold at Federal Reserve banks B) cash in a bank's vault plus its deposits at Federal Reserve banks C) cash in a bank's vault plus its gold at Federal Reserve banks D) cash in a bank's vault plus the cash carried by its customers Answer: B Topic: Banks' Reserves Skill: Recognition Status: Old AACSB: Reflective Thinking 20) A bank's reserves include A) the cash in its vault plus the value of its depositors' accounts. B) the cash in its vault plus its deposits held at a Federal Reserve bank. C) the cash in its vault plus any gold held for the bank at Fort Knox. D) its common stock holdings, the cash in its vault, and any deposits at a Federal Reserve bank. Answer: B Topic: Banks' Reserves Skill: Recognition Status: Old AACSB: Reflective Thinking 21) Bank reserves include I. the cash in the bank's vault II. the bank's deposits at the Federal Reserve A) only I B) only II C) both I and II D) neither I nor II Answer: C Topic: Banks' Reserves Skill: Recognition Status: Old AACSB: Reflective Thinking 22) Of the following, the riskiest assets held by commercial banks are A) reserves. B) U.S. government bonds. C) U.S. government Treasury bills. D) loans. Answer: D Topic: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking

23) An asset category that caries the highest interest rate is A) checkable deposit accounts. B) loans. C) cash in the bank vault. D) savings deposits. Answer: B Topic: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) Which of the following functions are performed by depository institutions? I. They make long-term loans using short-term deposits, thereby creating liquidity. II. They efficiently gather funds from a large base of depositors. III. They concentrate risk. A) I only B) II only C) III only D) I and II Answer: D Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) Which of the following is a service of depository institutions? A) decreasing the liquidity drain of funds in the banking system B) monitoring the Federal Reserve C) pooling risk D) loaning funds to other depository institutions at the discount rate Answer: C Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) Depository institutions are good at minimizing A) the costs of monitoring borrowers. B) risky borrowers. C) liquidity. D) all of the above Answer: A Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 36 Copyright © 2014 Pearson Education, Inc.

27) If a savings and loan "pools risk," which of the following must it do? A) take funds in from a large number of lenders B) have a large spread between the interest rate it charges borrowers and the interest rate it pays lenders C) lend money to a large number of firms D) Both answers A and C are correct. Answer: D Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 28) Depository institutions undertake all the following activities except they do not ________. A) print money B) minimize the cost of monitoring borrowers C) pool risk D) create liquidity Answer: A Topic: Economic Functions of Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 29) Depository institutions do all of the following EXCEPT A) set the required reserve ratio B) create liquidity C) pool risks D) minimize the cost of obtaining funds Answer: A Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) Liquidity can A) not be created. B) be created by borrowing short and lending long. C) only be created by the government. D) be created by borrowing long and lending short. Answer: B Topic: The Economic Functions of Depository institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking

31) The practice of borrowing short and lending long A) pools risk. B) minimizes the cost of monitoring borrowers. C) creates liquidity. D) All of the above answers are correct. Answer: C Topic: The Economic Functions of Depository institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) Which of the following is NOT an economic benefit of depository institutions? A) They borrow long and lend short. B) They create liquidity. C) They pool risk. D) They reduce the cost of monitoring borrowers. Answer: A Topic: The Economic Functions of Depository institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 33) Depository institution create liquidity when they A) buy assets that are liquid. B) borrow short and lend long. C) have liabilities that are illiquid. D) borrow long and lend short. Answer: B Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) Which of the following allow banks to minimize the cost to a business of borrowing? I. Borrowing long and lending short. II. Raising funds from a large number of depositors. III. Creating money by lending all their reserves. A) I only B) II only C) I and III D) II and III Answer: B Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 38 Copyright © 2014 Pearson Education, Inc.

35) When banks use specialized resources to monitor borrowers, they are A) pooling risk. B) lowering the cost of creating liquidity. C) minimizing the cost of assessing borrowers' creditworthiness. D) lending to only high-risk borrowers. Answer: C Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 36) The risk of making a loan is A) earning profits that are too high and cause higher taxes. B) the risk that lender does not pay. C) the risk that the borrower does not pay. D) called "default risk" when taxes are not paid. Answer: C Topic: Economic Functions of Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 37) Pooling of risk occurs when depository institutions A) make assets more liquid. B) specialize in loaning only to good borrowers. C) bring lenders together. D) lend to a variety of different borrowers. Answer: D Topic: Economic Functions of Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 38) When a depository institution pools risk, it A) buys short and lends long. B) borrows reserves from the Federal Reserve. C) spreads loan losses across many depositors so that no one depositor faces a high degree of risk. D) makes loans to just one firm. Answer: C Topic: Economic Functions of Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking

39) Financial innovation is A) the process of turning assets into a more liquid form. B) the development of new financial products and services. C) responsible for credit cards being included as part of money. D) causing a decrease in bank profits. Answer: B Topic: Financial Innovation Skill: Recognition Status: Old AACSB: Reflective Thinking 40) Depository institutions do all the following EXCEPT A) minimize the cost of obtaining funds. B) create liquidity. C) pool risks. D) create required reserve ratios. Answer: D Topic: Study Guide Question, Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 3 The Federal Reserve System 1) The Federal Reserve System is the A) insurance agency the insures deposits. B) central bank of the United States. C) law enforcement agency that tracks counterfeit money. D) federal government agency that undertakes deregulation for depository institutions. Answer: B Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 2) In the United States, the central bank is the ________. A) Bank of America B) Federal Reserve System C) Federal Reserve Bank of New York D) Federal Reserve Bank of Washington D.C. Answer: B Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

3) Which of the following is the central bank of the United States? A) Comptroller of the Currency B) Treasury Department C) Federal Reserve System D) Office of the Budget Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 4) The Federal Reserve System A) regulates the nation's financial institutions. B) conducts the nation's monetary policy. C) Both answers A and B are correct. D) Neither answer A nor B is correct. Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 5) All the following statements about the Federal Reserve are true EXCEPT it ________. A) is a public authority B) regulates a nation's depository institutions C) accepts checking deposits from the nation's residents D) controls the quantity of money Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 6) The Bank of Japan is Japan's central bank. As part of its duties, the Bank of Japan would A) provide banking services to Japan's citizens and firms. B) provide banking services to foreigners. C) control the quantity of money in circulation in Japan. D) change tax rates. Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

7) As a "central bank," which of the following is true regarding the Fed? I. The Fed is a public authority that regulates the nation's banks. II. The Fed is not allowed to provide services to commercial banks like Citibank. III. The Fed is required to provide banking services to private citizens. A) I B) II C) I and II D) I and III Answer: A Topic: The Federal Reserve System Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) The Federal Reserve System A) has officers that are elected, like members of Congress. B) controls the amount of currency in circulation. C) is headquartered in San Francisco. D) was recently declared unconstitutional by the Supreme Court. Answer: B Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 9) Control of the nation's quantity of money is handled by A) Congress. B) the Federal Reserve System. C) the President of the United States. D) Congress, the Federal Reserve System, and all commercial banks. Answer: B Topic: Monetary Policy Skill: Recognition Status: Old AACSB: Reflective Thinking 10) Monetary policy is conducted A) only by the Federal Reserve. B) by the Federal Reserve and the President of the United States. C) by the Federal Reserve, the President of the United States, and Congress. D) by the Federal Reserve with veto power residing with the President of the United States. Answer: A Topic: Monetary Policy Skill: Recognition Status: Old AACSB: Reflective Thinking 42 Copyright © 2014 Pearson Education, Inc.

11) When the Fed is ________ it is ________. A) adjusting the amount of money in circulation; issuing government bonds B) issuing government bonds; conducting monetary policy C) adjusting the amount of money in circulation; conducting monetary policy D) regulating the nation's financial institutions; conducting monetary policy Answer: C Topic: Monetary Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 12) Controlling the quantity of money and interest rates to influence aggregate economic activity is called A) foreign policy. B) monetary policy. C) fiscal policy. D) bank antitrust policy. Answer: B Topic: Monetary Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) The interest rate banks charge other banks for overnight loans is A) the federal funds rate. B) targeted by the FDIC C) higher than interest rates for securities and loans. D) lower than interest rates for loans, but higher than interest rates for securities. Answer: A Topic: Monetary Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) The nation is divided into ________ Federal Reserve districts, each having a Federal Reserve Bank. A) 10 B) 50 C) 12 D) 7 Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Revised AACSB: Reflective Thinking

15) The Federal Reserve has ________ regional Federal Reserve banks and ________ members of the Board of Governors. A) 12; 12 B) 12; 7 C) 7; 12 D) 7; 7 Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 16) Regional Federal Reserve banks A) are located in each of the 50 states. B) are run by the governors of the states in which they are located. C) provide general banking services to the public. D) None of the above answers is correct. Answer: D Topic: The Structure of the Federal Reserve System Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) Which of the following institutions is NOT part of the structure of the Federal Reserve system? A) The Federal Open Market Committee B) The Federal Reserve Banks C) The Board of Governors D) The Federal Government Answer: D Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 18) Members of the Federal Reserve System's Board of Governors A) are elected for life. B) hold 14-year staggered terms. C) are a special subcommittee of the Senate. D) are elected at large by district banks. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

19) The Board of Governors of the Federal Reserve System consists of A) 7 members appointed by Congress and 7 appointed by the President. B) the presidents of each regional Federal Reserve bank. C) 12 members appointed by Congress. D) 7 members appointed by the President of the United States. Answer: D Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 20) The Board of Governors is the A) Presidents of the 12 regional banks of the Federal Reserve. B) 7-member group that oversees the Federal Reserve. C) 12-member monetary policy committee of the Federal Reserve. D) 50-member organization of state banking regulators of the Federal Reserve. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 21) The Board of Governors of the Federal Reserve System is A) appointed by the Congress. B) elected by the public. C) appointed by the President of the United States and confirmed by the U.S. Senate. D) elected by members of the American Banking Association. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 22) This group consists of seven members appointed by the President of the United States for 14year terms: A) the presidents of the Federal Reserve Banks. B) the members of the Federal Open Market Committee. C) the members of the Board of Governors of the Federal Reserve System. D) None of the above answers are correct. Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Revised AACSB: Reflective Thinking

23) The Board of Governors of the Federal Reserve System does NOT A) consist of seven members with fourteen-year terms. B) include the presidents of the twelve Federal Reserve Banks. C) utilize a system of rotations so that a position comes open every two years. D) consist of members whose appointments have been approved by the Senate. Answer: B Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 24) The Federal Open Market Committee A) consists of the Fed chairman and the 12 regional bank presidents. B) is the main policy-making organ of the Federal Reserve. C) is headed by the president of the New York Federal Reserve Bank. D) meets every week to review the state of the economy. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 25) The Federal Open Market Committee (FOMC) A) consists of the 12 districts of the Federal Reserve. B) is the 7-member group that oversees the Federal Reserve. C) is the 12-member monetary policy committee of the Federal Reserve. D) is the 50-member organization of state banking regulators of the Federal Reserve. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 26) The Federal Open Market Committee (FOMC) is composed of A) representatives from the governors of all 50 states. B) Presidents of 5 Federal Reserve regional banks and the Board of Governors. C) the 12 Presidents of the Federal Reserve regional banks. D) the Board of Governors, the Vice-President of the United States, and the Secretary of Treasury for the United States. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

27) The Federal Open Market Committee (FOMC) A) determines the government's tax policy. B) determines the Fed's monetary policy. C) oversees all transactions on the stock market. D) lends to the least credit-worthy customers who otherwise can't get loans. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 28) The Federal Open Market Committee consists of the A) Federal Reserve chairman and the other six members of the Board of Governors. B) Federal Reserve branch bank presidents. C) Federal Reserve chairman and the Federal Reserve branch bank presidents. D) Federal Reserve chairman, the other six members of the Board of Governors, and five of the Federal Reserve branch bank presidents. Answer: D Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Revised AACSB: Reflective Thinking 29) The main policy-making organ of the Federal Reserve System is A) the Board of Governors. B) the Federal Reserve branch banks. C) the Federal Reserve chairman and the Federal Reserve branch bank presidents. D) the Federal Open Market Committee. Answer: D Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 30) Which part of the Federal Reserve System meets every 6 weeks to determine the nation's monetary policy? A) Federal Open Market Committee B) Board of Governors C) the Federal Reserve Banks D) depository institutions such as commercial banks Answer: A Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

31) Which of the following is TRUE regarding the Federal Open Market Committee (FOMC)? A) It is the main policy-making group of the Congress. B) Representatives from each state control its operation. C) It meets about every six weeks to decide on monetary policy. D) Both answers A and C are correct. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 32) The monetary policy-making body of the Federal Reserve is the A) the Federal Open Market Committee B) the New York Federal Reserve Bank C) regional Federal Reserve Banks D) Board of Governors Answer: A Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 33) Which Federal Reserve Bank president is always on the Federal Open Market Committee? A) New York B) Chicago C) St. Louis D) Boston Answer: A Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 34) The Federal Open Market Committee of the Federal Reserve System is responsible for A) maintaining competition among the nation's commercial banks. B) determining monetary policy actions. C) establishing the official price of gold. D) defining the foreign exchange value of the dollar. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

35) The Federal Open Market Committee A) meets weekly to set Fed policy. B) has 7 voting members. C) always includes the president of the Federal Reserve Bank of New York as a member. D) does not include any members of the Board of Governors. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 36) The main policy-making organ of the Federal Reserve System is the A) Board of Governors. B) Federal Reserve bank presidents. C) Federal Open Market Committee. D) Joint Congressional Committee on Monetary Policy. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 37) The main policy-making body of the Federal Reserve System is the A) Board of Governors. B) Federal Open Market Committee. C) Federal Reserve Banks. D) member commercial banks. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 38) The main policy-making organization of the Federal Reserve System is the ________. A) U.S. Mint B) U.S. Treasury C) Joint Congressional Committee on Monetary Policy D) Federal Open Market Committee Answer: D Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Revised AACSB: Reflective Thinking

39) The main policy designer of the Federal Reserve system is the A) 12 district banks. B) President and Congress. C) Federal Open Market Committee. D) Council of Economic Advisors. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 40) The Chairman of the Fed is appointed by ________. A) the Board of Governors of the Federal Reserve System B) the President of the United States C) Congress D) the U.S. Senate Answer: B Topic: The Fed's Power Center Skill: Recognition Status: Old AACSB: Reflective Thinking 41) The current chairman of the Federal Reserve System is A) Milton Friedman. B) Alan Greenspan. C) President Obama. D) Ben Bernanke. Answer: D Topic: The Fed's Power Center Skill: Recognition Status: Old AACSB: Reflective Thinking 42) The chairman of the Federal Reserve's Board of Governors A) controls the agenda of the Federal Open Market Committee meetings. B) is the main point of contact between the Fed and the President of the U.S. C) receives frequent background briefings on monetary policy issues from a large staff of economists and technical experts. D) All of the above answers are correct. Answer: D Topic: The Fed's Power Center Skill: Recognition Status: Old AACSB: Reflective Thinking

43) Most of the day-to-day power in monetary policy decisions lies with A) the President of the United States B) the Senate Banking Committee C) the chairman of the Board of Governors D) large commercial banks Answer: C Topic: The Fed's Power Center Skill: Recognition Status: Old AACSB: Reflective Thinking 44) On the Fed's balance sheet, assets include A) depository institutions deposits at the Federal Reserve and loans to depository institutions. B) U.S. government securities and loans to depository institutions. C) Federal Reserve notes and depository institutions' deposits at the Federal Reserve. D) Federal Reserve notes and loans to depository institutions. Answer: B Topic: Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking 45) Which of the following is an asset of the Fed? A) loans to depository institutions B) Federal Reserve notes C) banks' deposits D) Both answers B and C are correct. Answer: A Topic: Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking 46) Which of the following is NOT an asset of the Federal Reserve? A) Federal Reserve notes B) government securities C) loans to depository institutions D) None of the above are correct because they are all assets of the Federal Reserve Answer: A Topic: The Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking

47) Which of the following is NOT an asset of the Federal Reserve System? A) loans to depository institutions B) reserves of depository institutions C) U.S. government securities D) None of the above are correct because they are all assets of the Federal Reserve Answer: B Topic: The Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking 48) Which of the following is a liability of the Federal Reserve? A) Federal Reserve notes B) loans to depository institutions C) U.S. government securities D) U.S. coins Answer: A Topic: The Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking 49) Which of the following is a liability on the balance sheet of the Federal Reserve System? A) Federal Reserve notes B) U.S. government securities C) loans to depository institutions D) None of the above are correct because they are all liabilities of the Federal Reserve Answer: A Topic: The Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking 50) The monetary base is the sum of A) U.S. Treasury notes and other government securities. B) Federal Reserve notes, coins, and deposits of depository institutions. C) foreign and domestic deposits at the Fed. D) coins, currency, and checkable deposits. Answer: B Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking

51) The monetary base is the sum of A) Federal Reserve notes, coins, and deposits of depository institutions B) currency, travelers' checks, and checking deposits C) currency D) M1 and M2 Answer: A Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking 52) The monetary base consists of A) the quantity of money. B) the sum of Federal Reserve notes, coins, and depository institutions' deposits at the Fed. C) demand deposits and vault cash. D) government securities held by the Fed. Answer: B Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking 53) The monetary base is A) the sum of Federal Reserve notes, coins, and depository institutions' deposits at the Federal Reserve. B) Federal Reserve notes minus depository institutions' deposits at the Federal Reserve. C) depository institutions' deposits at the Federal Reserve minus Federal Reserve notes. D) the money borrowed by banks from other banks. Answer: A Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking 54) The monetary base does NOT include A) Federal Reserve notes. B) reserves of depository institutions. C) checking accounts at commercial banks. D) commercial banks' reserves. Answer: C Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking

55) Which of the following is NOT part of the monetary base? A) Federal Reserve notes B) reserves of depository institutions at the Fed C) the public's checking deposits at commercial banks D) coins Answer: C Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking 56) The sum of Federal Reserve notes, coins, and depository institutions' reserves is the ________. A) reserves of the Fed B) assets of the Fed C) monetary base D) liabilities of the Fed Answer: C Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking 57) Which of the following is NOT a part of the monetary base? A) Chemical Bank's deposits of reserves at the Fed B) First Bank's required reserves held at the Federal Reserve C) Federal Reserve notes D) U.S. government securities owned by the Fed Answer: D Topic: Monetary Base Skill: Conceptual Status: Old AACSB: Reflective Thinking 58) Which of the following is a tool that is used by the Fed to control the quantity of money? A) open market operations B) excess reserves C) government expenditure multiplier D) real interest rate Answer: A Topic: The Fed's Policy Tools Skill: Conceptual Status: Old AACSB: Reflective Thinking

59) Which of the following is NOT a monetary policy tool of the Federal Reserve? A) changes in required reserves B) last resort loans C) deposit insurance D) open market operations Answer: C Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 60) Which of the following is NOT one of the Fed's monetary policy tools? A) last resort loans B) the required reserve ratio C) the income tax rate D) buying and selling U.S. government securities Answer: C Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 61) Which of the following tools is NOT a policy tool of the Fed? A) last resort loans B) the tax rate on interest income C) the reserve ratio D) open market operations Answer: B Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 62) Which of the following is NOT a monetary policy tool? A) last resort loans B) open market operations C) required reserve ratio D) federal funds rate Answer: D Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking

63) Which of the following is NOT a policy tool of the Federal Reserve System? A) open market operations B) the tax rate imposed on interest income C) the interest rate charged by the Fed for loans to member banks D) the amount of required reserves held by member banks Answer: B Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 64) The tools at the disposal of the Fed for changing the quantity of money do NOT include A) open market operations. B) changing the required reserve ratio. C) changing discount rates. D) increasing the number of commercial banks. Answer: D Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 65) Federal Reserve policy tools include all of the following EXCEPT A) excess reserve ratios. B) required reserve ratios. C) last resort loans. D) open market operations. Answer: A Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 66) Federal Reserve policy tools include all of the following EXCEPT A) desired reserve ratios. B) required reserve ratios. C) the discount rate. D) open market operations. Answer: A Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking

67) The minimum percentage of deposits that a depository institution must hold and cannot use for lending is known as the A) minimum rate. B) required reserve ratio. C) money multiplier. D) discount rate. Answer: B Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 68) Reserve requirements are the A) minimum percentages of deposits that banks must hold as reserves. B) minimum amount of an owner's financial resources that must be placed in a depository institution. C) rules covering the types of deposits that banks may offer. D) rules covering the types of assets that banks may purchase. Answer: A Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 69) The fraction of deposits that banks must keep on hand or at the Federal Reserve is called the A) discount rate. B) required reserve ratio. C) deposit multiplier. D) money multiplier. Answer: B Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 70) The required reserve ratio is the ratio of reserves to ________ required by banking regulations. A) deposits B) loans C) profits D) cash Answer: A Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 57 Copyright © 2014 Pearson Education, Inc.

71) The required reserve ratio A) is the amount of money that banks require borrowers to reserve in their accounts. B) is the fraction of a bank's total deposits that are required to be held in reserve. C) increases when withdrawals from a bank are made. D) is higher for banks that make riskier loans. Answer: B Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 72) Which of the following is true regarding the required reserve ratio? A) The ratio determines the legally required amount of reserves a bank must hold. B) The ratio determines the amount of excess reserves a bank must hold. C) The ratio is only enforced against banks that are operating in a risky manner. D) None of the above answers is correct. Answer: A Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 73) Required reserves for a commercial bank A) are the reserves a bank is legally required to hold to back its deposits. B) are only the reserves required to be held in the bank's vault. C) are only the money used by the bank tellers. D) consist only of deposits at the Fed. Answer: A Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 74) The required reserve ratio ranges from A) 0 to 3 percent. B) 0 to 7 percent. C) 3 to 30 percent. D) 0 to 10 percent. Answer: D Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking

75) Changing which of the following is a Federal Reserve monetary policy tool? A) required reserve ratios B) desired reserve ratios C) excess reserve ratios. D) gold and foreign reserve ratios Answer: A Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 76) The discount rate is the interest rate A) that banks charge their best customers. B) that the Fed charges on its last resort loans. C) on interbank lending. D) that bank insurers pay on insured deposits. Answer: B Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 77) When the Federal Reserve lends reserves to depository institutions, it charges them interest. That interest rate is called the A) federal funds rate. B) loan rate. C) prime rate. D) discount rate. Answer: D Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 78) The interest rate that the Fed charges when it makes a last resort loan is the ________ rate. A) discount B) short-term C) reserve D) federal funds Answer: A Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

79) The discount rate is the interest rate that A) the Federal Reserve charges when it loans reserves to depository institutions. B) is the lowest rate that banks will charge when lending to their best customers. C) the Federal Reserve charges when it loans to the U.S. Government. D) banks charge when they lend to each other. Answer: A Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 80) The discount rate is the interest rate A) paid on time deposits. B) paid on funds banks borrow from other banks. C) paid on funds that depository institutions borrow from the Federal Reserve. D) that banks charge their "best" customers. Answer: C Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 81) The ________ rate is the interest rate at which the Fed lends ________ to depository institutions. A) discount rate; reserves B) discount rate; gold C) federal funds rate; deposits D) federal funds rate; reserves Answer: A Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 82) When the Fed wants to undertake open market operations, it A) can require all commercial banks to buy from or sell to it. B) can require all member banks to buy from or sell to it. C) buys or sells securities. D) buys securities from or sells securities to the federal government. Answer: C Topic: The Fed's Policy Tools, Open Market Operations Skill: Recognition Status: Old AACSB: Reflective Thinking

83) An open market operation occurs when the ________ buys or sells securities ________. A) Federal Reserve System; from or to the federal government B) Federal Reserve System; in the open market C) a commercial bank; from or to the federal government D) a commercial bank; from or to the public Answer: B Topic: The Fed's Policy Tools, Open Market Operations Skill: Recognition Status: Old AACSB: Reflective Thinking 84) An open market operation involves A) the Federal Reserve's purchase or sale of securities. B) the Federal Reserve's issuance of new stock. C) changing federal income tax rates. D) raising the debt limit of the United States. Answer: A Topic: The Fed's Policy Tools, Open Market Operations Skill: Recognition Status: Old AACSB: Reflective Thinking 85) When the Fed sells government securities to a bank, how are the Fed's assets affected? A) The amount of the Fed's government securities decreases. B) The amount of the Fed's government securities increases. C) The amount of reserves held at the Fed increases. D) The amount of reserves held at the Fed decreases. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 86) An open market purchase of securities by the Fed A) increases banks' reserves and decreases banks' securities. B) decreases banks' reserves and increases banks' securities. C) decreases banks' total assets. D) involves a bank purchasing government securities from the Fed. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Analytical Skills

87) An open market sale of securities by the Fed A) decreases banks' reserves and increases banks' securities. B) increases banks' reserves and decreases banks' securities. C) increases banks' total assets. D) involves a bank selling government securities to the Fed. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Analytical Skills 88) In an open market purchase, the Fed ________ government securities, which ________ bank reserves. A) buys, increases B) buys, decreases C) sells, increases D) sells, decreases Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 89) The Fed buys securities and gives the bank a check for the amount. After the check has cleared, A) reserves remain unchanged because the increase of reserves at the bank are offset by an increase in reserves at the Fed. B) reserves have decreased by the amount of the check because the Fed pays for the check by decreasing the bank's deposits at the Fed. C) reserves have increased by the amount of the check because the Fed pays for the check by increasing the amount of the bank's deposits with the Fed. D) reserves have increased by the amount of the reserves multiplied by the required reserve ratio, and the quantity of money increases by the difference between the amount of the check and the increase in the reserves. Answer: C Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking

90) If the Federal Reserve purchases government securities, A) banks' reserves will increase. B) the federal funds rate will rise. C) the discount rate will be forced higher. D) None of the above answers is correct because none of the effects occur. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 91) When the Fed buys U.S. government securities from a bank, the Fed A) loans the money needed to buy the securities to the bank. B) increases the bank's reserves at the Fed. C) obtains the money for the purchase from the U.S. Treasury. D) decreases the monetary base and raises the federal funds rate. Answer: B Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) If the Fed buys $100 in securities from a commercial bank, the A) Fed's assets will decrease. B) quantity of money will decrease. C) quantity of the bank's reserves will increase. D) amount of the bank's reserves reserves will not change. Answer: C Topic: How an Open Market Operation Works Skill: Conceptual Status: Revised AACSB: Reflective Thinking 93) In response to the financial crisis of 2007 and the ensuing recession, the Fed announced three rounds of "quantitative easing," where the Fed purchased billions of dollars of securities. What impact would quantitative easing have on the monetary base? A) The monetary base would increase. B) The monetary base would decrease. C) The monetary base would not change. D) While the monetary base would change, it is impossible to predict in which direction. Answer: A Topic: Monetary Base Skill: Conceptual Status: New AACSB: Reflective Thinking

94) If the Fed sells government securities, A) commercial bank reserves will decrease. B) the government's debt will be decreased. C) commercial bank reserves will increase. D) there will be no effect on the quantity of money. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 95) The initial impact of the Fed's open market sale of government securities to banks is A) an increase in the quantity of money by some multiple of the dollar volume of the sale. B) an increase in bank deposits at the Fed. C) a decrease in the quantity of money by some multiple of the dollar volume of the sale. D) a decrease of the banking system's reserve deposits at the Fed. Answer: D Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 96) A decrease in the quantity of reserves held by commercial banks could be the result of A) a decision by U.S. households to hold less currency. B) the sale of government securities by the Federal Reserve. C) a decrease in the government's budget deficit. D) an increase in the exchange rate. Answer: B Topic: How an Open Market Operation Works Skill: Conceptual Status: Revised AACSB: Reflective Thinking 97) The Fed's purchase of government securities could A) increase loans made by banks. B) be an effective anti-inflationary policy. C) decrease the price level and have no effect on real GDP. D) decrease bank reserves. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Revised AACSB: Reflective Thinking

98) When the Fed buys one million dollars in government securities from a commercial bank, A) the Fed's total assets decrease by one million dollars. B) the commercial bank's total assets increase by one million dollars. C) there is a change in the composition of the commercial bank's assets: reserves increase and government securities decrease. D) All of the above answers are correct. Answer: C Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills 99) If the Fed buys $100,000 in U.S. government securities from a commercial bank, the bank now has an additional $100,000 of A) total assets. B) excess reserves. C) actual reserves. D) net worth. Answer: C Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills 100) When the Fed sells one million dollars in securities to a commercial bank, A) the Fed's total assets increase by one million dollars. B) the commercial bank's total assets decrease by one million dollars. C) there is no change in the total assets of the Fed or the commercial bank. D) None of the above answers is correct. Answer: D Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills

101) Which of the following will occur if the Fed buys $10 million of securities from the University National Bank? A) The Fed will pay by increasing the University National Bank's deposit account with the Fed by $10 million. B) The University National Bank has $10 million more in securities. C) The Fed will pay by decreasing the University National Bank's deposit account with the Fed by $10 million. D) The University National Bank has $10 million less in excess reserves. Answer: A Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills 102) The Fed buys $100 million of government securities from Bank A. What is the effect on the Federal Reserve's balance sheet? A) Securities increase by $100 million and Federal Reserve notes (currency) decrease by $100 million. B) Securities increase by $100 million and reserves of Bank A increase by $100 million. C) Securities increase by $100 million and reserves of Bank A decrease by $100 million. D) Securities decrease by $100 million and reserves of Bank A increase by $100 million. Answer: B Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills 103) The Fed buys $100 million of government securities from Bank A. What is the effect on Bank A's balance sheet? A) Securities decrease by $100 million and reserves increase by $100 million. B) Securities decrease by $100 million and deposits decrease by $100 million. C) Securities increase by $100 million and reserves decrease by $100 million. D) Securities increase by $100 million and reserves increase by $100 million. Answer: A Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills

104) When the Fed lowers the federal funds rate, it can lead to A) the Fed selling government securities. B) an increase in lending by banks. C) a decrease in demand deposits. D) a decrease in the quantity of money. Answer: B Topic: How an Open Market Operation Works Skill: Conceptual Status: Revised AACSB: Reflective Thinking 105) The sale of government securities by the Fed leads to A) a decrease in bank reserves. B) a contraction in bank lending. C) a decrease in the monetary base. D) All of the above answers are correct. Answer: D Topic: How an Open Market Operation Works Skill: Conceptual Status: Revised AACSB: Reflective Thinking 106) The sale of $1 billion of securities to a bank or some other business by the Fed is an example of A) a last resort loan. B) a multiple contraction of the quantity of money. C) an open market operation. D) a change in the required reserve ratio. Answer: C Topic: Study Guide Question, Open Market Operations Skill: Conceptual Status: Old AACSB: Reflective Thinking

4 How Banks Create Money 1) Money is created by A) government taxation. B) banks taking in deposits. C) banks making loans. D) banks paying for depositor's insurance. Answer: C Topic: How Banks Create Money Skill: Recognition Status: Old AACSB: Reflective Thinking 2) The majority of money is created when A) banks make loans B) new coins are minted C) the federal government borrows from the public D) the Fed sells bonds Answer: A Topic: How Banks Create Money Skill: Recognition Status: Old AACSB: Reflective Thinking 3) A bank creates money by A) lending its excess reserves B) purchasing currency from the Federal Reserve C) buying bonds from the Federal Reserve D) printing more checks Answer: A Topic: How Banks Create Money Skill: Recognition Status: Old AACSB: Reflective Thinking 4) Banks create money whenever they A) accept a deposit. B) lend excess reserves to a borrower. C) receive monthly payments on their loans. D) receive interest on existing loans. Answer: B Topic: How Banks Create Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) Whenever a bank's actual reserves exceed its desired reserves, the bank A) can lend out additional funds. B) needs to call in loans. C) will go out of business. D) must increase the amount of its required reserves by obtaining more cash. Answer: A Topic: How Banks Create Money Skill: Recognition Status: Old AACSB: Reflective Thinking 6) Commercial banks are able to create money by A) printing Federal Reserve Notes. B) making loans. C) making customers pay back their loans. D) exchanging their reserves at the Fed for vault cash. Answer: B Topic: How Banks Create Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) The banking system in the United States creates money through the combination of excess reserves and A) banks loaning excess reserves. B) commodity money. C) banks' assets being more than their liabilities. D) stringent Federal Reserve regulations. Answer: A Topic: How Banks Create Money Skill: Recognition Status: Old AACSB: Reflective Thinking 8) If the desired reserve ratio is 3 percent and deposits totaled $575 billion, banks would hold A) $534.75 in reserves. B) $17.25 billion in excess reserves. C) $1,725 billion in currency. D) $17.25 billion in reserves. Answer: D Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills

9) A bank with $100 million in deposits has $15 million of cash in the bank, $10 million in deposits with the Fed, and $15 million in government securities in its vault. Its total reserves equal A) $10 million. B) $15 million. C) $25 million. D) $40 million. Answer: C Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 10) If required reserves are $150 and deposits are $1000, what is the required reserve ratio? A) 10 percent B) 15 percent C) 5 percent D) 85 percent Answer: B Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 11) If a customer deposits $10,000 in currency into a checking account, the bank's total reserves ________. A) increase B) do not change C) are greater than 100 percent D) decrease Answer: A Topic: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Analytical Skills 12) A bank's required reserves are calculated by multiplying ________. A) its deposits by the required reserve ratio B) the sum of its deposits and cash in its vault by the reserve ratio C) cash in its vault by the required reserve ratio D) the gold in its vault by the reserve ratio Answer: A Topic: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Reflective Thinking 70 Copyright © 2014 Pearson Education, Inc.

13) When bank deposits increase from $1 million to $2 million, banks' required reserves increase from $100,000 to $200,000. The required reserve ratio is ________. A) 10.0 B) 0.10 C) 1.00 D) 0.25 Answer: B Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 14) Excess reserves are A) desired reserves minus actual reserves. B) required reserves minus actual reserves. C) liquidity funds minus actual reserves. D) actual reserves minus desired reserves. Answer: D Topic: Reserves: Actual and Required Skill: Recognition Status: Old AACSB: Reflective Thinking 15) The difference between actual reserves and required reserves is A) net worth. B) excess reserves. C) illegal reserves. D) borrowings from the Fed. Answer: B Topic: Reserves: Actual and Required Skill: Recognition Status: Old AACSB: Reflective Thinking 16) Excess reserves are equal to A) the sum of desired reserves plus any reserves that are more than are required. B) actual reserves minus desired reserves. C) actual reserves plus desired reserves. D) desired reserves minus actual reserves. Answer: B Topic: Reserves: Actual and Required Skill: Recognition Status: Old AACSB: Reflective Thinking

17) The commercial banks on Sunny Island have checking deposits of $4 million, reserves of $600,000, and loans of $2.4 million. The desired reserve ratio is 10 percent. The banks have ________ of desired reserves and ________ of excess reserves. A) $600,000; $0 B) $400,000; $200,000 C) $400,000; $600,000 D) $600,000; $200,000 Answer: B Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 18) Suppose a bank has $1,500,000 in deposits and the desired reserve ratio is 12 percent. If the bank is currently holding $200,000 in reserves, the excess reserves are equal to A) zero. B) $40,000. C) $120,000. D) $20,000. Answer: D Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 19) If Bank A holds $200 in reserves, deposits are $1000, and the desired reserve ratio is 15 percent, how much are excess reserves? A) zero, because banks never hold excess reserves B) $200 C) $50 D) $150 Answer: C Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills

20) A small commercial bank has $10,000 in actual reserves, $60,000 in deposits, and has a 10 percent desired reserve ratio. Its excess reserves are A) $4,000. B) $10,000. C) $50,000. D) $60,000. Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 21) Suppose that a bank begins with $500 million in deposits and $100 million in reserves and is just meeting its desired reserve ratio. Now suppose a decrease in the required reserve ratio lowers the desired reserve ratio to 10 percent. After the fall in the desired reserve ratio but before the bank makes any changes, the bank's excess reserves are A) 0. B) $400 million. C) $450 million. D) $50 million. Answer: D Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 22) Suppose a bank has a desired reserve requirement ratio of 12 percent. If someone deposits $1,000 in the bank, A) immediately after the deposit, excess reserves increase by $880. B) the bank can make loans of $1,000. C) the bank's desired reserves rise by $1,000. D) Both answers B and C are correct. Answer: A Topic: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Analytical Skills

23) Suppose a bank is exactly meeting its desired reserve ratio of 10 percent and a new deposit of $75,000 is made. Immediately after the deposit is made, the bank's excess reserves equal A) zero. B) $7,500. C) $67,500. D) It is impossible to determine without additional information. Answer: C Topic: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Analytical Skills 24) A bank cannot create money unless its ________. A) required reserves are greater than actual reserves B) excess reserves are zero C) desired reserves are greater than actual reserves D) excess reserves equal deposits multiplied by the reserve ratio Answer: C Topic: Reserves and Loans Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) You withdraw $2,000 from your account. Your bank has a desired reserve ratio of 20 percent. This transaction, by itself, will directly reduce A) the quantity of money by $1,600. B) deposits by $1,600. C) the quantity of money by $2,000. D) deposits by $2,000. Answer: D Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills

TBK Bank Balance Sheet Assets Liabilities Reserves Deposits $120 $600 Loans Net worth 580 100 Total assets Total liabilities $700 $700 26) The above table presents the balance sheet of the TBK commercial bank. What is this bank's actual reserve ratio? A) $120 B) $700 C) 20 percent D) 17.14 percent Answer: C Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 27) The above table presents the balance sheet of the TBK commercial bank. If the desired reserve ratio is 25 percent, what is this bank's desired reserves? A) $120 B) $150 C) $175 D) 20 percent Answer: B Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills

Assets Reserves $100 Loans $600 Total $700

Liabilities Deposits $400 Net Worth $300 Total $700

28) The above table gives the initial balance sheet for Mini Bank. Mini Bank's actual reserve ratio equals ________. A) 25 percent B) 14.3 percent C) 33.3 percent D) 20 percent Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 29) The above table gives the initial balance sheet for Mini Bank. If the bank's desired reserve ratio is 10 percent, how much does this bank have in excess reserves? A) $60 B) $100 C) $40 D) $10 Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 30) The above table gives the initial balance sheet for Mini Bank. If the bank's desired reserve ratio is 10 percent, it will make A) more loans. B) fewer loans. C) no change in its lending. D) you cannot predict what the bank will do from this balance sheet without more information. Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Revised AACSB: Analytical Skills

Assets Reserves $30 Loans $970 Total $1,000

Liabilities Deposits $1,000 Total $1,000

31) The above table gives the initial balance sheet for Mega Bank. Mega Bank's desired reserves equal its required reserves. Based on the initial balance sheet, what is the required reserve ratio for Mega Bank? A) 3 percent B) 10 percent C) 30 percent D) 1.4 percent Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 32) The above table gives the initial balance sheet for Mega Bank. Barney comes into the bank and deposits $50 of currency into his checking account. The desired reserve ratio is 3 percent. After Barney's deposit, but before any other actions occur, MegaBank will have excess reserves of A) $15.00. B) $33.00. C) $48.50. D) $50.00. Answer: C Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills

33) The above table gives the initial balance sheet for Mega Bank. Barney comes into the bank and deposits $50 of currency into his checking account. The desired reserve ratio is 3 percent. After Barney's deposit, but before any other actions occur, what volume of loans will be made by MegaBank if the bank wants more profit and holds no excess reserves? A) $15.00 B) $33.00 C) $48.50 D) $50.00 Answer: C Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills Assets Reserves $500 Loans $2,500 Total assets $1,000

Liabilities Deposits $3,000 Total $3,000

34) The table above shows the balance sheet for Ralph's Bank. If the desired reserve ratio is 15 percent, Ralph's Bank has desired reserves of ________. A) $3,000 B) $2,500 C) $500 D) $450 Answer: D Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 35) The table above shows the balance sheet for Ralph's Bank. If the desired reserve ratio is 15 percent, Ralph's Bank has excess reserves of ________. A) $50 B) $500 C) $3,000 D) $2,500 Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 78 Copyright © 2014 Pearson Education, Inc.

36) The table shows the balance sheet for Ralph's Bank. If the desired reserve ratio is 15 percent, the maximum additional amount that Ralph's Bank can loan is equal to ________. A) $50 B) $500 C) $3,000 D) $2,500 Answer: A Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 37) When a bank has excess reserves A) it can create money. B) it can make loans. C) it has too many loans. D) Both answers A and B are correct. Answer: D Topic: Reserves and Loans Skill: Conceptual Status: Old AACSB: Reflective Thinking 38) A bank can only make a loan if it has A) excess reserves. B) a creditworthy customer willing to pay a high interest rate. C) permission from the Federal Reserve. D) reserves equal to its deposits. Answer: A Topic: Reserves and Loans Skill: Conceptual Status: Old AACSB: Reflective Thinking 39) Given a desired reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of A) $0. B) $20. C) $80. D) $400. Answer: C Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills

40) A bank has no excess reserves. Then it receives a new deposit for $100,000. If it has a desired reserve ratio of 20 percent, by how much can it increase its loans? A) $20,000 B) $80,000 C) $400,000 D) $500,000 Answer: B Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 41) Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 15 percent. How many loans can Bank A create at Bank A? A) zero, because Bank A has no excess reserves B) $200 C) $50 D) $850 Answer: C Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 42) Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 20 percent. How many deposits can Bank A create? A) zero, because Bank A has no excess reserves B) $200 C) $850 D) $50 Answer: A Topic: Reserves and Loans Skill: Conceptual Status: Old AACSB: Analytical Skills

University National Bank Balance Sheet Assets Liabilities Reserves $320 Deposits $440 Loans 120 _ Total assets $440 Total liabilities $440 43) The above table has the balance of the University National Bank. All figures are in millions of dollars. The desired reserve ratio is 20 percent. What is the value of excess reserves held by the University National Bank? A) $120 million B) $232 million C) $320 million D) $760 million Answer: B Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 44) The above table has the balance of the University National Bank. All figures are in millions of dollars. The desired reserve ratio is 20 percent. What would be the total increase in loans at this bank if all excess reserves were loaned out? A) $1,160 million B) $600 million C) $232 million D) $0 Answer: C Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 45) When part of the quantity of money is held in currency, then A) a currency drain occurs. B) there is a higher level of excess reserves. C) the money multiplier will increase in value. D) the Fed will find it beneficial to increase the discount rate. Answer: A Topic: Currency Drain Skill: Recognition Status: Old AACSB: Reflective Thinking

46) An increase in currency held outside the banks is ________. A) a currency drain B) income C) a currency surplus D) wealth Answer: A Topic: Currency Drain Skill: Recognition Status: Old AACSB: Reflective Thinking 47) Currency outside of banks increases from $100 million to $200 million. This change is considered A) a currency drain. B) a decrease in the monetary base. C) expansionary monetary policy. D) contractionary monetary policy. Answer: A Topic: Currency Drain Skill: Conceptual Status: Old AACSB: Reflective Thinking 48) An increase in the currency drain A) leads to an increase in excess reserves. B) decreases the size of the money multiplier. C) results in an increase in deposits. D) results in an increase in required reserves. Answer: B Topic: Currency Drain Skill: Conceptual Status: Old AACSB: Reflective Thinking 49) The larger the public's currency drain from the banking system, the A) smaller is the monetary base. B) smaller is the money multiplier. C) larger is the monetary base. D) larger is the money multiplier. Answer: B Topic: Currency Drain Skill: Conceptual Status: Old AACSB: Reflective Thinking

50) In February, 2010 the U.S. M1 money multiplier crashed to 0.786. Each $1 increase in the monetary base resulted in the quantity of money increasing by only $0.79. Where did the remaining $0.21 disappear? A) Banks held part of the $0.21 as excess reserves. B) Banks loaned out the $0.21. C) Consumers held part of the $0.21 as currency. D) Both A and C are correct. Answer: D Topic: Currency Drain Skill: Conceptual Status: New AACSB: Reflective Thinking 51) When the Fed conducts an open market operation by purchasing securities from a bank, ________. A) public holdings of securities increase B) the bank's deposits increase but its reserves do not change C) the bank's deposits increase but its reserves decrease D) the bank's reserves increase Answer: D Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 52) Which of the following best describes the chain of events in the money creation process? A) The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves. B) Currency is drained from the quantity of money into the banking system, where it is lent out. The loans are spent, increasing the currency drain and also the quantity of money. C) Desired reserves increase, encouraging banks to seek new deposits. When the new depositors come in, desired reserves decrease and the quantity of money increases. D) Low interest rates discourage people from holding currency. When they deposit the currency, interest rates rise, increasing the quantity of money. Answer: A Topic: The Multiplier Effect of an Open Market Operation Skill: Conceptual Status: Old AACSB: Reflective Thinking

53) The monetary expansion process from an open market operation continues until A) required reserves are eliminated. B) the Federal Reserve takes actions to stop the process. C) the discount rate is lower than market interest rates. D) excess bank reserves are eliminated. Answer: D Topic: The Multiplier Effect of an Open Market Operation Skill: Recognition Status: Old AACSB: Reflective Thinking 54) The money multiplier determines how much A) real GDP will be expanded given an increase in autonomous investment. B) the monetary base will be expanded given a change in the quantity of money. C) the quantity of money will be expanded given a change in the monetary base. D) money demand will expand given a change in the quantity of money. Answer: C Topic: The Money Multiplier Skill: Recognition Status: Old AACSB: Reflective Thinking 55) The money multiplier is A) the amount by which a change in the quantity of money is multiplied to determine the change in the monetary base. B) the amount by which a change in the monetary base is multiplied to determine the change in the quantity of money. C) equal to bank reserves divided by the change in the monetary base. D) equal to bank reserves divided by the change the quantity of money. Answer: B Topic: The Money Multiplier Skill: Recognition Status: Old AACSB: Reflective Thinking 56) When the monetary base increases by $2 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals A) 0.2 B) 5 C) 20.0 D) none of the above Answer: B Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 84 Copyright © 2014 Pearson Education, Inc.

57) When the monetary base increases by $4 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals A) 0.4 B) 2.5 C) 40.0 D) none of the above Answer: B Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 58) If an increase in the monetary base of $8 billion increases the quantity of money by $64 billion, then the money multiplier is equal to ________. A) $64 billion B) 8 C) $8 billion D) 1/8 Answer: B Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 59) Suppose that the money multiplier is 3. If the monetary base increases by $1 million, the quantity of money will A) increase by $3 million. B) increase by $300,000. C) decrease by $3 million. D) decrease by $300,000. Answer: A Topic: Using the Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 60) Suppose that the money multiplier is 4. If the monetary base decreases by $2 million, the quantity of money will A) increase by $8 million. B) increase by $500,000. C) decrease by $8 million. D) decrease by $500,000. Answer: C Topic: Using the Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 85 Copyright © 2014 Pearson Education, Inc.

Assets Reserves $400 Loans $800 Total $1,200

Liabilities Deposits $1,200 Total $1,200

61) In the balance sheet above, the entries are in millions of dollars for the FBN Bank. If the desired reserve ratio on deposits is 10 percent, FBN Bank has desired reserves of A) $700 million. B) $120 million. C) $100 million. D) $0. Answer: B Topic: Study Guide Question, Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 62) In the balance sheet above, the entries are in millions of dollars for the FBN Bank. If the desired reserve ratio equals 10 percent, FBN Bank has excess reserves of A) $280 million. B) $200 million. C) $100 million. D) $0. Answer: A Topic: Study Guide Question, Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 63) In the balance sheet above, the entries are in millions of dollars for the FBN Bank. If the desired reserve ratio on deposits is 10 percent, FBN Bank can loan an additional A) $280 million. B) $200 million. C) $100 million. D) $0. Answer: A Topic: Study Guide Question, Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills

64) In the balance sheet above, the entries are in millions of dollars for the FBN Bank. After FBN Bank loans the maximum amount it can, the loans have been spent, and the proceeds have been deposited in other banks, FBN Bank has excess reserves of A) $300 million. B) $200 million. C) $100 million. D) $0. Answer: D Topic: Study Guide Question, Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 65) If the money multiplier is 3.5, a $10 billion increase in the monetary base A) increases the quantity of money by $35 billion. B) increases the quantity of money by $10 billion. C) increases the quantity of money by $3.5 billion. D) increases the quantity of money but not by an amount given above. Answer: A Topic: Study Guide Question, Using the Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills

5 The Money Market 1) The quantity of money that people choose to hold depends on which of the following? I. The price level. II. Financial innovation. III. The exchange rate. A) I B) I and II C) I and III D) I, II, and III Answer: B Topic: Influences on Money Holding Skill: Recognition Status: Old AACSB: Reflective Thinking 2) Which of the following affects the amount of money a person is willing to hold? A) The use of credit cards increases. B) The price level rises from 103 to 107. C) The interest rate that you earn on your savings account increases. D) All of the above are correct. Answer: D Topic: Influences on Money Holding Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) If the price level rises, the quantity of A) nominal money people demand increases. B) real money people demand increases. C) nominal money people demand decreases. D) real money people demand decreases. Answer: A Topic: Influences on Money Holding, The Price Level Skill: Recognition Status: Old AACSB: Reflective Thinking

4) The demand for nominal money A) increases as the price level increases. B) decreases as the price level increases. C) depends on the quantity of money. D) is the same as the demand for real money. Answer: A Topic: Influences on Money Holding, The Price Level Skill: Recognition Status: Old AACSB: Reflective Thinking 5) Which of the following decreases the demand for nominal money? A) a decrease in the nominal interest rate B) an increase in real GDP C) an increase in the quantity of money D) a decrease in the price level Answer: D Topic: Influences on Money Holding, The Price Level Skill: Recognition Status: Old AACSB: Reflective Thinking 6) If the price level doubles, the A) nominal demand for money increases. B) nominal demand for money decreases. C) real demand for money decreases. D) real demand for money increases. Answer: A Topic: Influences on Money Holding, The Price Level Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) Suppose you hold $50 to buy groceries weekly and then the price of groceries increases by 5 percent. To be able to buy the same amount of groceries, what must happen to your nominal money holdings? A) They must increase by $5. B) They can decrease by $5. C) They must increase by $2.50. D) They must increase, but the amount of the increase is different than the above answers. Answer: C Topic: Influences on Money Holding, The Price Level Skill: Analytical Status: Old AACSB: Analytical Skills

8) The quantity of real money demanded is A) negatively related to the price level. B) positively related to the price level. C) independent of the price level. D) sometimes negatively and sometimes positively related to the price level. Answer: C Topic: Influences on Money Holding, The Price Level Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) The real quantity of money is A) inversely related to GDP. B) measured in current dollars. C) inversely related to the price level. D) measured in constant dollars. Answer: D Topic: Influences on Money Holding, The Price Level Skill: Recognition Status: Old AACSB: Reflective Thinking 10) When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________. A) increase; stay the same B) increase; increase C) increase; decrease D) decrease; increase Answer: A Topic: Influences on Money Holding, The Price Level Skill: Recognition Status: Old AACSB: Reflective Thinking 11) When the nominal interest rate rises, the A) quantity of money demanded decreases. B) demand for money decreases. C) demand for money increases. D) quantity of money demanded increases. Answer: A Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

12) The opportunity cost of holding money balances rather than other assets is A) the nominal interest rate. B) the price level. C) forgone consumption. D) forgone liquidity. Answer: A Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The opportunity cost of holding money is the A) nominal interest rate on assets other than money. B) price of goods and services. C) level of wage and rental income. D) ease with which an asset can be converted into a means of payment. Answer: A Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 14) The opportunity cost of holding money is A) the price level. B) real GDP. C) the inverse of the price level multiplied by the nominal interest rate. D) the nominal interest rate. Answer: D Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 15) The demand for money is ________ related to the nominal interest rate. A) positively B) negatively C) not D) None of the above answers is correct because the relationship between the demand for money and the nominal interest rate changes with the inflation rate. Answer: B Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

16) The opportunity cost of holding money increases when A) the purchasing power of money rises. B) the nominal interest rate rises. C) the price level falls. D) consumers' real incomes increase. Answer: B Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 17) A decrease in the nominal interest rate ________ the opportunity cost of holding money. A) increases B) decreases C) can increase or decrease D) None of the above answers is correct because the nominal interest rate does not affect the opportunity cost of holding money. Answer: B Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) The opportunity cost of holding money refers to A) the service fees charged to withdraw currency from an ATM. B) the price level. C) the interest that could have been earned if the money balances had been changed into an interest-bearing asset. D) the pleasure that would have been received if the money balances had been used to buy a good or service. Answer: C Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) The demand for money is ________ related to the nominal interest rate. A) positively B) negatively C) not related D) None of the above answers is correct because the relationship between the demand for money and the interest rate varies with the inflation rate. Answer: B Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 92 Copyright © 2014 Pearson Education, Inc.

20) When the nominal interest rate rises, the opportunity cost of holding money A) rises and people hold more money. B) falls and people hold less money. C) falls and people hold more money. D) rises and people hold less money. Answer: D Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) The higher the nominal interest rate, the A) greater the opportunity cost of holding money. B) lower the quantity of money demanded. C) more the demand for money curve shifts leftward. D) Both answers A and B are correct. Answer: D Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) In October of 2012, the nominal interest rate earned on money market accounts was around 0.40 percent. This interest rate is a measure of which of the following? A) the opportunity cost of holding money B) the inflation rate C) the demand for money D) the real interest rate Answer: A Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: New AACSB: Reflective Thinking 23) When the nominal interest rate rises, the quantity of money demanded decreases because A) people will buy fewer goods and hold less money. B) the price level also rises and people decrease their demand for money. C) people move funds from interest-bearing assets into money. D) people shift funds from money holdings to interest-bearing assets. Answer: D Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

24) Which of the following is correct? The demand for money A) increases as real GDP increases. B) decreases as the price level increases. C) depends on the quantity of money. D) increases when the nominal interest rate rises. Answer: A Topic: Influences on Money Holding, Real GDP Skill: Recognition Status: Old AACSB: Reflective Thinking 25) When real GDP increases, the demand for money A) increases. B) decreases. C) stays the same. D) we cannot make a prediction without additional information. Answer: A Topic: Influences on Money Holding, Real GDP Skill: Recognition Status: Old AACSB: Reflective Thinking 26) The quantity of money that people choose to hold is A) positively related to the nominal interest rate. B) positively related to real GDP. C) negatively related to the price level. D) positively related to the availability of ATM machines. Answer: B Topic: Influences on Money Holding, Real GDP Skill: Recognition Status: Old AACSB: Reflective Thinking 27) The quantity of money people want to hold increases if A) the price level falls. B) the nominal interest rate rises. C) real GDP increases. D) All of the above answers are correct. Answer: C Topic: Influences on Money Holding, Real GDP Skill: Conceptual Status: Old AACSB: Reflective Thinking

28) Which of the following decreases the demand for money? A) an increase in the price level B) an increase in the quantity of money C) a decrease in real GDP D) a decrease in the cost of printing money Answer: C Topic: Influences on Money Holding, Real GDP Skill: Conceptual Status: Old AACSB: Reflective Thinking 29) When real GDP increases, people demand A) the same quantity of real money. B) less real money. C) more real money. D) more money in nominal terms but less in real terms. Answer: C Topic: Influences on Money Holding, Real GDP Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) ________ real GDP increases the demand for money and ________ the nominal interest rate decreases the quantity of money demanded. A) Increasing; increasing B) Increasing; decreasing C) Decreasing; increasing D) Decreasing; decreasing Answer: A Topic: Influences on Money Holding Skill: Conceptual Status: Old AACSB: Reflective Thinking 31) Financial innovations can have the effect of A) only decreasing the demand for money. B) only increasing the demand for money. C) either increasing or decreasing the demand for money depending on what the innovation is. D) increasing the Fed's monetary policy. Answer: C Topic: Influences on Money Holding, Financial Innovation Skill: Conceptual Status: Old AACSB: Reflective Thinking

32) The demand for money curve is the relationship between ________ and ________, other things remaining the same. A) the quantity of real money demanded; the quantity of real money supplied B) the quantity of money demanded; the real interest rate C) the money demanded; the money supplied D) the quantity of real money demanded; the nominal interest rate Answer: D Topic: The Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 33) An increase in the nominal interest rate A) shifts the demand for money curve rightward. B) shifts the demand for money curve leftward. C) leads to an upward movement along the demand for money curve. D) leads to a downward movement along the demand for money curve. Answer: C Topic: The Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 34) There is a movement along the demand for money curve if A) the nominal interest rate rises. B) there is an economic expansion so that real GDP increases. C) banking customers use ATM machines more. D) the price level increases. Answer: A Topic: The Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 35) In October of 2012, the interest rate on money market accounts was about 0.4 percent. In 2007, the interest rate on money market accounts was about 4.0 percent. What has been the impact on the demand for money curve from this fall in the interest rate? A) the money demand curve shifted to the right B) the money demand curve shifted to the left C) there was a downward movement along the demand for money curve D) there was an upward movement along the demand for money curve Answer: C Topic: The Demand for Money Curve Skill: Conceptual Status: New AACSB: Reflective Thinking 96 Copyright © 2014 Pearson Education, Inc.

36) An increase in real GDP A) shifts the demand for money curve rightward. B) shifts the demand for money curve leftward. C) leads to an upward movement along the demand for money curve. D) leads to a downward movement along the demand for money curve. Answer: A Topic: Shifts in the Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 37) The demand for money curve shifts rightward if A) the price level increases. B) real GDP increases. C) the nominal interest rate increases. D) the real interest rate decreases. Answer: B Topic: Shifts in the Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 38) The demand for money curve shifts rightward if A) the nominal interest rate falls. B) financial innovation creates new substitutes for cash. C) real GDP increases. D) the price level falls. Answer: C Topic: Shifts in the Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 39) An increase in the nominal interest rate creates a ________ the money demand curve, and an increase in real GDP creates a ________ the money demand curve. A) movement down along; leftward shift of B) rightward shift of; movement up along C) movement up along; rightward shift of D) leftward shift of; rightward shift of Answer: C Topic: The Demand for Money Curve Skill: Recognition Status: Old AACSB: Analytical Skills

40) An increase in the opportunity cost of holding money creates a ________ the money demand curve and an increase in real GDP creates a ________ the money demand curve. A) leftward shift of; movement down along B) rightward shift of; movement down along C) movement up along; leftward shift of D) movement up along; rightward shift of Answer: D Topic: The Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

41) Use the figure above to answer this question. Suppose the economy is operating at point a. A move to ________ could be explained by ________. A) point e; a decrease in the nominal interest rate B) point c; an increase in the nominal interest rate C) point d; an increase in real GDP D) point b; an increase in real GDP Answer: C Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

42) Use the figure above to answer this question. Suppose the economy is operating at point a. A move to ________ could be explained by ________. A) point c; an increase in the use of credit cards B) point b; an increase in real GDP C) point b; an increase in the nominal interest rate D) point e; an increase in U.S. exports Answer: A Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills 43) In the above figure, suppose the economy is initially at point a. If the nominal interest rate increases, there is a movement to point such as A) b. B) c. C) d. D) e. Answer: D Topic: The Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills 44) In the above figure, suppose the economy is at point a. If there is an increase in real GDP, there is a movement to point such as A) b. B) c. C) d. D) e. Answer: C Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

45) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of a fall in the nominal interest rate? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1. Answer: D Topic: The Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills 46) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of a rise in the nominal interest rate? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1. Answer: C Topic: The Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

47) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of an increase in real GDP? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1. Answer: A Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills 48) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of an increase in financial innovation such as the introduction of ATMs? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1. Answer: B Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills 49) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of increased use of credit cards? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1. Answer: B Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

50) On a given day the quantity of money is ________ and the supply of money curve is ________. A) fixed; horizontal B) fixed; vertical C) variable; horizontal D) variable; vertical Answer: B Topic: The Quantity of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

51) In the figure above, an increase in the monetary base would create a change such as a A) movement from point a to point b along the supply of money curve MS0. B) movement from point b to point a along the supply of money curve MS0. C) shift from the supply of money curve MS0 to the supply of money curve MS1. D) shift from the supply of money curve MS1 to the supply of money curve MS0. Answer: C Topic: Supply of Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

52) In the figure above, a decrease in the monetary base would create a change such as a A) movement from point a to point b along the supply of money curve MS0. B) movement from point b to point a along the supply of money curve MS0. C) shift from the supply of money curve MS0 to the supply of money curve MS1. D) shift from the supply of money curve MS1 to the supply of money curve MS0. Answer: D Topic: Supply of Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

53) The figure above illustrates the effect of A) an increase in real GDP. B) a decrease in real GDP. C) an increase in the monetary base. D) a decrease in the monetary base. Answer: B Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

54) When the interest rate falls in the money market, the quantity of money demanded ________ and the quantity of money supplied ________. A) increases; decreases B) decreases; increases C) stays the same; decreases D) increases; stays the same Answer: D Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 55) When the quantity of money demanded is greater than the quantity of money supplied, people ________ bonds and the interest rate ________. A) sell; rises B) sell; falls C) buy; rises D) buy; falls Answer: A Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 56) Suppose that the interest rate is greater than the equilibrium interest rate. Which of the following occurs? I. There is an excess quantity of money. II. The quantity of money automatically increases. III. The interest rate falls. A) I B) I and II C) I and III D) I, II and III Answer: C Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

57) In the money market, if the interest rate exceeds the equilibrium interest, there is a surplus of money. How is the surplus eliminated? A) People buy bonds to rid themselves of the surplus money, bidding up their price and pushing interest rates down. B) Banks will lend out the surplus, lowering interest rates. C) The Federal Reserve will destroy currency, reducing the quantity of money. D) The high interest rate increases the demand for money, eliminating the surplus. Answer: A Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 58) When the interest rate is above the equilibrium interest rate there is an A) excess quantity of money and people will sell bonds. B) excess demand for money and people will sell bonds. C) excess quantity of money and people will buy bonds. D) excess demand for money and people will buy bonds. Answer: C Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 59) If the interest rate is above the equilibrium interest rate, then A) there is an excess demand for money. B) the quantity of money demanded exceeds the quantity supplied. C) people will sell bonds and the interest rate will fall. D) people will buy bonds and the interest rate will fall. Answer: D Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 60) Suppose the equilibrium interest rate in the money market is 5 percent and the current interest rate is 7 percent. As a result, A) the interest rate rises. B) real GDP increases. C) the demand for money curve shifts rightward. D) people buy bonds and the interest rate falls. Answer: D Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 105 Copyright © 2014 Pearson Education, Inc.

61) Suppose the money market has an equilibrium interest rate of 10 percent. If the actual interest is 8 percent, which of the following occurs to bring the money market back to equilibrium? A) People buy bonds, the price of bonds rises and the interest rate rises. B) People buy bonds, the price of bonds falls and the interest rate rises. C) People sell bonds, the price of bonds rises and the interest rate rises. D) People sell bonds, the price of bonds falls and the interest rate rises. Answer: D Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

Interest rate (percent) 2 3 4 5 6 7

Quantity of money (billions of dollars) 500 500 500 500 500 500

Money demand (billions of dollars) 575 550 525 500 475 450

62) The table above gives the quantity of money and money demand schedules. Suppose that the interest rate is equal to 6 percent. The effect of this interest rate in the money market is that A) the money market is in equilibrium. B) people buy bonds and the interest rate falls. C) people sell bonds and the interest rate falls. D) bond prices fall and so the interest rate falls. Answer: B Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 63) The table above gives the quantity of money and money demand schedules. Suppose that the interest rate is equal to 3 percent. The effect of this interest rate in the money market is that A) the money market is in equilibrium. B) people buy bonds and the interest rate falls. C) people sell bonds and the interest rate rises. D) bond prices rise so that the interest rate rises. Answer: C Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 106 Copyright © 2014 Pearson Education, Inc.

64) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion A) less money than the quantity supplied and the interest rate will rise. B) less money than the quantity supplied and the interest rate will fall. C) more money than the quantity supplied and the interest rate will fall. D) more money than the quantity supplied and the interest rate will rise. Answer: B Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 65) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion A) less money than the quantity supplied and bond prices will rise. B) less money than the quantity supplied and bond prices will fall. C) more money than the quantity supplied and bond prices will fall. D) more money than the quantity supplied and bond prices will rise. Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

66) In the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess A) quantity of money and the interest rate will rise. B) quantity of money and the interest rate will fall. C) demand for money and the interest rate will fall. D) demand for money and the interest rate will rise. Answer: D Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 67) In the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess A) quantity of money and bond prices will rise. B) quantity of money and bond prices will fall. C) demand for money and bond prices will fall. D) demand for money and bond prices will rise. Answer: C Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 68) In the figure above, if the interest rate is 6 percent, A) there is a $0.1 trillion excess quantity of money and the interest rate will rise. B) there is a $0.1 trillion excess quantity of money and the interest rate will fall. C) the money market is in equilibrium and the interest rate will remain constant. D) there is a $0.1 trillion excess demand for money and the interest rate will rise. Answer: C Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

69) In the above figure, if the interest rate is 4 percent, people A) sell bonds so as to convert them into money. B) buy bonds so as to have a better store of value. C) petition the Fed to tighten the quantity of money. D) buy stocks, because stocks are more liquid than currency. Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 70) In the above figure, if the interest rate is 8 percent, A) people sell bonds so as to convert them into money. B) people buy bonds and the interest rate falls. C) the Fed increases the quantity of money. D) people buy stocks, because stocks are more liquid than currency. Answer: B Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

71) In the short run, which of the following actions raise the interest rate? A) a decrease in the demand for money B) an increase in bond prices C) an increase in the quantity of money D) an increase in the demand for money Answer: D Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 72) In the short run, which of the following actions lower the interest rate? A) a decrease in the demand for money B) an increase in the demand for money C) a decrease in the quantity of money D) a decrease in bond prices Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 73) In the short run, when the Fed increases the quantity of money A) bond prices rise and the interest rate falls. B) bond prices fall and the interest rate rises. C) the demand for money increases. D) the supply of money curve shifts leftward. Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 74) In the short run, when the Fed decreases the quantity of money A) bond prices fall and the interest rate rises. B) bond prices rise and the interest rate falls. C) the demand for money increases. D) the supply of money curve shifts rightward. Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

75) In the long run, when the Fed increases the quantity of money the A) nothing real changes. B) price level falls. C) real interest rate rises. D) nominal interest rate falls. Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 76) An increase in ________ decreases the quantity of money people want to hold. A) the price level B) real GDP C) the interest rate D) the quantity of money Answer: C Topic: Study Guide Question, Influences on Money Holding, Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) A decrease in ________ decreases the demand for money. A) the discount rate B) real GDP C) the interest rate D) the quantity of money Answer: B Topic: Study Guide Question, Influences on Money Holding, Real GDP Skill: Conceptual Status: Old AACSB: Reflective Thinking 78) If real GDP decreases, the demand for money curve will shift A) leftward and the interest rate will rise. B) leftward and the interest rate will fall. C) rightward and the interest rate will rise. D) rightward and the interest rate will fall. Answer: B Topic: Study Guide Question, Shifts in the Demand for Money Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

79) In October of 2012, the interest rate on money market accounts was about 0.4 percent. In 2007, the interest rate on money market accounts was about 4.0 percent. What has been the impact on money demand from this fall in the interest rate? A) the money demand curve shifted to the right B) the money demand curve shifted to the left C) the quantity of money demanded increased D) the quantity of money demanded decreased Answer: C Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: New AACSB: Reflective Thinking 6 The Quantity Theory of Money 1) The velocity of circulation is A) the rate of change of the GDP deflator. B) the average number of times a dollar of money is used in a year to buy goods and services in GDP. C) the changes in the purchasing power of money over a given time period. D) constant. Answer: B Topic: Quantity Theory of Money, Velocity of Circulation Skill: Recognition Status: Old AACSB: Reflective Thinking 2) The velocity of circulation is A) the relationship between income and spending. B) the relationship between increases in income and investment. C) the ratio of currency to demand deposits. D) the average number of times per year a dollar is spent on goods and services in GDP. Answer: D Topic: Quantity Theory of Money, Velocity of Circulation Skill: Recognition Status: Old AACSB: Reflective Thinking

3) The velocity of circulation is A) equal to the price level multiplied by real GDP. B) equal to the quantity of money multiplied by nominal GDP. C) the average number of times a dollar bill is used in a year to buy the goods and services in GDP. D) average quantity of money that exists during a year. Answer: C Topic: Quantity Theory of Money, Velocity of Circulation Skill: Recognition Status: Old AACSB: Reflective Thinking 4) If an economy has a velocity of circulation of 3, then A) the quantity of money is 3 times real GDP. B) in a year the average dollar is exchanged 3 times to purchase goods and services in GDP. C) nominal GDP is 1/3 the size of the quantity of money. D) the quantity of money is $3 for every dollar of GDP. Answer: B Topic: Quantity Theory of Money, Velocity of Circulation Skill: Recognition Status: Old AACSB: Reflective Thinking 5) In the quantity theory of money, the quantity of money is assumed to A) not influence the velocity of circulation. B) rise during recessions. C) fall during recessions. D) be constant. Answer: A Topic: Quantity Theory of Money, Velocity of Circulation Skill: Recognition Status: Old AACSB: Reflective Thinking 6) When the velocity of circulation equals 4 in 2010, this fact means that A) consumers held four dollars in wealth for each dollar they spent in 2010. B) on average, each dollar of money in the economy purchased four dollars of goods and services in GDP in 2010. C) for each additional dollar of money injected into the economy, the price level rose 4 percent in 2010. D) real output of goods and services in GDP rose by four dollars for each additional dollar of money consumers saved. Answer: B Topic: Quantity Theory of Money, Velocity of Circulation Skill: Conceptual Status: Old AACSB: Reflective Thinking 113 Copyright © 2014 Pearson Education, Inc.

7) If nominal GDP is $12 trillion, the price level is 120, and the quantity of money is $4 trillion, what is the velocity of circulation? A) 3 B) 2.5 C) 30 D) 25 Answer: A Topic: Quantity Theory of Money, Velocity of Circulation Skill: Analytical Status: Old AACSB: Analytical Skills 8) Suppose that M = 300, P = 150, and Y = 6. Then the velocity of circulation equals A) 0.02. B) 0.50. C) 2.00. D) 3.00. Answer: D Topic: Quantity Theory of Money, Velocity of Circulation Skill: Analytical Status: Old AACSB: Analytical Skills 9) If nominal GDP = $15 trillion and the quantity of money is $3 trillion, what is the velocity of circulation? A) 16 B) 8 C) 5 D) 2 Answer: C Topic: Quantity Theory of Money, Velocity of Circulation Skill: Analytical Status: Old AACSB: Analytical Skills 10) Which of the following equations represents the equation of exchange? A) PM = VY B) MY = PV C) MV = PY D) M = VP/Y Answer: C Topic: Equation of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 114 Copyright © 2014 Pearson Education, Inc.

11) The equation of exchange A) is MV = PY. B) becomes the quantity theory if velocity and the price level are constant. C) cannot be used in an economy with inflation. D) All of the above answers are correct. Answer: A Topic: Equation of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 12) The equation of exchange states that the price level is equal to A) the quantity of money. B) velocity of circulation multiplied by the quantity of money divided by real GDP. C) real GDP multiplied by the velocity of circulation divided by nominal GDP. D) the velocity of circulation. Answer: B Topic: Equation of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The equation of exchange states that the quantity of money A) multiplied by the velocity of circulation equals nominal GDP. B) divided by price level equals real GDP. C) multiplied by nominal GDP equals the price level. D) divided by nominal GDP equals real GDP. Answer: A Topic: Equation of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 14) If velocity is 6 and the quantity of money is $2 trillion, what is nominal GDP? A) $12 trillion B) $6 trillion C) $3 trillion D) $333 billion Answer: A Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills

15) The quantity of money in an economy is $9 million, and the velocity of circulation is 3. Nominal GDP in this economy is ________. A) $6 million B) $9 million C) $3 million D) $27 million Answer: D Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 16) If real GDP is $10 trillion and the velocity of circulation is 2, the quantity of money A) is $2 trillion. B) is $5 trillion. C) is $20 trillion. D) cannot be determined from the information given. Answer: D Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 17) The quantity theory asserts that real GDP is A) not influenced by the quantity of money. B) never different from potential GDP. C) equal to nominal GDP multiplied by the quantity of money. D) equal to nominal GDP divided by the quantity of money. Answer: A Topic: Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 18) The equation of exchange becomes the same as the quantity theory of money by assuming that the velocity of circulation ________ when the quantity of money changes and potential GDP ________ when the quantity of money changes. A) changes; changes B) changes; does not change C) does not change; changes D) does not change; does not change Answer: D Topic: Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 116 Copyright © 2014 Pearson Education, Inc.

19) According to the quantity theory of money, A) V and M are constant. B) V and Y are not affected by the quantity of money. C) V and P are not affected by the quantity of money. D) V and M are not affected by changes in the price level. Answer: B Topic: Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) If V = 5, P = $3, and Y = 50, then the quantity of money equals A) $10. B) $30. C) $150. D) $300. Answer: B Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 21) If M = $100, Y = $500 and P = $2, then V is equal to A) 0.10 B) 1. C) 10. D) 50. Answer: C Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 22) If nominal GDP equals $10 trillion and the velocity of circulation is 5, then A) real GDP is $2 trillion. B) the quantity of money is $50 trillion. C) the quantity of money is $2 trillion. D) the real value of the quantity of money is $10 trillion. Answer: C Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills

23) Suppose that the nominal quantity of money is $200 billion and the value of nominal GDP is $1 trillion. It must be the case that A) the economy is suffering from inflation. B) the average price paid for a "typical" good is $5. C) there will be a shortage of money balances in the economy. D) the velocity of circulation is 5. Answer: D Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 24) The quantity theory of money predicts how changes in A) the price level affect nominal GDP. B) the price level affect real GDP. C) the quantity of money affect the price level. D) real GDP affect the nominal GDP. Answer: C Topic: Predictions of the Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 25) The quantity theory of money addresses the A) long-run effect the quantity of money has on the price level. B) determinants of potential GDP. C) determinants of the equilibrium unemployment rate. D) short-run effect the quantity of money has on the price level. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) The quantity theory of money asserts that inflation is the result of growth in A) the quantity of money. B) potential GDP. C) the natural rate of unemployment. D) money wage rates. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking

27) The quantity theory of money asserts that an increase in the quantity of money A) will decrease the price level by an offsetting amount. B) by n percent will lead to an increase in the price level by n + 1 percent. C) will lead to an equal percentage increase in real GDP. D) will lead to an equal percentage increase in the price level. Answer: D Topic: Predictions of the Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 28) The quantity theory of money argues that, in the long run, the percentage change in money will create an equal percentage change in A) velocity. B) real GDP. C) potential GDP. D) the price level. Answer: D Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 29) The quantity theory of money predicts that in the ________, a 10 percent increase in the quantity of money leads to a 10 percent increase in ________. A) long run; real GDP B) short run; velocity C) long run; velocity D) long run; price level Answer: D Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) The quantity theory of money states that in the long run A) the price level will not consistently rise, it will fluctuate. B) an increase in the quantity of money results in an equal percentage increase in the price level. C) a rise in the price level rises causes the quantity of money to increase. D) an increase in the quantity of money increases real GDP by a smaller percentage. Answer: B Topic: Predictions of the Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking

31) According to the quantity theory of money, a 10 percent increase in the quantity of money ultimately leads to a 10 percent increase in A) real national income. B) real GDP. C) the price level. D) velocity. Answer: C Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) According to the quantity theory of money, changes in the price level are the result of changes in the A) prime interest rate. B) real interest rate. C) quantity of money. D) velocity of circulation. Answer: C Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 33) Other things constant, the quantity theory of money concludes that any increase in the quantity of money A) decreases the demand for money. B) decreases in the aggregate price level. C) decreases the aggregate level of nominal income. D) proportionally increases the price level. Answer: D Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) The quantity theory of money states that A) inflation increases when the money growth rate increases. B) as the price level increases, the demand for money increases. C) as the interest rate rises, the demand for money decreases. D) changes in the quantity of money are determined by the commercial banks and not the Federal Reserve. Answer: A Topic: Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 120 Copyright © 2014 Pearson Education, Inc.

35) According to the quantity theory of money, a 15 percent increase in the quantity of money creates a 15 percent rise in A) the price level. B) the velocity of circulation. C) real GDP. D) the unemployment rate. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 36) According to the quantity theory of money, money growth and inflation are A) positively correlated. B) negatively correlated. C) independent, that is, not correlated. D) positively if the inflation rate is positive and negatively correlated if the inflation rate is negative. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 37) According to the quantity theory of money, in the long run A) an increase in the quantity of money creates an increase the price level but no increase in real GDP. B) the quantity of money in the economy will always be just the right amount. C) an increase in the quantity of money creates an increase in the price level and in real GDP. D) None of the above answers are correct. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

38) According to the quantity theory of money, a 25 percent change in M, the quantity of money, leads to a 25 percent change in A) V, the velocity of circulation. B) P, the price level. C) Y, real GDP. D) R, the interest rate. Answer: B Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 39) Suppose the money growth rate is 3 percent, velocity is constant, and real GDP is growing at 2 percent. What is the inflation rate? A) 1 percent B) 5 percent C) 3 percent D) 6 percent Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 40) Read the following statements and determine if they are true or false. I. According to the quantity theory of money, an increase in the growth rate of the quantity of money increases inflation in the long run. II. Historical and international data show that there is no correlation between inflation and money growth. A) I and II are both true. B) I and II are both false. C) I is true and II is false. D) I is false and II is true. Answer: C Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

41) Which of the following is true regarding the quantity theory of money? I. The theory predicts that in the long run the inflation rate equals the money growth rate minus the growth rate of real GDP. II. The theory predicts that countries with high growth rates of money will have high inflation rates. III. The theory predicts that increases in the growth rate of velocity lowers the inflation rate. A) I and II B) II and III C) I and III D) I, II and III Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) According to the quantity theory of money, in the long run, an increase in the quantity of money results in an equal percentage increase in ________. A) the price level B) the growth rate of real GDP C) the inflation level D) the growth rate of potential GDP Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 43) The data show that money growth and inflation are A) positively correlated. B) negatively correlated. C) not correlated. D) independent phenomena. Answer: A Topic: Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

44) The U.S. historical evidence A) generally supports the quantity theory of money in the long run. B) does not support the quantity theory of money. C) demonstrates that there is no correlation between the money growth rate and inflation. D) shows that a higher inflation rate causes an increase in the money growth rate. Answer: A Topic: Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 45) Looking at historical evidence from 1990 to 2005 for the United States and other countries, which of the following are true? I. There is a correlation between the growth rate of the quantity theory of money and the growth rate of real GDP. II. There is a correlation between the growth rate of the quantity theory of money and the inflation rate. A) Only I is true. B) Only II is true. C) Both I and II are true. D) Neither I or II is true. Answer: B Topic: International Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 46) According to the quantity theory, in the long run, an increase in the growth rate of ________ leads to an increase in the ________. A) real GDP; inflation rate B) the quantity of money; growth rate of real GDP C) the quantity of money; inflation rate D) real GDP; growth rate of velocity Answer: C Topic: Study Guide Question, Long-Run Effects of Change in Quantity of $ Skill: Conceptual Status: Old AACSB: Reflective Thinking

47) The quantity theory of money is the idea that in the long run A) the quantity of money is determined by banks. B) the quantity of money serves as a good indicator of how well money functions as a store of value. C) the quantity of money determines real GDP. D) an increase in the growth rate of the quantity of money leads to an equal increase in the inflation rate. Answer: D Topic: Study Guide Question, Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 48) Nominal GDP, PY, is $7.5 trillion. The quantity of money is $3 trillion. The velocity of circulation is A) 22.5. B) 10.5. C) 2.5. D) 3. Answer: C Topic: Study Guide Question, The Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills

7 News Based Questions 1) Which of the following is an example of money functioning as a medium of exchange? A) Walmart accepting your $20 when buy a CD. B) Apple pricing an iPhone at $299. C) Bank of America paying you 3 percent on your saving account. D) You saving your spare change in a jar before depositing them in your savings account. Answer: A Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) Which of the following is an example of money functioning as a unit of account? A) Bank of America charging 7 percent on an auto loan. B) Pepsi charging $1 for a can of soda. C) eBay using PayPal as a method of payment. D) Your writing a check at Target to pay for new clothes. Answer: B Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) Which of the following is an example of money functioning as a store of value? A) Comcast charging $99 for internet, phone and cable service. B) McDonalds charging 99 cents for a burger. C) Your saving your spare change in a jar in order to afford an end-of-term party. D) Amazon.com charging $9.95 for shipping. Answer: C Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) In September 2008, Regions Bank has $89 million in M1 deposits, $3 million in reserves and $81 million in loans. Regions Bank's desired reserve ratio is A) 3.4 percent B) 3.7 percent C) 91 percent D) 29.67 percent Answer: A Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills 126 Copyright © 2014 Pearson Education, Inc.

5) In September 2007, Regions Bank held $3 million in reserves against M1 deposits and made $83 million in loans. Between September 2007 and September 2008, deposits decreased from $114 million to $95 million. If Regions Bank wants to maintain its desired reserve ratio in 2008, it will A) increase its reserves. B) definitely make more loans. C) cannot make more loans. D) decrease its reserves. Answer: D Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills 6) In August 2007, Sun Trust Bank has $83 million in loans and $114 million in M1 deposits. If Sun Trust is holding $4 million in reserves, the bank's reserve ratio is A) $31 million. B) 4.8 percent C) 3.5 percent. D) 72.8 percent. Answer: C Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills 7) The table below shows data (in millions) for Sun Trust Banks in September 2007 and September 2008.

Loans Reserves Deposits

2007 $83 $4 $114

2008 $78 $5 $95

The data show that Sun Trust A) increased its reserve ratio to 5.3 percent over the 12 months. B) increased its reserve ratio to 6.4 percent over the 12 months. C) has fewer excess reserves in 2008. D) faced a higher currency drain ratio in 2008. Answer: A Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills

8) The table below shows data (in millions) for Sun Trust Banks in September 2007 and September 2008. Suppose that the required reserve ratio is 3 percent.

Loans Reserves Deposits

2007 $83 $4 $114

2008 $78 $5 $95

The data show that Sun Trust ________ make more loans in 2007 and ________ make more loans in 2008. A) can; can. B) can; cannot. C) cannot; cannot. D) cannot; can. Answer: A Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 9) The table below shows the data (in millions) for Wells Fargo Bank in September 2007 and September 2008. Suppose that the required reserve ratio is 3 percent.

Loans Reserves Deposits

2007 79 11 247

2008 100 11 266

The data show that Wells Fargo A) the reserve ratio did not change. B) had fewer excess reserves in 2007. C) the reserve ratio increased as loans increased. D) had fewer excess reserves in 2008. Answer: D Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills

10) The table below shows the data (in millions) for Wells Fargo Bank in September 2007 and September 2008. Suppose that the required reserve ratio is 3 percent.

Loans Reserves Deposits

2007 79 11 247

2008 100 11 266

The data show that A) the currency drain ratio increased. B) the Federal Reserve must have increased the required reserve ratio. C) Wells Fargo had excess reserves and could create money in 2007. D) Wells Fargo was only able to make more loans in 2008 because it gained more deposits. Answer: C Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 11) Between 2008 and 2009, U.S. real GDP decreased from $13.2 trillion to $12.9 trillion. As a result, the real demand for money ________ and the demand for money curve ________. A) decreased; shifted leftward B) did not change; did not shift C) increased; shifted leftward D) decreased; shifted rightward. Answer: A Topic: The Demand for Money Skill: Analytical Status: Old AACSB: Analytical Skills 12) In 2007, interest rates in Germany were 4.7 percent while the inflation rate was 1.7 percent. In 2008, interest rates increased to 5.3 percent and the inflation rate increased to 2.0. As a result, there is A) a leftward shift in Germany's demand for money curve. B) a downward movement along Germany's demand for money curve. C) a rightward shift in Germany's money supply curve. D) an upward movement along Germany's demand for money curve. Answer: D Topic: The Demand for Money Skill: Analytical Status: Old AACSB: Analytical Skills

13) In 2006, real GDP in Belgium grew at a 3 percent rate and inflation was 1.8 percent while the population did not change. As a result, there was ________ demand for money curve in Belgium. A) a rightward shift of the B) a leftward shift of the C) a movement up along the D) no change in the Answer: A Topic: The Demand for Money Skill: Analytical Status: Old AACSB: Analytical Skills 14) The table below shows data for Japan.

M1 growth rate Inflation rate

2008 0.7 0.4

2009 0.9 -0.3

Assuming the rate of velocity change is constant, real GDP A) grew by 0.3 percent in 2008. B) grew by -1.2 percent in 2009. C) grew by 1.1 percent in 2008. D) grew by 0.9 percent in 2009. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 15) The table below shows data for Brazil.

Real GDP growth rate Inflation rate

2006 3.8 4.2

2007 5.4 3.7

Assuming the rate of velocity change is constant, A) the growth rate of money increased between 2006 and 2007. B) the money growth rate was -0.4 percent in 2006. C) the growth rate of nominal GDP was 1.7 percent in 2006. D) the demand for money curve shifted leftward in 2006. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 130 Copyright © 2014 Pearson Education, Inc.

16) The table below shows data for Indonesia.

Real GDP growth rate Inflation rate

2009 4.5 4.8

2010 6.0 5.7

Assuming the rate of velocity change is constant, the money growth rate in Indonesia was A) 0.3 percent in 2009. B) 11.7 percent in 2010. C) -0.3 percent in 2009. D) 5.7 percent in 2010. Answer: B Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 17) The table below shows data for Indonesia between 2005 and 2006.

Money growth rate Real GDP growth rate

2005 21.4 5.7

2006 12.0 5.5

Assume the rate of velocity change is constant. According to the quantity theory of money, Indonesia's inflation rate A) is higher in 2005 than in 2006. B) was 17.5 percent in 2006. C) is 27.1 percent in 2005. D) will increase over the 12 months. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 18) The inflation rate in Venezuela has increased between 2005 and 2010, rising from 14 percent per year to 31 percent per year. At the same time, the growth rate of real GDP fell from 10 percent per year to -2.6 percent per year. The quantity theory of money A) states that the inflation rate over the period would average 4 percent. B) predicts that the velocity of money will decrease over the period. C) states that the growth rate of money must have increased over the period. D) predicts that nominal GDP will decrease over the period. Answer: C Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 131 Copyright © 2014 Pearson Education, Inc.

8 Essay Questions 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: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 2) What are the three functions of money? Answer: Money serves as a medium of exchange (so that money is accepted in exchange for goods and services), as a unit of account (so that prices are measured in units of money), and as a store of value (so that money is exchangeable at a later date). Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 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: Recognition Status: Old AACSB: Reflective Thinking 4) Give an example of how money functions as a unit of account. Answer: Money functions as a unit of account when it is used to in a price. For instance, a price of $60 dollars for a purse shows how the price of the purse is being measured in units of money. Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) 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 (d), 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 in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 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 checking account deposits, are a means of payment and fulfill all the functions of money. These deposits are therefore money. Topic: Money in the United States Today Skill: Recognition 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 Are Not Money Skill: Conceptual 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 Cards Are Not Money Skill: Conceptual 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 Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) Are checks and credit cards money? Explain why or why not. Answer: Checks are not money. Checks are instructions to your depository institution allowing for funds to be given to the entity listed on the check. Credit cards also are not money. Credit cards are ID cards that allow the user to access a previously-approved line of credit. The funds borrowed using a credit card must eventually be repaid using money. Topic: Checks and Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) What makes up M1? Is M1 larger or smaller than real GDP? Answer: M1 is the sum of currency outside of the banks 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 smaller than real GDP. Real GDP is about 9 times larger than M1. Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 12) 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 outside of the banks 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: Money in the United States Today, M1 and M2 Skill: Recognition Status: Old AACSB: Reflective Thinking

13) "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: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 14) "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: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) "Banks hold 100 percent of their customers' deposits as reserves." Is the previous statement correct or not? Answer: The statement is incorrect. If banks kept all of their deposits as reserves, banks would earn no profit. So banks keep a fraction of their deposits as reserves. Topic: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking 16) What are the economic functions of depository institutions? Answer: Depository institutions provide four economic services. First, they create liquidity, that is, bank deposits are highly liquid so that they are easily convertible into money. Second, they minimize cost of obtaining funds because borrowing from one bank is cheaper than borrowing from a variety of lenders. Third, they minimize cost of monitoring borrowers because depository institutions specialize in monitoring borrowers. Fourth, they pool risk by making loans to many borrowers. Topic: Economic Functions of Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking

17) List and discuss the four economic functions that depository institutions provide their customers. Answer: Depository institutions create liquidity, lower costs of obtaining funds, lower costs of monitoring borrowers, and pool risk. They create liquidity because they create assets that can be easily converted into money. Indeed, some of their deposits are money itself! They lower the costs of lending and borrowing funds. If you have funds to loan, rather than searching for a borrower, you can simply deposit the funds in a financial firm. Similarly, if you want to borrow funds, rather than searching for someone with funds to loan, you can simply borrow from a financial firm. Depository institutions also lower the cost of monitoring borrowers because these firms specialize in this activity. Finally, depository institutions pool risk and thereby lower the average risk of loaning funds. In other words, by lending to a large number of firms and individuals, a bank lowers the average risk it faces because it knows that only a small fraction of the large number of loans won't be repaid. Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) How do banks create liquidity? Answer: Banks create liquidity because they accept short-term deposits and make long-term loans. The short-term deposits can be quickly and easily changed into money—indeed, some of the deposits are money itself! In exchange, the bank makes long-term loans that cannot be converted to money until their due date is reached. Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) 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: The Federal Reserve System Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) 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: The Federal Reserve System Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) 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: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 22) The president of which Federal Reserve bank is always a voting member of the FOMC? 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: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 23) 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: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

24) "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: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 25) 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: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 26) 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. 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: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

27) List the Fed's main policy tools and briefly explain each one. Answer: The Fed's main policy tools are: required reserve ratios, last resort loans, and open market operations. 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 last resort loans reflects the fact that the Fed stands ready to make loans to financial institutions when other firms may be unwilling to do so. The interest rate charged on these loans is the discount rate. An open market operation is the buying and selling of government bonds by the Fed in the open market. Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Communication 28) 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: How the Discount Rate Works Skill: Recognition Status: Old AACSB: Reflective Thinking 29) "When the Fed buys securities from a bank, the quantity of money eventually decreases 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 buys securities from a bank, the quantity of money increases rather than decreases. Second, the money multiplier points out that the change in the quantity of money is ultimately greater than, not less than, the initial change in the monetary base. Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Reflective Thinking 30) When the Fed buys securities from a bank, 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 securities from a bank, 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: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Reflective Thinking

31) 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: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Reflective Thinking 32) Describe how actual reserves are calculated and explain the difference between desired 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. Desired reserves are the reserves that the bank wants to hold. The amount of desired reserves is equal to the desired reserve ratio multiplied by the bank's deposits. Excess reserves equal actual reserves minus desired reserves. A bank can make loans equal to the amount of its excess reserves. Topic: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Reflective Thinking 33) "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: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) 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: Reserves and Loans Skill: Conceptual Status: Old AACSB: Reflective Thinking

35) What factors affect the demand for money? Answer: Four factors influence the demand for money. First is the price level. An increase in the price level increases the nominal demand for money. Second is the interest rate. An increase in the interest rate raises the opportunity cost of holding money and decreases the quantity of money demanded. Third is real GDP. An increase in real GDP increases the demand for money. Fourth is financial innovation. Innovations that lower the cost of switching between money and other assets decrease the demand for money. Topic: The Influences on Money Holding Skill: Recognition Status: Old AACSB: Reflective Thinking 36) How are the nominal and real demands for money related to changes in the price level? Answer: When the price level rises the nominal demand for money increases by the same proportion. For example if the price level rises 5 percent, people demand 5 percent more nominal money so that they can continue to purchase the same quantity of goods and services. The nominal demand is measured in number of dollars. The real demand is the quantity of money measured in constant dollars. This amount does not change when the price level rises. The quantity of real money demanded is independent of the price level. Topic: The Influences on Money Holding Skill: Recognition Status: Old AACSB: Reflective Thinking 37) What is the opportunity cost of holding money? Answer: The opportunity cost of holding money is the nominal interest rate. Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 38) 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 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: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

39) What effect does an increase in the interest rate have on the opportunity cost of holding money and on the demand for money curve? Answer: An increase in the interest rate increases the opportunity cost of holding money. There is a movement upward along the demand for money curve. Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 40) How does an increase in real GDP affect the demand for money curve? Answer: An increase in real GDP increases the demand for money and shifts the demand curve rightward. Topic: Shifts in the Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 41) 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: Shifts in the Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 42) Describe how financial innovation has affected the demand for money. Answer: Financial innovation is the development by depository institutions of new financial products and changing technology within the banking industry. Examples include daily interest checking deposits, automatic transfers of money between deposits, ATM's and credit cards. In general these innovations have allowed the public to be more flexible in their choices between cash and less liquid assets as banks have delivered greater liquidity without forgoing interest earned. The result has been a large decrease in the demand for M1 and a smaller decrease in the demand for M2. Topic: Shifts in the Demand for Money Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

43) Explain how the money market determines the equilibrium interest rate. Answer: The demand for money curve, MD, is downward sloping because as the interest rate decreases the quantity of money demanded increases. The supply of money curve, MS, is vertical at the quantity of real money. There exists only one interest rate for which the quantity of money demanded is equal to the quantity supplied. If the interest rate is above the equilibrium interest rate, so that there is an excess supply of money, people respond by buying bonds so that the interest rate falls. Likewise, if the interest rate is less than the equilibrium interest rate, so that there is an excess demand for money, people respond by selling bonds and the interest rate rises. Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Communication 44) 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 interest rate. The quantity of money is greater than the quantity of the money demanded when the interest rate is above the equilibrium interest rate. When this occurs, in an effort to decrease the amount of money to be equal to the quantity they want to hold, people buy bonds with the excess money. As a result, the interest rate falls. The fall in the interest rate increases the quantity of money demanded. When the interest rate reaches its equilibrium, there is no longer an excess supply of money because at the equilibrium interest rate, the quantity of money supplied equals the quantity demanded. Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Communication 45) In the short run, how is the interest rate determined? If the interest rate is less than the equilibrium interest rate, what occurs? Answer: The interest rate is determined in the money market by the interaction of the demand for money and the supply of money. If the 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: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Communication

46) "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 speed with which money is used to purchase goods and services. Topic: Velocity of Circulation Skill: Conceptual Status: Old AACSB: Reflective Thinking 47) 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: Conceptual Status: Old AACSB: Reflective Thinking 48) Discuss the quantity theory of money. Be sure to mention the velocity of circulation and the equation of exchange. Answer: The quantity theory of money is the proposition that in the long run an increase in the money supply leads to an equal percentage increase in the price level. The velocity of circulation is defined as the average number of times a dollar is used annually in exchange for goods and services. Because GDP is the total of all goods and services purchased, we can derive a formula for the velocity of circulation from GDP. If we use Y for real GDP and P as the price level, the PY = nominal GDP. Because the money supply is used to purchase GDP, velocity, V, equals (PY)/M, where M is the quantity of money. This formula can be rearranged to become the equation of exchange, which states that MV = PY. Given the assumptions that neither velocity nor potential GDP are influenced by the quantity of money, we can then solve for the price level as P = (MV/Y). Given the assumptions then, changes in the quantity of money lead to only changes in the price level. The quantity theory states that in the long run the percentage increase in the quantity of money equals the percentage increase in the price level. Topic: Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Communication

49) 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: Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Communication 50) 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: Conceptual Status: Old AACSB: Reflective Thinking 51) How has growth in M2 minus the growth in real GDP compared to the inflation rate in the United States? Answer: Since 1960, M2 growth minus the growth in real GDP has been closely correlated with inflation rates. The period of rapid inflation, during the 1970s, occurred at the same time there was a high growth rate of M2 minus the growth rate of real GDP. This correlation is present throughout all the years. Topic: Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 52) What is the relationship between money growth and inflation across countries? Does your answer support the quantity theory of money? Answer: The international evidence shows that the money growth rate and inflation rate are positively related. While the correlation is not precise, it is generally high. Topic: International Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

53) "If the currency drain increases, the monetary base decreases." Explain whether the previous statement is correct or incorrect. Answer: The statement is false. If the currency drain increases, the money multiplier (and the quantity of money) decreases but the monetary base itself is unaffected. Topic: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Reflective Thinking 54) 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: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Analytical Skills 55) 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: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Analytical Skills

56) Explain how a currency drain affects the size of the money multiplier. In your explanation, suppose that a bank gains $1 million in new deposits and reserves. Further suppose that the desired reserve ratio is 10 percent and the currency drain is 50 percent. Answer: A currency drain 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 will keep $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 of 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 newly created deposit money) is kept outside the banks as currency. Hence the second bank, which must keep $60,000 as reserves, can loan only $540,000. And of this loan, 50 percent or $180,000 is kept as currency and only $360,000 is 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: Requires Mathematical Note Skill: Analytical Status: Old AACSB: Analytical Skills 57) If the currency drain increases, how can the Fed adjust the monetary base to offset the effect on the quantity of money? Answer: If the currency drain 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: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Analytical Skills 58) What is the money multiplier and what affects its size? Answer: The money multiplier is the amount by which a change in the monetary base is multiplied to determine the change in the quantity of money. The money multiplier is greater than 1.0. Its size is affected by the desired reserve ratio and the currency drain. The higher the desired reserve ratio and/or the larger the currency drain, the smaller the money multiplier. Topic: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Analytical Skills

59) Suppose the Fed 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: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Analytical Skills 9 Numeric and Graphing Questions 1) 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: Money in the United States Today, M1 Skill: Analytical Status: Old AACSB: Analytical Skills 2) 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: Money in the United States Today, M2 Skill: Analytical Status: Old AACSB: Analytical Skills

3) 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: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills 4) 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: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills 5) 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: Banks' Balance Sheet Skill: Analytical Status: Old AACSB: Analytical Skills

6) 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: Banks' Balance Sheet Skill: Analytical Status: Old AACSB: Analytical Skills 7) 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) How much does the bank have in excess reserves? b) What can the bank do with its excess reserves? Name two options. Answer: a) The excess reserves are $30, equal to the actual reserves of $50 minus the desired reserves of $20 (= 20 percent of $100 of deposits). b) The bank can use its excess reserves to make loans or buy more securities. Topic: Banks' Balance Sheet Skill: Analytical Status: Old AACSB: Analytical Skills 8) A bank reports reserves of $100,000, government securities of $50,000, loans of $750,000, and checkable deposits of $900,000. The desired reserve ratio is 10 percent. 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 wants to keep 10 percent of its checkable deposits as reserves, so the desired reserves are ($900,000) × 0.10 = $90,000. So excess reserves equal $100,000 $90,000 = $10,000. Topic: Banks' Balance Sheet Skill: Analytical Status: Old AACSB: Analytical Skills

9) 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 wants to have ($250,000) × (0.10) = $25,000 as reserves. Its actual reserves equal $25,000. Therefore its excess reserves equal $25,000 $25,000, or $0. Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 10) 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: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 11) A bank receives new deposits equal to $200,000 and the desired reserve ratio is 10 percent. What is the amount of new loans the bank can make? Answer: The bank can make new loans equal to the amount of its excess reserves. The bank's desired reserves equal ($200,000) × (0.10) = $20,000, leaving the bank with excess reserves of $180,000. As a result, the bank can make $180,000 in new loans. Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 12) The Fed 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. However, because Commerce Bank's deposits have not changed, none of these additional reserves are desired reserves, so Commerce Bank's excess reserves also increase by $50,000. Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills

13) 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: Analytical Status: Old AACSB: Analytical Skills Quantity of Interest rate money demanded (percent per year) (trillions of 2005 dollars) 8 0.7 6 0.9 4 1.1 2 1.3 14) The above table has the demand for money schedule. a) If the Fed supplies $1.1 trillion dollars, what is the equilibrium 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 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: Analytical Status: Old AACSB: Analytical Skills

Quantity of Interest rate money demanded (percent per year) (trillions of 2005 dollars) 3 2.0 4 1.5 5 1.0 6 0.5 15) 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 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 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: Analytical Status: Old AACSB: Analytical Skills

16) The above figure has the 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 MS0 and the equilibrium interest rate is 6 percent. When the Fed increases the quantity of money, the supply of money curve shifts to MS1 and the equilibrium interest rate falls to 4 percent. Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

17) 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: Analytical Status: Old AACSB: Analytical Skills 10 True or False 1) The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a medium of exchange. Answer: TRUE Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 2) Barter eliminates the double coincidence of wants. Answer: FALSE Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) When Patty uses money to buy her lunch, she is showing the use of money as a "store of value." Answer: FALSE Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) Credit cards are not part of the nation's money supply. Answer: TRUE Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 5) The money supply, as measured by M1, consists almost entirely of currency. Answer: FALSE Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 155 Copyright © 2014 Pearson Education, Inc.

6) Traveler's checks are included in M1 but not in M2. Answer: FALSE Topic: Money in the United States Today, M1 and M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 7) M1 is usually larger than M2. Answer: FALSE Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) A depository institution receives deposits from lenders and makes loans to borrowers. Answer: TRUE Topic: Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 9) A depository institution creates liquidity and pools risk. Answer: TRUE Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) The Federal Reserve is divided into 7 districts. Answer: FALSE Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 11) The main policy-making body of the Federal Reserve System is the Federal Open Market committee. Answer: TRUE Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

12) The FOMC is the agency that insures deposits up to $250,000. Answer: FALSE Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The most powerful individual in the Federal Reserve is the Chairman of the Board of Governors. Answer: TRUE Topic: The Fed's Power Center Skill: Recognition Status: Old AACSB: Reflective Thinking 14) If the Fed sells securities to commercial banks, there is no money multiplier effect. Answer: FALSE Topic: The Money Multiplier Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) The desired reserve ratio helps determine the amount of money banks can create. Answer: TRUE Topic: The Money Multiplier Skill: Recognition Status: Old AACSB: Reflective Thinking 16) If actual reserves are 100 when deposits are 400, then definitely the desired reserve ratio is 0.25. Answer: FALSE Topic: The Money Multiplier Skill: Recognition Status: Old AACSB: Reflective Thinking 17) The term "currency drain" refers to an increase in currency held outside banks. Answer: TRUE Topic: Currency Drain Skill: Recognition Status: Old AACSB: Reflective Thinking

18) A currency drain occurs because people want to hold some of their money as currency rather than as deposits. Answer: TRUE Topic: Currency Drain Skill: Recognition Status: Old AACSB: Reflective Thinking 19) A change in the price level changes the amount of nominal money people demand. Answer: TRUE Topic: The Influences on Money Holding, The Price Level Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) The opportunity cost of holding money is the nominal interest rate. Answer: TRUE Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 21) Suppose that nominal interest rates double. As a result, the quantity of money doubles as well. Answer: FALSE Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) The increased use of automatic teller machines has decreased the demand for money. Answer: TRUE Topic: The Influences on Money Holding, Financial Innovation Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) If there is an excess quantity of money, people will buy bonds. Answer: TRUE Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

24) According to the quantity theory of money, in the long run, an increase in the quantity of money does not change real GDP but does raise the price level. Answer: TRUE Topic: The Long-Run Effects of a Change in the Quantity of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) According to the quantity theory of money, in the long run an increase in the quantity of money creates an increase in the price level but does not increase real GDP. Answer: TRUE Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) The quantity theory of money asserts that an increase in the quantity of money leads to an equal percentage increase in the price level in the long run. Answer: TRUE Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) Assuming velocity is constant, a 10 percent increase in the quantity of money leads to a 10 percent increase in nominal GDP in both the short run and the long run. Answer: TRUE Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 28) According to the quantity theory of money, inflation causes an increase in the money supply. Answer: FALSE Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 29) International data supports the quantity theory of money conclusion that high money growth rates are associated with inflation. Answer: TRUE Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 159 Copyright © 2014 Pearson Education, Inc.

30) In comparing growth rates of money growth and inflation across countries, the long-run proposition of the quantity theory of money is supported. Answer: TRUE Topic: International Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

11 Extended Problems 1) The commercial banks in Fundland have Reserves $500 million Loans $3,500 million Deposits $4,000 million Total assets $5,000 million The banks hold no excess reserves. a) Calculate the banks' desired reserve ratio. b) An immigrant arrives in Fundland with $10 million, which she deposits in a bank. How much does the immigrant's bank lend initially? Answer: a) With no excess reserves, the desired reserve ratio is the fraction of banks' total deposits that are held in reserves. So in Fundland, the banks' desired reserve ratio is or 12.5 percent. b) With a desired reserve ratio of 12.5 percent, the bank keeps on reserve. It then lends the rest, so it lends $10 million - $1.25 million, which is $8.75 million. Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 2) The commercial banks in Lendland have Reserves $400 million Loans $3,600 million Deposits $4,000 million Total assets $4,600 million The banks hold no excess reserves. a) Calculate the banks' reserve ratio. b) An immigrant arrives in Lendland with $5 million, which he deposits in a bank. How much does the immigrant's bank lend initially? Answer: a) With no excess reserves, the desired reserve ratio is the fraction of banks' total deposits that are held in reserves. So in Lendland, the banks' desired reserve ratio is or 10 percent. b) With a desired reserve ratio of 10 percent, the bank keeps on reserve. It then lends the rest, so it lends $5 million - $0.5 million, which is $4.5 million. Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills

3) In the economy of Briskland, the commercial banks have deposits of $500 billion. Their reserves are $50 billion, 80 percent of which is in deposits with the Central Bank. There is $20 billion in Central Bank notes outside the banks, and there are no coins. a) What is the monetary base? b) If all the deposits are money, what is the total quantity of money? c) What is the banks' reserve ratio? d) What is the currency drain as a percentage of the quantity of deposits? Answer: a) The monetary base is the sum of Central Bank notes, $20 billion, and deposits at the Central Bank. The deposits at the central bank are 80 percent of banks' reserves, so deposits at the central bank are which is $40 billion. Then the monetary base is b) The quantity of money is Central Bank notes plus deposits, so the quantity of money is c) The banks' reserve ratio is the ratio of banks' reserve to deposits, which is or 10 percent. d) The currency drain is Central Bank notes held outside the banks. In Briskland, the currency drain is $20 billion, so as a percentage of the quantity of money, the currency drain is or 4.0 percent. Topic: Monetary Base Skill: Analytical Status: Old AACSB: Analytical Skills

4) Friedmania is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology so real GDP does not change. In 2010, real GDP was $500 million, the price level, measured by the GDP deflator, was 150 and the velocity of circulation of money was 10. (Because the price level is measured by the GDP deflator, it must be divided by 100 before it is used in the equation of exchange.) In 2011, the quantity of money increased by 20 percent. a) What was the quantity of money in 2010? b) What was the velocity of circulation in 2011? c) What was the price level in 2010? Answer: a) The equation of exchange states that the quantity of money, M, multiplied by the velocity of circulation, V, equals real GDP, Y, multiplied by the price level, P. In terms of a formula, the equation of exchange is that Using this formula, gives the quantity of money as $75 billion. b) The quantity theory of money asserts that the velocity of circulation is not influenced by the quantity of money. So the velocity of circulation remains constant at 10. c) From the equation of exchange, the price level is Because the quantity of money increased by 20 percent, the quantity of money in 2011 is So Another way to calculate the price level in 2011 is to notice that according to the quantity theory, a change in the quantity of money has no effect on velocity and real GDP. So if the quantity of money increases by 20 percent, to balance the equation of exchange, the price level must also increase by 20 percent. So from this approach, the price level in Friedmania is which is also equal to 180. Topic: Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills

5) Fisheria is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology. In 2010, real GDP was $300 million, the quantity of money was $60, and the velocity of circulation of money was 10. In 2011, the price level rose by 20 percent. a) What was the price level in 2010? (The price level is measured by the GDP deflator, which is 100 in 2000. So the price level from the equation of exchange needs to be multiplied by 100 to convert it to the GDP deflator.) b) What was real GDP in 2011? c) What was the velocity of circulation in 2011? d) What was the quantity of money in 2011? Answer: a) The equation of exchange states that the quantity of money, M, multiplied by the velocity of circulation, V, equals real GDP, Y, multiplied by the price level, P. In terms of a formula, the equation of exchange is that This formula shows that Using this result, the price level is which must be multiplied by 100 so that the price level is 200. b) Real GDP does not change because the country has a constant population, capital stock, and technology, and, according to the quantity theory of money, real GDP is not influenced by changes in the quantity of money. So real GDP in 2011 is $300 million. c) The quantity theory of money asserts that the velocity of circulation is not influenced by the quantity of money. So the velocity of circulation remains constant at 10. d) From the equation of exchange, the quantity of money is Because the price level in 2011 increased by 20 percent, the price level in 2011 is So using the equation of exchange formula, Another way to calculate the quantity of money in 2011 is to notice that according to the quantity theory, a change in the quantity of money has no effect on velocity and real GDP. So if the price level rises by 20 percent, to balance the equation of exchange, the quantity of money must also increase by 20 percent. So from this approach, in 2011 the quantity of money in Fisheria is Topic: Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills

6) In the economy of Brightland, the commercial banks have deposits of $600 billion. Their reserves are $60 billion. All reserves are in deposits with the Central Bank and the commercial banks hold no excess reserves. There is $120 billion in Central Bank notes outside the banks, and there are no coins. a) What is the economy's monetary base? b) What is the quantity of money in the economy? c) Calculate the money multiplier. d) Suppose the Central Bank of Brightland undertakes an open market purchase of securities of so that the monetary base increases by $5 billion. By how much will the quantity of money change? Answer: a) The monetary base is the sum of Central Bank notes and deposits at the Central Bank, so the monetary base is b) The quantity of money equals notes plus deposits, which is c) The money multiplier is where c is the ratio of currency to deposits and r is the desired reserve ratio. In Brightland, the ratio of currency to deposits is Because there are no excess reserves, the desired reserve ratio is So the money multiplier is d) The quantity of money in the economy increases by the change in the monetary base multiplied by the money multiplier, so the quantity of money increases by Topic: Requires Mathematical Note Skill: Analytical Status: Old AACSB: Analytical Skills

12 Mathematical Note: The Money Multiplier 1) ________ in the desired reserve ratio will ________ the money multiplier. A) An increase; have no effect on B) An increase; decrease C) A decrease; decrease D) A decrease; will have no effect on Answer: B Topic: The Money Multiplier Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) ________ in the currency drain ________ the money multiplier. A) A decrease; does not change B) An increase; increases C) A decrease; decreases D) An increase; decreases Answer: D Topic: The Money Multiplier Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) If the desired reserve ratio rises, the money multiplier A) decreases. B) increases. C) stays the same. D) probably changes but more information is needed to determine if it increases or decreases. Answer: A Topic: The Money Multiplier Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) The smaller the currency drain, the A) smaller the increase in the quantity of money from an increase in reserves. B) more likely it is that the banking system will hold a larger proportion of excess reserves. C) the smaller the effect of a change in the discount rate. D) larger the increase in the quantity of money from an increase in reserves. Answer: D Topic: The Money Multiplier Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) The banking system has just experienced an increase in deposits of $50,000. The currency drain ratio is 20 percent and the desired reserve ratio is 10 percent. What does the money multiplier equal? A) 4.00 B) 3.33 C) 0.25 D) 10.00 Answer: A Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 6) In Zealand, banks' desired reserve ratio is 20 percent and there is no currency drain. The money multiplier equals ________. A) 0.50 B) 0.20 C) 20.0 D) 5.0 Answer: D Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 7) In Zealand, banks' desired reserve ratio is 20 percent and the currency drain also equals 20 percent. The money multiplier equals ________. A) 2.18 B) 3.33 C) 5.0 D) 3.0 Answer: D Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 9 The Exchange Rate and the Balance of Payments 1 The Foreign Exchange Market 1) The term "foreign currency" refers to foreign I. coins II. notes III. bank deposits A) II only. B) II and III only. C) I and II only. D) I, II, and III. Answer: D Topic: Financing International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking 2) If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with A) dollars. B) yuan, the Chinese currency. C) international monetary credits. D) euros, or any other third currency. Answer: B Topic: Financing International Trade Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) If the United States sells beef to Japan, the U.S. beef producer is paid with A) dollars. B) yen, the Japanese currency. C) international monetary credits. D) euros, or any other third currency. Answer: A Topic: Financing International Trade Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) When Safeway supermarkets in the United States buys strawberries from Mexico, A) it uses dollars to pay Mexican farmers. B) it uses pesos to pay Mexican farmers. C) it may use any currency it chooses. D) the transaction shows up in the U.S. capital account. Answer: B Topic: Financing International Trade Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) Americans demand Japanese yen in order to A) buy Japanese products. B) supply American goods in Japanese markets. C) allow the Japanese to buy U.S. products. D) balance the current account. Answer: A Topic: Financing International Trade Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) Which of the following statements is correct? I. The exchange rate is a price. II. The exchange rate is different from other prices because it is NOT determined by supply and demand. A) only I B) only II C) I and II D) neither I nor II Answer: A Topic: The Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) The exchange rate is the A) opportunity cost of pursuing a nation's comparative advantage. B) price of one country's currency expressed in terms of another country's currency. C) ratio between imports and exports. D) interest rate that is charged on risk-free international capital flow. Answer: B Topic: The Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 2 Copyright © 2014 Pearson Education, Inc.

8) The exchange rate is the price at which the ________ of one country exchanges for the ________ of another country. A) currency; goods B) goods; goods C) currency; currency D) currency; financial instruments Answer: C Topic: The Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 9) A decrease in the value of a currency in terms of other currencies is known as A) an appreciation. B) a depreciation. C) a par value. D) a gold point. Answer: B Topic: The Exchange Rate, Currency Depreciation Skill: Recognition Status: Old AACSB: Reflective Thinking 10) When the value of one currency falls relative to another currency, the exchange rate for the first currency has A) depreciated. B) appreciated. C) demanded. D) revalued. Answer: A Topic: The Exchange Rate, Currency Depreciation Skill: Recognition Status: Old AACSB: Reflective Thinking 11) By definition, currency depreciation occurs when the value of A) all currencies fall relative to gold. B) one currency falls relative to another currency. C) one currency rises relative to another currency. D) gold falls relative to the value of currencies. Answer: B Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) Suppose that the exchange rate between the dollar and the peso changed from 6 pesos per dollar to 8 pesos per dollar. This change means that the A) peso appreciated. B) dollar depreciated. C) peso depreciated. D) Both answers A and B are correct. Answer: C Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) If the dollar's value changes from 120 yen per dollar to 110 yen per dollar, the dollar has A) depreciated. B) appreciated. C) demanded. D) devalued. Answer: A Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) Which of the following examples definitely illustrates a depreciation of the U.S. dollar? A) The dollar exchanges for 120 euros and then exchanges for 100 euros. B) The dollar exchanges for 100 euros and then exchanges for 120 yen. C) The dollar exchanges for 1 pound and then exchanges for 1.2 pounds. D) The dollar exchanges for 250 yen and then exchanges for 275 euros. Answer: A Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) When the U.S. dollar depreciates against the yen, the yen becomes ________ expensive and the U.S. exchange rate ________. A) more; rises B) less; rises C) more; falls D) less; falls Answer: C Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) When the U.S. dollar depreciates against the yen, the yen ________ and the exchange rate ________. A) appreciates; rises B) depreciates; rises C) appreciates; falls D) depreciates; falls Answer: C Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) Last year the exchange rate between U.S. dollars and Mexican pesos was 10 pesos per dollar. Today is it 11 pesos per dollar. Here, the dollar ________ against the peso, and the peso ________ against the dollar A) appreciated; depreciated B) depreciated; appreciated C) appreciated; appreciated D) depreciated; depreciated Answer: A Topic: The Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) Suppose the exchange rate of the U.S. dollar was 1.50 British pounds = $1.00 (U.S.) on Wednesday, and on the following Monday the exchange rate was $.75 (U.S.) = 1.00 British pound. Which of the following best describes what happened between Wednesday and the following Monday? A) The U.S. dollar appreciated against the British pound. B) The British pound appreciated against the U.S. dollar. C) The U.S. dollar depreciated against the British pound. D) Both answers B and C are correct. Answer: D Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Revised AACSB: Reflective Thinking

19) An increase in the value of a domestic currency in terms of other currencies is known as A) an appreciation. B) a depreciation. C) a flexible exchange rate. D) a term not given in the above answers. Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Recognition Status: Old AACSB: Reflective Thinking 20) Which of the following examples definitely illustrates an appreciation of the U.S. dollar? A) The dollar exchanges for 120 euros and then exchanges for 100 euros. B) The dollar exchanges for 100 yen and then exchanges for 125 euros. C) The dollar exchanges for 1 pound and then exchanges for 1.2 pounds. D) none of the above Answer: C Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) Suppose the exchange rate of the U.S. dollar was 1.00 euro = $0.50 on Thursday, and on Friday the exchange rate was $1.00 = 2.10 euros. Which of the following best explains what has happened between Thursday and Friday? A) The U.S. dollar appreciated against the euro. B) The euro appreciated against the U.S. dollar. C) The U.S. dollar depreciated against the euro. D) Both answers B and C are correct. Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) If the pound-dollar exchange rate changes from £0.60 per dollar to £0.65 per dollar, then the pound has ________ against the dollar and the dollar has ________ against the pound. A) depreciated; depreciated B) appreciated; depreciated C) appreciated; appreciated D) depreciated; appreciated Answer: D Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 6 Copyright © 2014 Pearson Education, Inc.

23) If 100 Japanese yen buy more U.S. dollars today than yesterday, the dollar has ________ and the yen has ________. A) depreciated; appreciated B) appreciated; depreciated C) depreciated; depreciated D) appreciated; appreciated Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) If the value of a dollar rises in terms of yen, the dollar has ________ and the yen has ________. A) appreciated; appreciated B) appreciated; depreciated C) depreciated; appreciated D) depreciated; depreciated Answer: B Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) If the Japanese yen was 123 per dollar and now is 114 yen per dollar, it can be said that A) the yen appreciated against the dollar. B) the yen has depreciated against the dollar. C) the dollar has appreciated against the yen. D) None of the above answers is correct. Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Analytical Status: Old AACSB: Reflective Thinking 26) If the exchange rate falls from 120 yen per dollar to 100 yen per dollar, the dollar has ________ and the yen has ________. A) depreciated; appreciated B) appreciated; depreciated C) depreciated; depreciated D) appreciated; appreciated Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 7 Copyright © 2014 Pearson Education, Inc.

27) Suppose $1 buys 1.20 euros in January and 1.10 euros in the following December. As a result, A) the dollar has appreciated. B) the euro has appreciated. C) the euro has depreciated. D) U.S. exports have increased. Answer: B Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Revised AACSB: Reflective Thinking

Currency Euro Japanese yen Canadian dollar

2007 exchange rate (per U.S. dollar) 0.9954

2008 exchange rate (per U.S. dollar) 1.0747

102.20

114.90

1.44

1.50

28) The table above shows the exchange rates between various currencies and the U.S. dollar. Between 2007 and 2008, the U.S. dollar ________ against the euro and ________ against the Japanese yen. A) depreciated; depreciated B) appreciated; appreciated C) appreciated; depreciated D) depreciated; appreciated Answer: B Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 29) The table above shows the exchange rates between various currencies and the U.S. dollar. Between 2007 and 2008, the Japanese yen ________ against the U.S dollar and the euro ________ against the U.S. dollar. A) appreciated; appreciated B) depreciated; appreciated C) depreciated; depreciated D) appreciated; depreciated Answer: C Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 8 Copyright © 2014 Pearson Education, Inc.

30) When people who are holding the money of some other country want to exchange it for U.S. dollars, they ________ U.S. dollars and ________ that other country's money. A) demand; supply B) supply; supply C) supply; demand D) demand; demand Answer: A Topic: The Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 31) Which of the following creates a demand for U.S. dollars? A) Toyota, a Japanese firm, purchasing land in Texas B) a U.S. restaurant purchasing Mexican tomatoes C) a U.S. tourist catching a show in London D) a Japanese tourist catching a show in London Answer: A Topic: The Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) When the exchange rate falls, in the foreign exchange market the A) quantity demanded of the currency increases. B) demand for the currency increases. C) quantity demanded of the currency decreases. D) demand for the currency decreases. Answer: A Topic: Law of Demand for Foreign Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 33) The law of demand in the foreign exchange market refers to the relationship between the A) exchange rate and the quantity of U.S. dollars demanded B) interest rate and the exchange rate C) interest rate and the quantity of U.S. dollars demanded D) U.S. price level and the exchange rate Answer: A Topic: The Law of Demand for Foreign Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking

34) The law of demand for dollars in the foreign exchange market means that the A) lower the exchange rate, the greater the quantity of dollars demanded. B) higher the exchange rate, the smaller the quantity of dollars demanded. C) lower the exchange rate, the smaller the quantity of U.S. exports demanded. D) Both answers A and B are correct. Answer: D Topic: The Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 35) With everything else the same, in the foreign exchange market the A) larger the value of U.S. exports, the greater is the quantity of dollars demanded. B) lower the exchange rate, the smaller the amount of U.S. exports. C) the lower the exchange rate, the smaller is the expected profit from buying dollars. D) the higher the exchange rate, the cheaper are U.S.-produced goods and services. Answer: A Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 36) In the foreign exchange market, a change in which of the following will result in a movement along the demand curve for U.S. dollars? A) the exchange rate B) the U.S. interest rate C) the interest rate in the foreign country D) the expected future exchange rate Answer: A Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 37) The dollar is regarded as the "safe haven" currency; investors flock to it when they are worried about the outlook for the global economy. Fears were at their greatest in late 2008 and early 2009 after the collapse of Lehman Brothers, an investment bank, in September 2008. As investors flocked to the dollar, A) the demand for dollars increased and the exchange rate increased. B) the demand for dollars decreased and the exchange rate decreased. C) the supply of dollars increased and the exchange rate decreased. D) the supply of dollars decreased and the exchange rate increased. Answer: A Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: New AACSB: Reflective Thinking 10 Copyright © 2014 Pearson Education, Inc.

38) The dollar is regarded as the "safe haven" currency; investors flock to it when they are worried about the outlook for the global economy. Fears were at their greatest in late 2008 and early 2009 after the collapse of Lehman Brothers, an investment bank, in September 2008. If investors flocked to the dollar, A) the exchange rate would increase. B) the exchange rate would decrease. C) the exchange rate would not change. D) the exchange rate could increase or decrease. Answer: A Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: New AACSB: Reflective Thinking 39) The demand curve for U.S. dollars slopes downward because as the dollar ________ U.S. goods become ________ expensive to foreign residents, so they purchase fewer U.S. goods, and the quantity of dollars demanded decreases. A) appreciates; more B) appreciates; less C) depreciates; more D) depreciates; less Answer: A Topic: The Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 40) When the U.S. exchange rate falls, U.S. goods become ________ to foreign residents and U.S. exports ________. A) less expensive; increase B) less expensive; decrease C) more expensive; decrease D) more expensive; increase Answer: A Topic: The Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking

41) As the exchange rate ________, the ________ is the value of U.S. ________. A) falls; greater; imports B) falls; greater; exports C) rises; greater; exports D) rises; smaller; imports Answer: B Topic: The Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) As the value of U.S. exports ________, the quantity of ________ demanded increases. A) increases; foreign currencies B) increases; dollars C) decreases; dollars D) None of the above is correct because the value of U.S. exports has nothing to do with the quantity of dollars or foreign currency demanded. Answer: B Topic: Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 43) The quantity of dollars demanded by foreign nations increases as A) U.S. residents purchase more foreign goods. B) foreigners purchase more U.S. goods. C) more U.S. residents travel abroad. D) U.S. exports fall. Answer: B Topic: Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 44) Exports of U.S. goods creates a ________ U.S. dollars and creates a ________ foreign currencies. A) demand for; demand for. B) supply of; supply of C) demand for; supply of D) supply of; demand for Answer: C Topic: Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking

45) Suppose China Airlines wants to purchase a French Airbus. The price of the Airbus is 95 million Euro. If the exchange rate is 1 euro per 10 yuan, the price of this airplane to China Airlines is A) 950 million yuan. B) 85.5 million yuan. C) 10 million yuan. D) 9.5 million yuan. Answer: A Topic: Law of Demand for Foreign Exchange, Exports Skill: Analytical Status: Old AACSB: Analytical Skills 46) Suppose China Airlines wants to purchase a French Airbus. The price of the Airbus is 95 million Euro. If the exchange rate is 1 euro per 9 yuan, the price of this airplane to China Airlines is A) 855 million yuan. B) 85.5 million yuan. C) 83.6 million yuan. D) 10.6 million yuan. Answer: A Topic: Law of Demand for Foreign Exchange, Exports Skill: Analytical Status: Old AACSB: Analytical Skills 47) If nothing else changes, the ________ the current exchange rate, the ________ is the expected profit from holding dollars, all other things remaining the same. A) higher; larger B) lower; smaller C) lower; larger D) The premise of the question is wrong because the exchange rate has nothing to do with expected profit from holding dollars. Answer: C Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking

48) A factor helping determine demand for the dollar in the foreign exchange market is A) the expected future exchange rate. B) the expected future interest rate. C) the amount of U.S. imports. D) the supply of U.S. dollars. Answer: A Topic: Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 49) If the exchange rate falls, then the expected profit from holding the currency A) does not change. B) increases. C) decreases. D) can either increase or decrease. Answer: B Topic: Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 50) As the expected profit from holding dollars ________, the quantity of ________. A) increases; dollars demanded increases B) increases; dollars demanded decreases C) decrease; foreign currency demanded decreases D) None of the above answers is correct. Answer: A Topic: Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 51) The lower the exchange rate today, ceteris paribus, the A) greater is the expected profit from buying U.S. dollars today and holding them. B) smaller is the expected profit from buying U.S. dollars today and holding them. C) greater is the expected profit from buying foreign currency today and holding it. D) smaller the quantity of U.S. dollars demanded in the foreign exchange market today. Answer: A Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking

52) The higher the exchange rate today, the A) smaller is the expected profit from buying U.S. dollars today and holding them. B) greater is the expected profit from buying U.S. dollars today and holding them. C) smaller is the expected profit from buying foreign currency today and holding it. D) greater the quantity of U.S. dollars demanded in the foreign exchange market today. Answer: A Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 53) When the U.S. exchange rate rises and the expected future exchange rate does not change, the expected profit from buying U.S. dollars today A) also rises B) falls C) does not change D) may rise, fall, or stay the same Answer: B Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking

Investor Investor A Investor B Investor C

Expected future value of a dollar (francs per dollar) 120 100 85

54) Using the table above, if the current market value of the dollar is 125 francs per dollar, A) investor A expects dollar appreciation, but B and C expect depreciation. B) investor A expects dollar depreciation, but B and C expect appreciation. C) all three investors expect the dollar to appreciate. D) all three investors expect the dollar to depreciate. Answer: D Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills

55) Using the table above, if the current market value of the dollar is 125 francs, A) investor A holds dollars, but B and C hold francs. B) investor A holds francs, but B and C hold dollars. C) all three investors hold francs. D) all three investors hold dollars. Answer: C Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills 56) Using the table above, if the current market value of the dollar is 70 francs, A) investor A expects dollar appreciation, but B and C expect depreciation. B) investor A expects dollar depreciation, but B and C expect appreciation. C) all three investors expect the dollar to appreciate. D) all three investors expect the dollar to depreciate. Answer: C Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills 57) Using the table above, if the current market value of the dollar is 70 francs, A) investor A holds dollars, but B and C hold francs. B) investor A holds francs, but B and C hold dollars. C) all three investors hold francs. D) all three investors hold dollars. Answer: D Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills 58) Using the table above, if the current market value of the dollar is 90 francs, A) investor A expects dollar appreciation, but B and C expect depreciation. B) investor C expects dollar depreciation, but A and B expect appreciation. C) all three investors expect the dollar to appreciate. D) all three investors expect the dollar to depreciate. Answer: B Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills

59) Using the table above, if the current market value of the dollar is 110 francs, A) investor A expects dollar appreciation, but B and C expect depreciation. B) investor C expects dollar depreciation, but A and B expect appreciation. C) all three investors expect the dollar to appreciate. D) all three investors expect the dollar to depreciate. Answer: A Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills 60) When you arrive at the airport in Paris and go to the bank window to exchange dollars into euros, you are A) selling euros to the French. B) avoiding the use of foreign exchange markets. C) contributing to U.S. exports. D) None of the above answers is correct. Answer: D Topic: Supply in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 61) In the foreign exchange market, the higher the dollar's exchange rate, the A) larger the supply of dollars. B) smaller the quantity supplied of dollars. C) smaller the supply of dollars. D) larger the quantity supplied of dollars. Answer: D Topic: Law of Supply for Foreign Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 62) When the U.S. exchange rate rises, foreign goods become ________ and U.S. imports ________. A) less expensive; increase B) more expensive; decrease C) less expensive; decrease D) more expensive; increase Answer: A Topic: The Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

63) Other things remaining the same, the ________ the exchange rate for dollars, the greater the ________ in the foreign exchange market. A) higher; quantity of dollars supplied B) higher; quantity of dollars demanded C) lower; value of U.S. imports D) higher; expected profits from holding dollars Answer: A Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 64) The demand for Mexican tomatoes by an American food grocery chain creates a A) demand for the U.S. dollar. B) demand for an interest rate differential. C) supply of Mexican pesos. D) supply of U.S. dollars. Answer: D Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 65) Consider the market for dollars. If the exchange rate rises from 2 pesos per dollar to 4 pesos per dollar, A) the supply curve of dollars shifts leftward. B) the supply curve of dollars shifts rightward. C) there is an upward movement along the supply curve for dollars. D) there is a downward movement along the supply curve for dollars. Answer: C Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 66) As the exchange rate ________, the quantity of dollars ________ on the foreign exchange market ________. A) rises; supplied; increases B) falls; supplied; increases C) rises; demanded; increases D) falls; demanded; decreases Answer: A Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 18 Copyright © 2014 Pearson Education, Inc.

67) In the foreign exchange market, the supply curve for dollars slopes upwards because A) as the exchange rate rises, imports become more expensive, and more dollars are supplied to pay for the imports. B) as the exchange rate rises, imports become cheaper, and more dollars are supplied to pay for the increase in the quantity of imports. C) as the exchange rate rises, more dollars are supplied since the profit from selling dollars falls. D) supply curves always slope upwards. Answer: B Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 68) In the foreign exchange market, which of the following results in a movement along the supply curve of dollars? A) a change in the expected future exchange rate B) a change in the U.S. interest rate C) a change in the current exchange rate D) None of the above answers are correct. Answer: C Topic: The Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 69) When a good is imported into the United States, there is created a A) supply of foreign currency with no effect on the market for the dollar. B) demand for dollars with no effect on markets for foreign currencies. C) supply of foreign currencies and a demand for dollars. D) demand for foreign currencies and a supply of dollars. Answer: D Topic: Law of Supply for Foreign Exchange, Imports Skill: Conceptual Status: Old AACSB: Reflective Thinking 70) Other things remaining the same, the A) larger the value of U.S. imports, the smaller is the quantity of foreign currency demanded. B) larger the value of U.S. imports, the greater is the quantity of U.S. dollars supplied to the foreign exchange market. C) lower the exchange rate, the cheaper are foreign-produced goods and services. D) higher the exchange rate, the greater is the expected profit from selling dollars. Answer: B Topic: Law of Supply for Foreign Exchange, Imports Skill: Conceptual Status: Old AACSB: Reflective Thinking 19 Copyright © 2014 Pearson Education, Inc.

71) The larger the value of U.S. imports, the greater the quantity of ________ causing the quantity supplied of dollars to ________. A) U.S. dollars demanded; increase B) U.S. dollars demanded; decrease C) foreign currency demanded; increase D) foreign currency demanded; decrease Answer: C Topic: Law of Supply for Foreign Exchange, Imports Skill: Conceptual Status: Old AACSB: Reflective Thinking 72) The ________ the exchange rate, the ________ are foreign-produced goods and hence the greater the quantity of dollars supplied. A) higher; cheaper B) lower; cheaper C) higher; more expensive D) lower; more expensive Answer: A Topic: Law of Supply for Foreign Exchange, Imports Skill: Conceptual Status: Old AACSB: Reflective Thinking 73) The ________ the exchange rate, the ________ are foreign-produced goods and hence the smaller the quantity of dollars supplied. A) lower; more expensive B) lower; cheaper C) greater; cheaper D) greater; more expensive Answer: A Topic: Law of Supply for Foreign Exchange, Imports Skill: Conceptual Status: Old AACSB: Reflective Thinking 74) A factor determining the supply of U.S. dollars in the foreign exchange market is the A) expected future exchange rate. B) expected future interest rate in the United States. C) U.S. supply of exports. D) expected future interest rate in foreign countries. Answer: A Topic: Law of Supply for Foreign Exchange, Expected Profit Skill: Recognition Status: Old AACSB: Reflective Thinking 20 Copyright © 2014 Pearson Education, Inc.

75) The ________ the expected profit from holding a foreign currency, the greater is the ________ in the foreign exchange market. A) larger; quantity demanded of dollars B) smaller; quantity demanded of foreign currency C) larger; quantity supplied of dollars D) None of the above is correct because the expected profit has nothing to do with the supply and demand for dollars or foreign currency. Answer: C Topic: Law of Supply for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 76) The higher the dollar's exchange rate, the ________ the expected profit from holding dollars and so ________ dollars are supplied. A) larger; more B) larger; fewer C) smaller; more D) smaller; fewer Answer: C Topic: Law of Supply for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) Consider the market for dollars. The higher the exchange rate, the ________ is the expected profit from holding foreign currency and the greater is the ________. A) larger; quantity of dollars supplied B) larger; leftward shift in the demand curve for dollars C) smaller; quantity of dollars supplied D) smaller; leftward shift in the demand curve for dollars Answer: A Topic: Law of Supply for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking

78) If the equilibrium exchange rate for the dollar is 110 yen per dollar and the current exchange rate is 120 yen per dollar, then the A) supply curve of U.S. dollars shifts rightward. B) dollar will depreciate. C) dollar will appreciate. D) demand curve for U.S. dollars shifts rightward. Answer: B Topic: Equilibrium Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 79) Consider the market for euros. Suppose the exchange rate is ________ its equilibrium. This means that the quantity of euros ________ is greater than the quantity of euros ________ and the exchange rate will ________. A) above; supplied; demanded; fall B) below; supplied; demanded; rise C) above; demanded; supplied; fall D) below; demanded; supplied; fall Answer: A Topic: Equilibrium Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

80) In the figure above, the equilibrium exchange rate is: $1 U.S. equals A) $2.00 Canadian. B) $1.50 Canadian. C) $0.50 Canadian. D) none of the above Answer: B Topic: Equilibrium Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 81) If the exchange rate between the dollar and Japanese yen is below the equilibrium exchange rate, there will be a ________ of dollars, and the exchange rate will ________. A) surplus; fall to the equilibrium level B) shortage; change only when the supply curve shifts leftward C) shortage; rise to the equilibrium level D) surplus; rise to the equilibrium level Answer: C Topic: Equilibrium Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

82) If the exchange rate is above equilibrium, there will be ________ in the foreign exchange market. A) a surplus B) a shortage C) a decrease in demand D) an increase in demand Answer: A Topic: Equilibrium Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 83) Suppose the exchange rate between the U.S. dollar and the French franc is 0.25 francs per dollar. If a television sells for 100 francs in France, what is the dollar price of the television set? A) $400 B) $25 C) $50 D) $200 Answer: A Topic: Study Guide Question, The Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 84) Suppose that a dollar buys 120 yen. If a VCR sells for 18,600 yen in Japan, the price of the VCR in dollars is ________. A) $186.00 B) $223.20 C) $120.00 D) $155.00 Answer: D Topic: Study Guide Question, The Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 85) Suppose that the yen-dollar foreign exchange rate changes from 130 yen per dollar to 140 yen per dollar. Then the yen has A) depreciated against the dollar, and the dollar has appreciated against the yen. B) depreciated against the dollar, and the dollar has depreciated against the yen. C) appreciated against the dollar, and the dollar has appreciated against the yen. D) appreciated against the dollar, and the dollar has depreciated against the yen. Answer: A Topic: Study Guide Question, Exchange Rate, Currency Depreciation Skill: Analytical Status: Old AACSB: Analytical Skills 24 Copyright © 2014 Pearson Education, Inc.

86) Suppose the peso-dollar foreign exchange rate changes from 50 pesos per dollar to 30 pesos per dollar. Then the peso has ________ against the dollar and the dollar has ________ against the peso. A) appreciated; depreciated B) appreciated; appreciated C) depreciated; appreciated D) depreciated; depreciated Answer: A Topic: Study Guide Question, Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 87) If the U.S. exchange rate rises, the price to foreigners of U.S.-produced goods and services ________ and the quantity of U.S. dollars demanded ________. A) rises; decreases B) rises; increases C) falls; decreases D) falls; increases Answer: A Topic: Study Guide Question, Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

2 Exchange Rate Fluctuations 1) Important factors that change the demand for dollars and shift the demand curve for dollars include which of the following? I. Interest rates around the world. II. The current exchange rate. III. The expected future exchange rate. A) I and II B) I and III C) II D) I, II, and III Answer: B Topic: Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) With everything else the same, which of the following would increase the demand for U.S. dollars in the foreign exchange market? I. a rise in the U.S. interest rate II. a fall in interest rates in foreign countries III. a rise in the expected future exchange rate A) I only B) I and II only C) I and III only D) I, II, and III Answer: D Topic: Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) The demand for dollars in the foreign exchange market will increase (so that the demand curve shifts rightward) if A) the U.S. interest rate differential falls. B) the expected future exchange rate falls. C) the exchange rate for the dollar falls. D) None of the above answers is correct. Answer: D Topic: Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) In the foreign exchange market, an increase in the world demand for U.S. exports shifts A) demand curve for U.S. dollars rightward B) demand curve for U.S. dollars leftward C) supply curve for U.S. dollars leftward D) supply curve for U.S. dollars rightward Answer: A Topic: Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) Airbus is a European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result, the A) demand curve for euros shifts rightward. B) demand curve for euros shifts leftward. C) quantity demanded for euros increases as the euro/rupee exchange rate increases. D) quantity demand for euros decreases, on matter what the euro/rupee exchange rate is. Answer: A Topic: Changes in the Demand for Dollars, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) Hyundai is a large South Korean company that produces finished steel products. Hyundai plans to buy raw steel from U.S. Steel. As a result, the A) demand curve for U.S. dollars shifts rightward. B) demand curve for U.S. dollars shifts leftward. C) demand curve for South Korean won shifts rightward. D) demand curve for South Korean won shifts leftward. Answer: A Topic: Changes in the Demand for Dollars, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) Hyundai is a large South Korean company that produces finished steel products. Hyundai plans to buy raw steel from U.S. Steel. As a result, the demand curve for U.S. dollars ________ and the demand curve for South Korean won ________. A) shifts rightward; does not shift B) shifts rightward; shifts leftward C) does not shift; shifts leftward D) shifts leftward; shifts rightward. Answer: A Topic: Changes in the Demand for Dollars, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 27 Copyright © 2014 Pearson Education, Inc.

8) Airbus is a European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result, A) the demand curve for European euros and the supply curve for Indian rupees both shift rightward. B) the demand curve for European euros shifts rightward and the supply curve for Indian rupees shifts leftward. C) only the demand curve for Indian rupees shifts rightward. D) only the demand curve for European euros shifts rightward. Answer: A Topic: Changes in the Demand for Dollars, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) The U.S. interest rate minus the foreign interest rate is called the ________. A) foreign interest rate differential B) U.S. bond rate differential C) U.S. interest rate differential D) U.S. stock yield differential Answer: C Topic: Changes in the Demand for Dollars, Interest Rates Skill: Recognition Status: Old AACSB: Reflective Thinking 10) Suppose the U.S. interest rate is 6 percent and the world interest rate is 5 percent. The U.S. interest differential is A) -1 percent. B) 1.2 percent. C) 1 percent. D) -0.83 percent. Answer: C Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking

11) Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate A) rises and foreign interest rates remain constant. B) falls and foreign interest rates remain constant. C) falls and foreign interest rates rise. D) remains constant and foreign interest rates rise. Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Recognition Status: Old AACSB: Reflective Thinking 12) Which of the following occurrences would NOT shift the demand curve for U.S. dollars in the foreign exchange market? A) an increase in the U.S. exchange rate B) an increase in the expected future U.S. exchange rate C) an increase in U.S. interest rates D) an increase in foreign interest rates Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) The interest rate in Canada rises while the interest rate in the United States does not change. The A) demand curve for Canadian dollars will shift leftward. B) demand curve for Canadian dollars will shift rightward. C) demand curve for U.S. dollars will shift rightward. D) demand curves Canadian and U.S. dollars will remain unchanged. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) If the U.S. interest rate rises while interest rates in the rest of the world do not change, the higher U.S. interest rate A) decreases the demand for dollars. B) increases the demand for dollars. C) has no effect on the demand for dollars. D) will stop all trading between the currencies of the U.S. and other countries. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 29 Copyright © 2014 Pearson Education, Inc.

15) An increase in the interest rate in the United States compared to the interest rate in Great Britain will A) increase the U.S. interest rate differential. B) increase the demand for pounds. C) shift the demand curve for dollars rightward. D) Both answers A and C are correct. Answer: D Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 16) The demand for dollars in the foreign exchange market will decrease and the demand curve will shift leftward if A) the U.S. interest rate differential decreases. B) the expected future exchange rate rises. C) the exchange rate for the dollar rises. D) None of the above answers is correct. Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) Suppose the current exchange rate between the euro and the United States dollar is 1.15 euros per dollar. If interest rates in the United States increase and interest rates in Europe remain unchanged then A) the demand for dollars will increase. B) the demand for dollars will decrease. C) the demand for euros will increase. D) None of the above answers is correct. Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) If the interest rate in the United States increases, then in the foreign exchange market the A) demand for U.S. dollars will remain unchanged. B) demand for U.S. dollars will increase. C) demand for U.S. dollars will decrease. D) supply of U.S. dollars will increase. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) If the interest rate on Japanese yen assets falls while interest rates in the United States remain constant, the A) quantity of dollars demanded will increase. B) quantity of dollars demanded will decrease. C) demand for dollars will increase. D) demand for dollars will decrease. Answer: C Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Revised AACSB: Reflective Thinking 20) If the interest rate on Swiss franc assets increases while interest rates in the United States remain constant, the A) quantity of dollars demanded will decrease. B) demand for dollars will increase. C) demand for dollars will decrease. D) quantity of dollars demanded will increase. Answer: C Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Revised AACSB: Reflective Thinking 21) Today, the dollar is worth 1.15 euros. Due to changes in economic conditions, in one month people come to expect the dollar will be worth 1.20 euros. This belief A) increases the demand for dollars. B) decreases the demand for dollars. C) increases the demand for euros. D) increases the value of exports to Europe. Answer: A Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 31 Copyright © 2014 Pearson Education, Inc.

22) If there is an increase in the expected future U.S. exchange rate, there is A) an upward movement along the demand curve for dollars. B) a downward movement along the demand curve for dollars. C) a leftward shift of the demand curve for dollars. D) a rightward shift of the demand curve for dollars. Answer: D Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) If people expect the foreign exchange rate for dollars to rise in the future, A) the demand for dollars today decreases. B) the demand for dollars today increases. C) the demand for dollars today is unaffected. D) there is a movement along the demand curve for dollars. Answer: B Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Revised AACSB: Reflective Thinking 24) U.S. residents come to believe that the dollar will depreciate in the future, that is, the exchange rate in the future will be lower than the current exchange rate. As a result, A) the demand curve for dollars shifts rightward. B) the demand curve for dollars shifts leftward. C) there is a movement upward along the demand curve for dollars. D) None of the above answers are correct. Answer: B Topic: Change in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) U.S. residents come to believe that the dollar will appreciate in the future, that is, the exchange rate in the future will be higher than the current exchange rate. As a result, A) the demand curve for dollars shifts rightward. B) the demand curve for dollars shifts leftward. C) there is a movement downward along the demand curve for dollars. D) None of the above answers are correct. Answer: A Topic: Change in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

26) If growth in the United States speeds up so that investors believe they can make a bigger profit from U.S. assets, the ________ U.S. dollars will ________. A) demand for; increase B) demand for; decrease C) supply of; increase D) supply of; decrease Answer: A Topic: Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) Today the U.S. dollar is worth 1.5 Canadian dollars. Because of changes in economic conditions, people come to believe that by the end of the month the U.S. dollar will be worth 1.2 Canadian dollars. This belief A) increases the demand for U.S. dollars today. B) decreases the demand for U.S. dollars today. C) decreases the demand for Canadian dollars today. D) decreases the value of exports to Canada. Answer: B Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Revised AACSB: Reflective Thinking

28) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could occur when A) the expected future exchange rate decreases. B) the U.S. interest rate rises. C) people expect that the dollar will depreciate. D) foreign interest rates increase. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 29) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could occur when A) the expected future exchange rate falls. B) the U.S. interest rate drops. C) people expect that the dollar will depreciate. D) foreign interest rates drop. Answer: D Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills

30) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D2 could occur when A) the U.S. interest rate falls. B) the U.S. interest rate rises. C) people expect that the dollar will appreciate. D) foreign interest rates fall. Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 31) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D2 could occur when A) the expected future exchange rate increases. B) the U.S. interest rate falls. C) people expect that the dollar will appreciate. D) foreign interest rates fall. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 32) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D2 could occur when A) the expected future exchange rate increases. B) the U.S. interest rate rises. C) people expect that the dollar will appreciate. D) foreign interest rates rise. Answer: D Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills

33) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could occur when A) foreign interest rates increase. B) the U.S. interest rate falls. C) people expect that the dollar will depreciate. D) the expected future exchange rate increases. Answer: D Topic: Change in Demand for Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 34) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could occur when A) the expected future exchange rate falls. B) the U.S. interest rate decreases. C) people expect that the dollar will appreciate. D) foreign interest rates increase. Answer: C Topic: Change in Demand for Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 35) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D2 could occur when A) the expected future exchange rate increases. B) the U.S. interest rate rises. C) people expect that the dollar will depreciate. D) foreign interest rates fall. Answer: C Topic: Change in Demand for Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

36) The above figure shows the demand curve for dollars in the yen/dollar exchange market. A movement from point A to point B means that the A) quantity supplied of dollars has increased. B) quantity demanded of dollars has increased. C) quantity demanded of dollars has decreased. D) quantity demanded of yen has decreased. Answer: C Topic: Law of Demand for Foreign Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 37) In the above figure, suppose the economy is initially at point A. The interest rate in Japan rises relative to the interest rate in the United States. As a result, there will be a change from point A to a point such as ________. A) point B B) point C C) point D D) point E Answer: D Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills

38) In the above figure, suppose the economy is initially at point A. People come to expect the future U.S. exchange rate to be lower. As a result, there is a change from point A to a point such as ________. A) point B B) point C C) point D D) point E Answer: D Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 39) In the above figure, suppose the economy is initially at point A. People come to expect the future U.S. exchange rate to be higher. As a result there is a change from point A to a point such as ________. A) point B B) point C C) point D D) point E Answer: C Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 40) A change in which of the following changes the supply of dollars and shifts the supply curve of dollars? I. An increase in the exchange rate. II. A change in interest rates. III. A decrease in the expected future exchange rate. A) I B) I and II C) II and III D) I, II, and III Answer: C Topic: Changes in the Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

41) Interest rates in the United States rise relative to interest rates in other countries. As a result, in the foreign exchange market A) the supply curve of dollars shifts leftward. B) the supply curve of dollars shifts rightward. C) the demand curve for dollars shifts leftward. D) there is an upward movement along the supply curve of dollars. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) With everything else the same, in the foreign exchange market which of the following increases the supply of U.S. dollars? I. a fall in the U.S. interest rate II. a fall in interest rates in foreign countries III. a rise in expected future exchange rate A) I only B) I and II only C) I and III only D) I, II, and III Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 43) If interest rates in Mexico decrease while the interest rates in the United States remain unchanged then A) the supply of Mexican pesos will increase. B) the supply of Mexican pesos will decrease. C) the supply of U.S. dollars will increase. D) None of the above answers is correct. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking

44) If interest rates in Japan rise and those in the United States do not change, there is A) a decrease in the supply of dollars. B) an increase in the supply of dollars. C) a downward movement along the supply curve for dollars. D) None of the above answers is correct. Answer: B Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 45) If the U.S. interest rate differential increases, then in the foreign exchange market the A) quantity of U.S. dollars supplied increases. B) supply of U.S. dollars decreases. C) demand for U.S. dollars does not change. D) supply of U.S. dollars increases. Answer: B Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 46) The supply curve of U.S. dollars shifts leftward. This could have been influenced by ________. A) a rise in the U.S. interest rate differential B) a fall in the expected future exchange rate C) an increase in the U.S. exchange rate D) a decrease in the U.S. exchange rate Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 47) As the expected future exchange rate for dollars increases, A) the demand for U.S. dollars increases. B) the supply of U.S. dollars decreases. C) the U.S. interest rate will fall. D) Both answers A and B are correct. Answer: D Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Revised AACSB: Reflective Thinking

48) People come to expect the exchange rate for the dollar to rise from 90 yen per dollar to 111 yen per dollar in a month. As a result, A) the supply curve of dollars shifts leftward. B) the supply curve of dollars shifts rightward. C) the demand curve for dollars shifts leftward. D) there is a downward movement along the supply curve of dollars. Answer: A Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 49) If the expected future exchange rate rises, the currency's A) quantity supplied increases. B) supply decreases. C) supply increases. D) exchange rate falls. Answer: B Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 50) The supply of dollars in the foreign exchange market decreases and that the supply curve shifts leftward if A) the U.S. interest rate differential decreases. B) the expected future exchange rate rises. C) the exchange rate for the dollar rises. D) All of the above are correct. Answer: B Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

51) In the figure above, suppose the economy is initially at point B. Then the interest rate in Japan rises relative to the interest rate in the United States. This change ________ the supply of dollars and the market moves to a point such as ________. A) decreases; A B) decreases; E C) increases; D D) increases; C Answer: D Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 52) In the figure above, suppose the economy is initially at point B. If people come to believe that the exchange rate will fall in the future, the supply of dollars ________ and the market moves to point such as ________. A) decreases; A B) decreases; E C) increases; D D) increases; C Answer: D Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

53) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could occur when A) the U.S. interest rate differential increases. B) the U.S. interest rate differential decreases. C) the expected future exchange rate falls. D) the current exchange rate falls. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 54) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could occur when A) the U.S. interest rate falls. B) foreign interest rates fall. C) the expected future exchange rate falls. D) the current exchange rate falls. Answer: B Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills

55) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could occur when A) the U.S. interest rate rises. B) foreign interest rates rise. C) the expected future exchange rate falls. D) the current exchange rate rises. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 56) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when A) the U.S. interest rate falls. B) the expected future exchange rate rises. C) the U.S. interest rate differential increases. D) the current exchange rate falls. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 57) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when A) foreign interest rates rise. B) the expected future exchange rate rises. C) the U.S. interest rate rises. D) the current exchange rate falls. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 58) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could occur when A) the expected future exchange rate rises. B) the U.S. interest rate differential decreases. C) the expected future exchange rate falls. D) the current exchange rate falls. Answer: A Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 44 Copyright © 2014 Pearson Education, Inc.

59) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when A) the current exchange rate rises. B) the current exchange rate falls. C) the expected future exchange rate rises. D) the expected future exchange rate falls. Answer: D Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 60) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when A) the expected future exchange rate falls. B) the U.S. interest rate differential increases. C) the expected future exchange rate rises. D) the current exchange rate falls. Answer: A Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 61) If the U.S. interest rate differential increases, in the foreign exchange market the demand for U.S. dollars ________ and the supply of U.S. dollars ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

62) When the U.S. interest rate rises relative to that in other counties, in the foreign exchange market the demand for U.S. dollars ________ and the supply of U.S. dollars ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 63) Other things remaining the same, if the U.S. interest rate differential increases, the demand curve for U.S. dollars shifts ________ and the supply curve of U.S. dollars shifts ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: B Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 64) If the Federal Reserve increases interest rates, A) the demand curve for U.S. dollars shifts rightward and the supply curve of U.S. dollars shifts leftward. B) the demand curve for U.S. dollars shifts leftward and the supply curve of U.S. dollars shifts rightward. C) the demand curve for U.S. dollars and the demand curve for European euros both shift rightward. D) only the demand curve for U.S. dollars shifts rightward. Answer: A Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

65) If the Federal Reserve increases interest rates, ceteris paribus, A) the supply curve of U.S. dollars shifts leftward and the supply curve of European euros shifts rightward. B) the demand curve for U.S. dollars shifts leftward and the supply curve of U.S. dollars shifts rightward. C) the demand curve for U.S. dollars and the demand curve for European euros both shift rightward. D) only the demand curve for U.S. dollars shifts rightward. Answer: A Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 66) If the European Central Bank increases interest rates, A) the demand curve for European euros shifts rightward and the supply curve of European euros shifts leftward. B) the demand curve for European euros shifts leftward and the supply curve of European euros shifts rightward. C) the demand curve for European euros and the demand curve for U.S. dollars both shift rightward. D) only the demand curve for European euros shifts rightward. Answer: A Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 67) Other things remaining the same, if the expected future exchange rate rises, the demand curve for U.S. dollars shifts ________ and the supply curve of U.S. dollars shifts ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: B Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

68) Relative to the yen, from 2005-2007 the U.S. dollar A) appreciated due to an increase in the interest rate differential and expectations of a higher future exchange rate. B) appreciated due to a decrease in the interest rate differential and expectations of a lower future exchange rate. C) depreciated due to an increase in the interest rate differential and expectations of a higher future exchange rate. D) depreciated due to a decrease in the interest rate differential and expectations of a lower future exchange rate. Answer: A Topic: Changes in the Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 69) Relative to the yen, from 2007-2012 the U.S. dollar A) appreciated due to an increase in the interest rate differential and expectations of a higher future exchange rate. B) appreciated due to a decrease in the interest rate differential and expectations of a lower future exchange rate. C) depreciated due to an increase in the interest rate differential and expectations of a higher future exchange rate. D) depreciated due to a decrease in the interest rate differential and expectations of a lower future exchange rate. Answer: D Topic: Changes in the Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 70) The U.S. dollar will depreciate in value if A) the demand curve for U.S. dollars shifts rightward. B) the demand curve for U.S. dollars shifts leftward. C) the supply curve of U.S. dollars shifts rightward. D) Both answers B and C are correct. Answer: D Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking

71) The U.S. dollar will depreciate in value if A) the demand for the dollar increases. B) the demand for the dollar decreases. C) the supply of foreign exchange decreases. D) U.S. citizens choose to buy fewer foreign goods. Answer: B Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 72) The U.S. dollar will appreciate in value if A) the demand curve for U.S. dollars shifts rightward. B) the demand curve for U.S. dollars shifts leftward. C) the supply curve of U.S. dollars shifts rightward. D) Americans choose to buy more foreign goods. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 73) Suppose $1 will buy 150 yen in January and 200 yen the following December. This change could have occurred if the A) demand curve for dollars shifted rightward. B) demand curve for dollars shifted leftward. C) supply curve of dollars shifted rightward. D) demand curve for yen shifted rightward. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Revised AACSB: Reflective Thinking 74) If the demand for a country's currency increases, the currency A) appreciates. B) depreciates. C) stays the same. D) could either appreciate, depreciate, or stay the same. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking

75) An increase in the U.S. demand for imports will ________ the supply of dollars and lead the dollar to ________. A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate Answer: C Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 76) Which of the following will lead to an appreciation of the U.S. dollar against the British pound? A) an increase in British demand for U.S. imports B) an increase in U.S. demand for British imports C) an increase in British interest rates D) a decrease in British demand for U.S. assets Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 77) Assume that there is an increased demand in the United States for European wines. If all other factors are held constant, this change will result in A) an increase in the exchange rate for euros. B) an appreciation of the dollar. C) a movement along the demand curve for euros. D) a decrease in the value of the euro. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 78) An increase in foreign demand for U.S. exports will ________ the demand for dollars and lead the dollar to ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 50 Copyright © 2014 Pearson Education, Inc.

79) An increase in the Japanese interest rate will ________ the demand for dollars and lead the dollar to ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 80) An increase in the Japanese interest rate will ________ the supply of dollars and lead the dollar to ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: B Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 81) Which of the following will lead to a depreciation of the dollar against the British pound? A) an increase in British demand for U.S. imports B) an increase in U.S. interest rates C) a decrease in British demand for U.S. assets D) a decrease in U.S. demand for British goods Answer: C Topic: Changes in the Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 82) If the Federal Reserve raises the U.S. interest rate, foreigners' A) demand for U.S. dollars will increase and the exchange rate will rise. B) demand for U.S. dollars will decrease and the exchange rate will fall. C) demand for U.S. dollars will increase and the exchange rate will fall. D) demand for U.S. dollars will decrease and the exchange rate will rise. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 51 Copyright © 2014 Pearson Education, Inc.

83) Suppose the exchange rate for the U.S. dollar rises. This could be caused by A) an increase in U.S. import demand. B) a decrease in the world demand for U.S. exports. C) a fall in the expected future exchange rate. D) an increase in the U.S. interest rate differential. Answer: D Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 84) Suppose that the U.S. exchange rate is expected to fall in the future. As a result, in the foreign exchange market, there will be A) an increase in the demand for dollars, a decrease in the supply of dollars, and a rise in the equilibrium exchange rate. B) an increase in the demand for dollars, a decrease in the supply of dollars, and a fall in the equilibrium exchange rate. C) a decrease in the demand for dollars, an increase in the supply of dollars, and a rise in the equilibrium exchange rate. D) a decrease in the demand for dollars, an increase in the supply of dollars, and a fall in the equilibrium exchange rate. Answer: D Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 85) Suppose the market for dollars is in equilibrium, then the expected future exchange rate rises. What effect does this change have on the current exchange rate? A) It will rise. B) It will fall. C) It will remain unchanged. D) Because both the supply and demand curves shift, the effect on the exchange rate is unpredictable. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking

86) If people expect the dollar to depreciate, then the A) demand for dollars will decrease, the supply of dollars will increase, and the exchange rate will fall. B) demand for dollars will decrease, the supply of dollars will not change, and the exchange rate will fall. C) supply of dollars will increase, the demand for dollars will not change, and the exchange rate will fall. D) demand for dollars will increase, the supply of dollars will decrease, and the exchange rate will rise. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 87) Suppose the exchange rate for the U.S. dollar falls. This could be caused by A) a decrease in U.S. import demand. B) an increase in the world demand for U.S. exports. C) an increase in the U.S. interest rate differential. D) a fall in the expected future exchange rate. Answer: D Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

88) In the figure above, an increase in the U.S. interest rate relative to that in Canada shifts the demand curve for U.S. dollars ________ and shifts the supply curve of U.S. dollars ________. A) leftward; leftward B) leftward; rightward C) rightward; leftward D) rightward; rightward Answer: C Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

89) Using the above figure, which of the following is correct? A) 1 guilder will sell for $2. B) 1 dollar will sell for 1/2 guilder. C) A shortage of guilders exists at an exchange rate above $0.60. D) A surplus of guilders exists at an exchange rate above $0.60. Answer: D Topic: Equilibrium Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 90) Using the above figure, an increase in the demand for Dutch goods by U. S. consumers will lead to A) a depreciation in the Dutch currency. B) an appreciation in the Dutch currency. C) an increase in the supply of Dutch currency as foreign exchange. D) a decrease in the supply of Dutch currency as foreign exchange. Answer: B Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

91) What factors can change expectations about the exchange rate? A) interest rate parity B) purchasing power parity C) real GDP parity D) Both answers A and B are correct. Answer: D Topic: Exchange Rate Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) Adjusted for risk, interest rate parity A) holds only for larger countries. B) holds only between the U.S. and Canada. C) holds only when purchasing parity holds. D) always holds. Answer: D Topic: Interest Rate Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 93) If there are equal rates of return between assets in two currencies, then there is A) purchasing power parity. B) interest rate parity. C) parity of exchange. D) foreign exchange parity. Answer: B Topic: Interest Rate Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 94) If in Chicago the interest rate is 5 percent a year and in Vancouver it is 4 percent a year, ________. A) the quantity of Canadian dollars purchased will increase B) the Canadian dollar is expected to depreciate C) interest rate parity does not exist D) the U.S. dollar is expected to depreciate Answer: D Topic: Interest Rate Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking

95) Suppose that the U.S. interest rate is 5 percent and the Turkish interest rate is 50 percent. The effect of this difference in the foreign exchange market is that A) financial capital stops moving. B) an American investor is guaranteed to make an additional 45 percent in dollar terms by investing in Turkey. C) investors expect the Turkish currency to rise in value (appreciate) against the dollar. D) investors expect the Turkish currency to fall in value (depreciate) against the dollar. Answer: D Topic: Interest Rate Parity Skill: Conceptual Status: Revised AACSB: Reflective Thinking 96) Suppose that the U.S. interest rate is 5 percent and the Japanese interest rate is 1 percent. The effect of this difference in the foreign exchange market is that A) financial capital stops moving. B) a Japanese investor is guaranteed to make an additional 4 percent in yen terms by investing in the United States. C) investors expect the yen to appreciate against the dollar. D) investors expect the yen to depreciate against the dollar. Answer: C Topic: Interest Rate Parity Skill: Conceptual Status: Revised AACSB: Reflective Thinking 97) Suppose a deposit in New York earns 6 percent a year and a deposit in London earns 4 percent a year. Interest rate parity holds if the A) U.S. dollar appreciates by 2 percent a year. B) U.S. dollar depreciates by 2 percent a year. C) U.K. pound depreciates by 2 percent a year. D) None of the above answers is correct because interest rate parity requires that the interest rates be the same in both countries. Answer: B Topic: Interest Rate Parity Skill: Analytical Status: Old AACSB: Analytical Skills

98) Suppose a British bank offers a 3 percent interest rate while a U.S. bank offers a 7 percent interest rate. People must expect the U.S. dollar will A) depreciate 4 percent. B) appreciate 4 percent. C) appreciate 10 percent. D) depreciate 10 percent. Answer: A Topic: Interest Rate Parity Skill: Analytical Status: Old AACSB: Analytical Skills 99) According to interest rate parity, if the interest rate is 1 percent in the European Union and the euro is expected to appreciate 3 percent, the comparable interest rate in the United States will be A) 4 percent. B) 3 percent. C) 2 percent. D) 1 percent. Answer: A Topic: Interest Rate Parity Skill: Conceptual Status: Old AACSB: Analytical Skills 100) Suppose a Japanese bank offers a 4 percent interest rate and U.S. banks offer a 2 percent interest rate. People must expect the yen to A) depreciate by 2 percent. B) appreciate by 2 percent. C) depreciate by 6 percent. D) appreciate by 6 percent. Answer: A Topic: Interest Rate Parity Skill: Conceptual Status: Old AACSB: Analytical Skills 101) The idea that the value of money is equal across countries is known as A) interest rate parity. B) the expected profit parity effect. C) purchasing power parity. D) exchange rate parity. Answer: C Topic: Purchasing Power Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 58 Copyright © 2014 Pearson Education, Inc.

102) If the prices in the United States rise faster than those in other countries, A) the exchange rate rises. B) the exchange rate falls. C) then interest rate parity must not hold. D) the interest rate in the United States falls. Answer: B Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 103) Suppose the exchange rate between the U.S. dollar and the Mexican peso was $1 = 5 pesos. A can of Pepsi sells for $2 in Boston and 12 pesos in Mexico City. A) Purchasing power parity prevails with these prices. B) Purchasing power parity does not prevail with these prices. C) The U.S. dollar would be expected to depreciate. D) None of the above answers is correct. Answer: B Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Analytical Skills 104) Suppose the exchange rate between the dollar and the euro is 2 euros per dollar. The price of a clock in Europe is 20 euros while the price of the same clock in the United States is $5. From these prices and exchange rate, it can be concluded that A) purchasing power parity holds. B) money buys more in the United States. C) money buys more in Europe. D) interest rate parity holds. Answer: B Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Analytical Skills

105) Suppose the exchange rate between the U.S. dollar and the Jamaican dollar was $1 U.S. = $40 Jamaican dollars. A beach towel sells for $20 in Miami and $60 Jamaican in Negril. A) Purchasing power parity does not prevail with these prices. B) The U.S. dollar would be expected to depreciate. C) The Jamaican dollar would be expected to appreciate. D) All of the above are correct. Answer: D Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Analytical Skills 106) If the price level rises in the United States but not in foreign nations and the current exchange rate does not change, the expected future exchange rate A) rises. B) falls. C) stays the same. D) You can't tell from the given information. Answer: B Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 107) According to purchasing power parity, a rise in inflation in the United States. relative to the rest of the world will lead to A) a balance of payments surplus. B) a balance of payments deficit. C) an exchange rate appreciation. D) an exchange rate depreciation. Answer: D Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 108) Suppose that U.S. inflation is 3 percent and Turkish inflation is 70 percent. The effect of this discrepancy on the foreign exchange market is that A) the Turkish currency will depreciate. B) the dollar will depreciate. C) it is impossible for interest rate parity to hold. D) the Turkish currency will appreciate. Answer: A Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 60 Copyright © 2014 Pearson Education, Inc.

109) According to purchasing power parity, the foreign exchange market will A) undervalue the dollar if inflation in the United States is greater than it is elsewhere. B) no longer demand dollars if the inflation rate in the United States exceeds that of other nations. C) adjust the value of the exchange rate to reflect differing inflation rates between nations. D) result in a flow of dollars out of the United States whenever its rate of inflation is below that of other nations. Answer: C Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 110) When a nation's currency depreciates, the country might A) have an inflation rate that exceeds the inflation rate in nations with which it trades. B) have an inflation rate below the inflation rate in nations with which it trades. C) be responding to an increase in the demand for its currency. D) be responding to a decrease in the domestic demand for foreign currencies. Answer: A Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 111) In France, the price of a computer is 1,227.6 euros. In Japan, the price of the same computer is 137,920 yen. If a U.S. dollar can buy 1.023 euros or 119.93 yen, then purchasing power parity ________. A) is equal to interest rate parity and the computer is cheaper in North America B) does not hold and the computer is cheaper in France C) does not hold and the computer is cheaper in Japan D) holds and the computer is the same price everywhere Answer: C Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills

112) Suppose that the price of an identical sport-utility vehicle is $32,000 in U.S. dollars in the United States and $32,000 in Canadian dollars in Canada. Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S. dollar. Does purchasing power parity hold for SUVs between the United States and Canada? A) Yes, because SUVs have the same price in each local currency. B) No, because SUVs are more expensive in Canada than the United States. C) No, because SUVs are more expensive in the United States than in Canada. D) Without knowing interest rates, we can't say. Answer: C Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills 113) Suppose that the price of an identical sport-utility vehicle is $32,000 in U.S. dollars in the United States and $32,000 in Canadian dollars in Canada. Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S. dollar. Based on this information what will happen to the exchange rate between the United States and Canada? A) The value of the U.S. dollar will fall as U.S. residents purchase SUVs in Canada. B) The value of the Canadian dollar will fall as Canadians purchase SUVs in the United States. C) The exchange rate will stay the same because purchasing power parity already holds. D) The value of the Canadian dollar will fall because Canadian prices are lower than U.S. prices. Answer: A Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills 114) Suppose that $1 U.S. costs $1.50 Canadian. If in St. Louis a CD costs $10 U.S. and in Montreal it costs $15 Canadian, then ________. A) purchasing power parity exists B) Canadians will buy CDs in St. Louis C) Americans will buy CDs in Montreal D) Virgin Records will have an incentive to build more stores in North America Answer: A Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills

115) "The Big Mac index is The Economist's burger-based measure of whether currencies are over- or undervalued.... [E]xchange rates should eventually adjust to make the price of a basket of goods the same in each country. Our basket contains just one item: the Big Mac hamburger, which is pretty much the same around the world." The Economist, July 28, 2012 Which principal is The Economist relying on when using the Big Mac to value exchange rates? A) interest rate parity B) market price parity C) purchasing power parity D) exchange rate parity Answer: C Topic: Purchasing Power Parity Skill: Definition Status: New AACSB: Reflective Thinking 116) The nominal exchange rate is A) the value of the U.S. dollar expressed in units of foreign currency per U.S. dollar. B) the real exchange rate multiplied by the ratio of the U.S. price level to the foreign price level. C) the relative price of U.S. produced goods to foreign produced goods. D) a measure of the quantity of the nominal GDP of other countries that we get per unit of U.S. nominal GDP. Answer: A Topic: The Nominal Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 117) The real exchange rate is the A) relative price of U.S. produced output relative to foreign-produced output. B) price of foreign goods relative to the price of domestic goods C) trade-weighted index D) current account balance Answer: A Topic: The Real Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

118) The real exchange rate is A) the relative price of U.S. produced goods to foreign produced goods. B) the nominal exchange rate multiplied by the ratio of the foreign price level to the U.S. price level. C) the money price of foreign produced goods relative to the money price of U.S. produced goods. D) a measure of how much currency exchanges for a unit of another currency. Answer: A Topic: The Real Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 119) If the nominal exchange rate rises and price levels stay constant, the real exchange rate will A) rise B) fall C) stay constant D) could rise, fall or stay constant Answer: A Topic: The Real Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 120) Given the U.S. price level P, the foreign country price level P*, and the nominal exchange rate E in foreign currency per U.S. dollar, the real exchange rate RER is given by A) RER = E × (P/P*) B) RER = E × (P*/P) C) RER = (P/P*) / E D) RER = P / (E/P*) Answer: A Topic: The Real Exchange Rate Skill: Analytical Status: Revised AACSB: Reflective Thinking 121) Given the U.S. price level P, the foreign country price level P*, and the real exchange rate RER in foreign currency per U.S. dollar, the nominal exchange rate E would be given by A) E = RER × (P/P*) B) E = RER × (P*/P) C) E = (P/P*) / RER D) E = P × (RER/P*) Answer: B Topic: The Nominal Exchange Rate Skill: Analytical Status: Revised AACSB: Reflective Thinking 64 Copyright © 2014 Pearson Education, Inc.

122) Initially the nominal exchange rate between the South Korean won and the U.S. dollar is 950 won per dollar. If the nominal exchange rate increases to 1000 won per dollar and the U.S and Korean price levels do not change, the real exchange rate A) is the same as before. B) is greater than before. C) is less than before. D) More information is needed to answer the question. Answer: B Topic: The Real Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 123) If the price level in the U.S. is 120, the price level in South Africa is 140, and the nominal exchange rate is 7 South African rands per dollar, then the real exchange rate is A) 6 South African goods per U.S. good. B) 8.4 South African goods per U.S. good. C) 9.8 South African goods per U.S. good. D) 1.4 South African goods per U.S. good. Answer: A Topic: The Real Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 124) Suppose your firm wants to import sugarcane from Brazil. The exchange rate is 3 Brazilian reals per U.S. dollar and sugarcane costs 36 reals per ton. How much is a ton of sugarcane in U.S. dollars? A) $12 B) $39 C) $108 D) $109 Answer: A Topic: The Real Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

125) In the long run, the nominal exchange rate A) is a monetary phenomenon, determined by the quantities of money in two countries. B) is not related to the real exchange rate, since the real exchange rate is the true value of currencies. C) will not change if prices in one country change, since prices are nominal variables. D) is fixed by world central banks, as indicated by the fixed exchange rate system. Answer: A Topic: Nominal Exchange Rate in the Long Run Skill: Conceptual Status: Old AACSB: Reflective Thinking 126) A decrease in the demand for U.S. exports ________ the demand for U.S. dollars and shifts the demand curve for U.S. dollars ________. A) increases; rightward B) decreases; rightward C) decreases; leftward D) increases; leftward Answer: C Topic: Study Guide Question, Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 127) A decrease in the expected future exchange rate ________ the demand for U.S. dollars and shifts the demand curve for U.S. dollars ________. A) increases; rightward B) decreases; rightward C) decreases; leftward D) increases; leftward Answer: C Topic: Study Guide Question, Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 128) Of the following, when would the U.S. exchange rate rise the most? A) When the supply of and demand for U.S. dollars increase. B) When the supply of U.S. dollars increases and the demand for them decreases. C) When the supply of U.S. dollars decreases and the demand for them increases. D) When the supply of and demand for U.S. dollars decrease. Answer: C Topic: Study Guide Question, Changes in the Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 66 Copyright © 2014 Pearson Education, Inc.

3 Exchange Rate Policy 1) The Fed A) allows a flexible exchange rate, though their actions can impact the exchange rate. B) has no influence on the exchange rate. C) sells U.S. dollars to China in an attempt to depreciate the U.S. dollar. D) alternates between a flexible, fixed, and crawling peg exchange rate policy depending on economic conditions. Answer: A Topic: Exchange Rate Policies Skill: Recognition Status: Old AACSB: Reflective Thinking 2) Which of the following exchange rate policies uses a target exchange rate, but allows the target to change? A) crawling peg B) flexible exchange rate C) fixed exchange rate D) moving target Answer: A Topic: Exchange Rate Regimes Skill: Recognition Status: Old AACSB: Reflective Thinking 3) ________ can intervene directly in the foreign exchange market by buying or selling dollars. A) Congress B) The Fed C) The International Monetary Fund D) The U.S. Treasury department Answer: B Topic: The Fed in the Foreign Exchange Market Skill: Recognition Status: Old AACSB: Reflective Thinking 4) The Federal Reserve can influence the exchange rate by A) changing interest rates. B) buying or selling dollars. C) Both answers A and B are correct. D) None of the above answers is correct Answer: C Topic: The Fed in the Foreign Exchange Market Skill: Recognition Status: Old AACSB: Reflective Thinking 67 Copyright © 2014 Pearson Education, Inc.

5) The Fed ________ intervene in the foreign exchange market by supplying dollars and the Fed ________ intervene in the foreign exchange market by demanding dollars. A) can; can B) cannot; can C) can; cannot D) cannot; cannot Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Recognition Status: Old AACSB: Reflective Thinking 6) How does a country maintain a fixed exchange rate? A) By intervening in the foreign exchange markets and buying or selling currency as needed to achieve the desired exchange rate. B) By forbidding foreign exchange markets to trade currency at anything other than the official exchange rate. C) By setting domestic interest rates to achieve purchasing power parity as the desired exchange rate. D) By intervening in import and export markets to achieve the desired current account and exchange rate. Answer: A Topic: Exchange Rate Regimes Skill: Conceptual Status: New AACSB: Reflective Thinking 7) Suppose the Fed wants to fix the U.S. dollar/Mexican peso rate at 11 pesos per dollar under a fixed exchange rate policy. If the exchange rate falls to 10 pesos per dollar, the Fed can A) buy dollars. B) sell dollars. C) attempt to freeze all sales of dollars. D) any of the above actions could take place. Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) Suppose the target exchange rate set by the Fed is 100 yen per dollar. If the demand for dollars temporarily increases, to maintain the target exchange rate, the Fed can A) sell dollars. B) buy dollars. C) violate interest rate parity. D) violate purchasing power parity. Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) Suppose the target exchange rate set by the Fed is 100 guilders per dollar. If the demand for dollars temporarily decreases, to maintain the target exchange rate, the Fed can A) sell dollars. B) buy dollars. C) increase U.S. exports. D) increase U.S. imports. Answer: B Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) Suppose the target exchange rate set by the Fed is 150 yen per dollar. If the demand for dollars permanently decreases the Fed A) can permanently meet the target by selling dollars. B) can permanently meet the target by buying dollars. C) must violate both interest rate parity and purchasing power parity to permanently meet the target. D) cannot permanently maintain the target rate. Answer: D Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) If the Fed sets a target exchange rate that is higher than the current exchange rate, then A) the Fed must sell dollars. B) the Fed must buy dollars. C) the Fed can do nothing in the short run. D) will try to print more dollars for foreign distribution. Answer: B Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 69 Copyright © 2014 Pearson Education, Inc.

12) If the exchange rate is higher than the Fed's target exchange rate, the Fed would A) implement purchasing power parity. B) implement interest rate parity. C) buy dollars. D) sell dollars. Answer: D Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) If the Fed wants to depreciate the dollar against the yen, the Fed will A) increase the supply of dollars by selling yen. B) increase the demand for dollars by selling yen. C) decrease the supply of dollars by selling yen. D) increase the supply of dollars by buying yen. Answer: D Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) Suppose the current exchange rate between the Chinese yuan and the United States dollar is 7 yuan per dollar. If the Fed sought to drive up the exchange rate to 8 yuan per dollar then it would A) buy dollars. B) sell dollars. C) buy yuan. D) sell dollars and buy yuan. Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) If the target exchange rate is 100 yen per dollar and the current exchange rate is 90 yen per dollar, the Fed will A) sell dollars and the demand for dollars will increase. B) sell dollars and the demand for dollars will decrease. C) buy dollars and the demand for dollars will increase. D) buy dollars and the demand for dollars will decrease. Answer: C Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 70 Copyright © 2014 Pearson Education, Inc.

16) In the above figure, suppose the demand for dollars temporarily increases so that the demand curve shifts to D1. To maintain the target exchange rate, the Fed A) can sell dollars. B) can buy dollars. C) must violate interest rate parity but not purchasing power parity. D) cannot maintain the target exchange rate. Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Analytical Status: Old AACSB: Analytical Skills 17) In the figure above, suppose the demand for dollars temporarily decreases so that the demand curve shifts to D2. To maintain the target exchange rate, the Fed A) can sell dollars. B) can buy dollars. C) must violate both interest rate parity and purchasing power parity. D) cannot maintain the target exchange rate. Answer: B Topic: The Fed in the Foreign Exchange Market Skill: Analytical Status: Old AACSB: Analytical Skills

18) In the above figure, suppose the demand for dollars permanently decreases to D2. To maintain the target, the Fed A) can buy dollars. B) can sell dollars. C) must decrease the nation's net exports. D) cannot permanently maintain the exchange rate target of 150 yen per dollar. Answer: D Topic: The Fed in the Foreign Exchange Market Skill: Analytical Status: Old AACSB: Analytical Skills 19) If the Fed raises the U.S. interest rate, the demand for dollars ________ and the exchange rate ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Analytical Status: Old AACSB: Reflective Thinking 20) Epsilon is a country whose unit of currency is the omega. New information leads people to expect that the omega will appreciate next year. To keep the foreign exchange value of the omega fairly steady, the Bank of Epsilon will ________ enough omegas on the foreign exchange market so that the ________ omegas will ________. A) buy; demand for; increase B) sell; supply of; increase C) buy; demand for; decrease D) buy; supply of; decrease Answer: B Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

21) If the Fed wants to depreciate the U.S. dollar against the British pound, it will ________. A) sell foreign exchange B) decrease the money supply C) sell British pounds D) sell U.S. dollars Answer: D Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) If a nation's central bank increased domestic interest rates, the nation's exchange rate would change if the country's exchange rate was a A) a flexible exchange rate. B) a fixed exchange rate. C) a crawling peg. D) a nominally fixed exchange rate. Answer: A Topic: Exchange Rate Policies Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) China has used a fixed yuan exchange rate and a crawling peg exchange rate. In both cases, China pegs its currency to the A) U.S. dollar B) Japanese yen C) euro D) Mexican peso Answer: A Topic: China's Exchange Rate Policy Skill: Recognition Status: Old AACSB: Reflective Thinking 24) If the People's Bank of China adopted a flexible exchange rate policy, A) the U.S. dollar would depreciate. B) the U.S. dollar would appreciate. C) the yuan would depreciate. D) the yuan-U.S. dollar exchange rate would rise. Answer: A Topic: China's Exchange Rate Policy Skill: Recognition Status: Old AACSB: Reflective Thinking

25) The People's Bank of China has A) allowed a flexible exchange rate to boost exports. B) managed its exchange rate to help control inflation. C) strictly followed a fixed exchange rate to boost exports. D) purchased U.S. dollars to appreciate the yuan. Answer: B Topic: China's Exchange Rate Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) By fixing its exchange rate, China is most likely A) achieving a low inflation rate by anchoring to the U.S. inflation rate. B) keeping its export prices low. C) making it easier to compete in world markets. D) Both B and C. Answer: A Topic: China's Exchange Rate Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) All of the following statements are correct EXCEPT: A) China's exchange rate policy boosts exports in the long run. B) China's exchange rate policy is mainly an attempt to control inflation. C) China's exchange rate policy results in a depreciated yuan. D) China's exchange rate policy does not impact the real exchange rate in the long run. Answer: A Topic: China's Exchange Rate Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 28) If a country's central bank does not intervene in the foreign exchange market, the country has A) a crawling peg exchange rate policy. B) a fixed exchange rate policy. C) a flexible exchange rate policy. D) no exchange rate policy. Answer: C Topic: Study Guide Question, Exchange Rate Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking

29) If the Fed sells U.S. dollars, the exchange rate A) rises. B) does not change. C) falls. D) changes, but the direction depends on whether the Fed affected the demand for dollars or the supply of dollars. Answer: C Topic: Study Guide Question, The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) How does a country maintain a fixed exchange rate? A) By intervening in the foreign exchange markets and buying or selling currency as needed to achieve the desired exchange rate. B) By forbidding foreign exchange markets to trade currency at anything other than the official exchange rate. C) By setting domestic interest rates to achieve purchasing power parity as the desired exchange rate. D) By intervening in import and export markets to achieve the desired current account and exchange rate. Answer: A Topic: Exchange Rate Regimes Skill: Conceptual Status: New AACSB: Reflective Thinking

4 Financing International Trade 1) A country's balance of payments accounts record A) the country's net indebtedness to foreigners. B) its international trading, borrowing, and lending. C) the flow of human and nonhuman resources between it and its trading partners. D) only its official transactions with other governments. Answer: B Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 2) When the United States imports goods and services from the rest of the world, A) we receive payments from the rest of the world. B) we make payments to the rest of the world. C) we increase our inflation rate. D) we decrease our inflation rate. Answer: B Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) When we export goods to foreign countries, we A) receive payments from the rest of the world. B) make payments to the rest of the world. C) increase our inflation rate. D) decrease our inflation rate. Answer: A Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) Balance of payments accounts include A) the net interest income account. B) the current account. C) Both answers A and B are correct. D) Neither answer A nor B is correct. Answer: B Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking

5) Which of the following is recorded in the U.S. balance of payments account? I. foreign investment in the United States II. U.S. investment abroad III. the U.S. government deficit or surplus A) III only B) I and II C) I and III D) I, II and III Answer: B Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 6) A country's balance of payments accounts records A) only the goods and services purchases among countries over a period of time. B) the international trading, borrowing, and lending positions of a country over a period of time. C) the flow of human and non-human capital among countries over a period of time. D) only official transactions between governments over a period of time. Answer: B Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 7) A country's balance of payments accounts include all of the following EXCEPT A) military account. B) current account. C) capital and financial account. D) official settlements account. Answer: A Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 8) In part, a country's current account measures A) its current debt as opposed to its long-term debt. B) borrowing and lending activity between the country's residents and foreigners. C) net increases and decreases in a country's holdings of foreign currency. D) receipts from the sale of goods and services to foreigners and payments for goods and services bought from foreigners. Answer: D Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 77 Copyright © 2014 Pearson Education, Inc.

9) The account that records the receipts from the exports of goods and services sold abroad, the payments for imports of goods and services from abroad, net interest income paid abroad, and net transfers is the ________. A) current account B) official settlements account C) international capital account D) capital and financial account Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 10) Which international account is used to record payments for imports, receipts from exports, net interest paid abroad and net transfers? A) the capital and financial account B) the current account C) the official settlements account D) the trade account Answer: B Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 11) Which of the following is included in a nation's current account? I. the import of services II. a change of foreign currency holdings III. net transfers, such as foreign aid payments A) I and III B) I and II C) II and III D) III only Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking

12) The current account A) measures our exports minus our imports taking into account interest payments paid to and received from the rest of the world. B) measures our imports minus our exports. C) does not account for interest payments paid to and received from the rest of the world. D) is part of GDP. Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The current account is A) the difference between exports and imports, also taking into account interest payments to and from the rest of the world. B) the amount of money the government keeps on hand to pay its bills taking account of the interest payments on its debt. C) is the amount of tax revenue that the government expects to collect. D) is the total amount of interest payments that the U.S. owes to foreign countries. Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 14) The largest part of the U.S. current account consists of A) Fed transfers of U.S. dollars to other central banks. B) net transfer payments between the United States and Mexico. C) receipts from exports and payments for imports. D) net borrowing between the United States and other countries. Answer: C Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 15) Suppose that the U.S. government gives foreign aid to Turkey. This transaction would directly A) increase the U.S. current account. B) decrease the U.S. current account. C) increase the U.S. capital and financial account. D) decrease the U.S. capital and financial account. Answer: B Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 79 Copyright © 2014 Pearson Education, Inc.

16) An American consumer buys a French luxury product in New York. In the U.S. balance of payments accounts, this transaction directly appears in A) the official settlements account. B) the imports part of the current account. C) the net transfers part of the current account. D) the capital and financial account. Answer: B Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 17) Which of the following contributes to a current account surplus for a country? A) having tourists visit the country B) importing textiles C) having foreigners buy government securities from the country's government D) importing financial services Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) The current account records all transactions below EXCEPT for A) net exports of goods and services. B) net interest income. C) net foreign investment. D) net transfers. Answer: C Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 19) Which of the following is NOT included in the U.S. current account? A) U.S. investment abroad B) net interest income C) net transfers D) imports of goods and services Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking

20) The balance of payments account which records foreign investment in the United States and U.S. investments abroad is the A) capital and financial account B) current account C) official settlements account D) None of the above because foreign investment in the United States is included in one account and U.S. investment abroad is included in another account Answer: A Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking 21) The account that records foreign investment in the United States minus U.S. investment abroad is the A) capital and financial account. B) official settlements account. C) current account. D) U.S. official reserves account. Answer: A Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking 22) The capital and financial account measures ________. A) foreign investment in the United States minus U.S. investment abroad B) capital produced outside of the United States minus capital produced inside the United States C) capital used inside the United States but manufactured outside the United States D) capital used outside the United States but manufactured inside the United States Answer: A Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking

23) Which of the following is included in a nation's capital and financial account? I. the purchase of foreign stocks and bonds II. the sale of foreign stocks and bonds III. importing a piece of capital equipment A) I only B) I and II C) III only D) I, II and III Answer: B Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) Which of the following transactions is NOT recorded in the capital and financial account? A) foreign investment in the United States B) U.S. investment abroad C) statistical discrepancy D) net interest income Answer: D Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking 25) A negative balance in the capital and financial account means the economy is A) lending to the rest of the world B) running a capital account surplus C) borrowing from the rest of the world D) importing more than it is exporting Answer: A Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking 26) Which of the following transactions directly leads to a surplus on the U.S. capital and financial account? A) An American purchases a share of stock on the Tokyo exchange. B) An American sells wheat to an African nation. C) A Japanese resident purchases a U.S. government bond. D) A resident of France visits the United States. Answer: C Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 82 Copyright © 2014 Pearson Education, Inc.

27) A German publishing company buys an American publishing company based in New York. In the U.S. balance of payments accounts, this transaction directly appears in A) the official settlements account. B) the imports part of the current account. C) the net transfers part of the current account. D) the capital and financial account. Answer: D Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking 28) The official settlements account records the change in ________. A) international trade B) U.S. official reserves C) foreign investment and domestic investment D) the reserves held by banks and the Fed Answer: B Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking 29) Which of the following accounts records the change in U.S. official reserves? A) current account B) capital and financial account C) official settlements account D) none of the above Answer: C Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking 30) The account that records changes in the U.S. government's holdings of foreign currency is the A) capital and financial account. B) official settlements account. C) current account. D) U.S. official reserves account. Answer: B Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking

31) If the U.S. government increased its holdings of British pounds, definitely A) the capital and financial account would increase. B) the capital and financial account would decrease. C) there would be an increase in U.S. official reserves. D) there would be a decrease in U.S. official reserves. Answer: C Topic: Balance of Payments Accounts, Official Settlements Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) If the U.S. government decreased its holdings of Mexican pesos, definitely A) the capital and financial account would increase. B) the capital and financial account would decrease. C) there would be an increase in U.S. official reserves. D) there would be a decrease in U.S. official reserves. Answer: D Topic: Balance of Payments Accounts, Official Settlements Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 33) Which of the following statements is INCORRECT? A) Payments for imports and receipts from exports are recorded in the current account. B) Foreign investment in the United States and U.S. investment abroad are recorded in the capital and financial account. C) A change in U.S. official reserves is recorded in the official settlements account. D) Net interest income is recorded in the official settlements account. Answer: D Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking 34) The official settlements account of a country measures A) the receipts from goods and services bought and sold and transfers to and from foreigners. B) borrowing and lending between the country's residents and foreigners. C) the net increase or decrease in the country's official reserves. D) net transfer payments between the country's citizens and foreigners. Answer: C Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking

35) U.S. official reserves are the ________. A) reserves of U.S. dollars held by the World Bank B) U.S. government's holdings of foreign currency C) reserves of U.S. dollars held by foreign banks D) holdings of foreign currency by the public and the banks Answer: B Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking 36) The change in U.S. official reserves is equal to A) borrowing from abroad plus the current account deficit. B) the current account balance plus the capital and financial account balance. C) the current account balance minus the capital and financial account balance. D) foreign investment in the United States minus U.S. investment abroad. Answer: B Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking 37) An official settlements account balance of -$5,000 means A) official reserves of foreign currency increased $5,000 B) official reserves of foreign currency decreased $5,000 C) the country is exporting more than it is importing D) the country is importing more than it is exporting Answer: A Topic: Balance of Payments Accounts, Official Settlements Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 38) To pay for a current account deficit, a country can A) borrow money from abroad B) lend money abroad C) increase official reserves to cover the shortfall D) transfer money from the capital account to the official settlements account Answer: A Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking

39) If a country is importing more than they are exporting, the current account will have a ________ balance and the capital and financial account will have a ________ balance. A) negative; positive B) negative; negative C) positive; negative D) positive; positive Answer: A Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 40) If foreign investment in the United States exceeds U.S. investment abroad, there is a ________; and when U.S. investment abroad exceeds foreign investment in the United States, there is ________. A) current account surplus; a current account deficit B) current account surplus; an official accounts surplus C) capital and financial account surplus; a capital and financial account deficit D) capital and financial account deficit; a capital and financial account surplus Answer: C Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 41) When there is a current account deficit and the official settlements account equals 0, then A) exports exceed imports for the country. B) the country is an exporter of capital. C) the capital and financial account has a surplus. D) the country has a budget surplus. Answer: C Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 42) If U.S. imports increase, the sum of the balance of payments accounts (the sum of the current account plus capital and financial account plus official settlements account) A) becomes negative. B) becomes positive. C) becomes negative or positive depending on the government budget deficit or surplus. D) does not change. Answer: D Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 86 Copyright © 2014 Pearson Education, Inc.

43) The sum of the current account, capital and financial account, and official settlements account is A) a positive number if the country has a trade surplus. B) a negative number if the country has a trade deficit. C) positive or negative depending on whether the domestic exchange rate is appreciating or depreciating. D) always equal to zero. Answer: D Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 44) Suppose the current account of a country is in balance and the official settlements account equals 0. A new transaction occurs so that the current account is now in surplus, but the official settlements account does not change. From this we know that A) the balance of trade is now in surplus. B) the government is running a budget deficit. C) the capital and financial account is now in deficit. D) the government must make official reserve transactions. Answer: C Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 45) If the current account balance is $30 billion, and the capital and financial account balance is $35 billion, then the official settlements account balance is ________ billion, and the official reserves ________. A) $5 billion; increase B) -$5 billion; increase C) $5 billion; decrease D) -$5 billion; decrease Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills

46) If the current account balance is -$100 billion and the capital and financial account balance is $80 billion, then the official settlement account balance is A) -$20 billion. B) $20 billion. C) always 0. D) impossible to determine with the information given. Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 47) If the U.S. current account balance is -$500 billion and the capital and financial account balance is +$510 billion, A) the U.S. official settlements account balance is $10 billion. B) the U.S. government's holdings of foreign currency increases by $10 billion. C) foreign investment in the United States is smaller than the U.S. investment abroad. D) U.S. exports are greater than U.S. imports. Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 48) If the current account has a negative balance of $100 and the capital and financial account has a positive balance of $80, there will be ________ in official reserves of ________. A) a decrease; $20 B) an increase; $20 C) an increase; $180 D) a decrease; $180 Answer: A Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 49) If the current account has a positive balance of $100 and the capital and financial account has a negative balance of $90, there will be ________ in official reserves of ________. A) a decrease; $10 B) an increase; $10 C) an increase; $190 D) a decrease; $190 Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 88 Copyright © 2014 Pearson Education, Inc.

Item Exports of goods Imports of goods Exports of services Imports of services Net interest income Net transfers U.S. investment abroad Foreign investment in the United States Official settlements account

Billions of dollars 1000 -665 410 -590 0 -15 -600 400 60

50) The data in the table above are the U.S. balance of payments. The current account balance is A) $140 billion. B) $155 billion. C) $170 billion. D) -$45 billion. Answer: A Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 51) The data in the table above are the U.S. balance of payments. The data show that A) the United States has a current account surplus. B) the United States has a capital and financial account surplus. C) The United States loaned $400 billion to the rest of the world. D) Both answers A and B are correct. Answer: A Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 52) The data in the table above are the U.S. balance of payments. The capital and financial account balance is A) $0. B) -$80 billion. C) -$200 billion. D) +$200 billion. Answer: C Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 89 Copyright © 2014 Pearson Education, Inc.

53) The data in the table above are the U.S. balance of payments. The sum of the current account plus capital and financial account plus official settlements account is equal to A) $0. B) -$335 billion. C) $140 billion. D) -$60 billion. Answer: A Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills

Item Imports of goods and services Exports of goods and services Net interest income Net transfers U.S. investment abroad Foreign investment in the United States

Billions of dollars -750 1,000 -50 -50 -350 200

54) The data in the table above are the U.S. balance of payments. What is the current account balance? A) $0 B) $150 billion C) -$100 billion D) -$150 billion Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills 55) The data in the table above are the U.S. balance of payments. What is the capital and financial account balance? A) $0 B) $150 billion C) -$350 billion D) -$150 billion Answer: D Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills 90 Copyright © 2014 Pearson Education, Inc.

56) The data in the table above are the U.S. balance of payments. If there is no statistical discrepancy, what is the balance in the official settlements account? A) $150 billion B) -$150 billion C) $50 billion D) $0 Answer: D Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills

Item Exports of goods and services Imports of goods and services Net interest income Net transfers Urland's investment abroad Foreign investment in Urland

Billions of dollars 635 -555 -18 22 -467 321

57) The above table shows some of the balance of payments accounts for Urland. What is Urland's balance on the current account? A) $80 billion B) $62 billion C) $84 billion D) $47 billion Answer: C Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills

58) The above table shows some of the balance of payments accounts for Urland. What is Urland's balance on the capital and financial account? A) -$146 billion B) -$183 billion C) -$99 billion D) $142 billion Answer: A Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills 59) The above table shows some of the balance of payments accounts for Urland. What is Urland's balance in the official settlements account? A) $405 billion B) $62 billion C) $99 billion D) $37 billion Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills 60) When we have a negative current account, we are A) borrowing from the rest of the world. B) lending to the rest of the world. C) running a government budget surplus. D) None of the above is correct. Answer: A Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 61) Which of the following statements about the balance of payments accounts is correct? A) The current account must be greater than the capital and financial account. B) The sum of all three accounts is always zero. C) The official settlements account is typically larger than both the capital and financial account and the current account. D) Typically the capital and financial account is near zero because it equals the difference between the current account and the official settlements account. Answer: B Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 92 Copyright © 2014 Pearson Education, Inc.

62) The European Commission believes that 2012 exports of goods and services from Spain will be 22 larger than in 2009. Irish exports are expected to have grown by 15 percent over the same period. If imports remain constant, A) the current account balance in both countries will become more positive. B) the current account balance in both countries will become more negative. C) there will be no change in the current account balance of both countries. D) in both countries the capital and financial account balance will become more positive. Answer: A Topic: Current Account Balance Skill: Conceptual Status: New AACSB: Reflective Thinking 63) Over the last 25 years, according to the United States balance of payments, A) the current account and the capital and financial account balances tend to move in the same direction. B) the current account and the capital and financial account balances tend to move in opposite directions. C) there is no clear relationship between the current account balance and the capital and financial account balance. D) the official settlements balance fluctuates greatly from year to year. Answer: B Topic: Patterns and Trends in International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking 64) During most of the 1980s, 1990s, and 2000s the U.S. has had a ________ current account balance and a ________ capital and financial account balance. A) positive; positive B) positive; negative C) negative; positive D) negative; negative Answer: C Topic: Patterns and Trends in International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking

65) If a country is currently lending more to the rest of the world than it is borrowing from the rest of the world, the country is a A) net borrower. B) debtor nation. C) net lender. D) creditor nation. Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 66) Suppose Italy currently lends 1.5 billion euros to other nations and borrows 1 billion euros from other nations. Italy definitely is a A) net borrower. B) net lender. C) creditor nation. D) debtor nation. Answer: B Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Revised AACSB: Reflective Thinking 67) If a country lends more to foreign countries than it borrows from foreign countries in a year, then definitely that year A) it has a current account deficit. B) it is a creditor nation. C) it is a debtor nation. D) it is a net lender. Answer: D Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking

68) Which of the following countries are net lenders? I. Japan II. United States A) I only B) II only C) both I and II D) neither I nor II Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 69) If a country is currently borrowing more from the rest of the world than it is lending to the rest of the world, the country is a A) net borrower. B) debtor nation. C) net lender. D) creditor nation. Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 70) Suppose this year Angola borrows $100 million from foreign countries while it lends $15 million. Angola definitely is a A) net borrower. B) net lender. C) creditor nation. D) debtor nation. Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking

71) If a country during its entire history has invested more in the rest of the world than the rest of the world has invested in it, the country is a A) net borrower. B) debtor nation. C) net lender. D) creditor nation. Answer: D Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 72) A creditor nation means a nation A) whose exports exceed its imports. B) whose current account is larger than its capital account. C) whose current lending to the rest of the world exceeds its borrowing from the rest of the world. D) through its history has invested more in the rest of the world than other countries have invested in it. Answer: D Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 73) Over its history, Spain has loaned more money abroad than foreigners have lent to it. Spain is a A) net lender. B) net borrower. C) creditor nation. D) debtor nation. Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking

74) If a nation during its entire history has borrowed more from the rest of the world than it has lent to the rest of the world, the country is a A) net borrower. B) debtor nation. C) net lender. D) creditor nation. Answer: B Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 75) A debtor nation means a nation A) whose imports exceeds its exports. B) whose current account is less than its capital account. C) through its history has invested less in the rest of the world than other countries have invested in it D) whose current lending to the rest of the world exceeds its borrowing from the rest of the world. Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 76) Over its history, Brazil has borrowed more from the rest of the world than it has loaned to the rest of the world. Brazil A) eventually will have a balance of payments account that does not balance. B) is a debtor nation. C) is a creditor nation. D) has no current account balance. Answer: B Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking

77) A country that during its entire history has borrowed more from the rest of the world than it has lent to it is a ________, and a country that during its entire history has invested more in the rest of the world than other countries have invested in it is a ________. A) debtor nation; investor nation B) borrower nation; creditor nation C) debtor nation; creditor nation D) net borrower nation; net lender nation Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 78) A net borrower is a country that ________, while a net lender is a country that ________. A) borrows more than it lends; owes more to foreigners than foreigners owe to it B) decreases its stock of outstanding foreign debt; lends more than it borrows C) borrows more than it lends; lends more than it borrows D) lends more than it borrows; borrows more than it lends Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 79) This year a country loaned more to the rest of the world than it borrowed from the rest of the world. In addition, the country has invested more in the rest of the world than other countries have invested in it. The country is currently a ________ and also a ________. A) net lender; creditor nation B) net borrower; creditor nation C) net borrower; debtor nation D) debtor nation; net lender Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking

80) A country that borrows more from the rest of the world than it lends to it in a year is called a ________, and a country that lends more to the rest of the world than it borrows from it in a year is called a ________. A) borrower; lender B) importer; exporter C) net borrower; net lender D) gross borrower; gross lender Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 81) Today, the United States is a I. net borrower II. net lender III. debtor nation IV. creditor nation A) I and IV B) II and IV C) I and III D) II and III Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 82) If a country has a capital and financial account surplus, that country's stock of international indebtedness is A) increasing. B) decreasing. C) constant. D) zero. Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Analytical Skills

83) If a country has a capital and financial account deficit, that country's stock of international indebtedness is A) increasing. B) decreasing. C) constant. D) zero. Answer: B Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Analytical Skills 84) Since the mid 1980s, the United States has been a net ________ and a ________ nation. A) borrower; creditor B) lender; creditor C) borrower; debtor D) lender; debtor Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 85) If we import more than we export from the rest of the world we A) must borrow an equal amount from the rest of the world. B) can lend an equal amount to the rest of the world. C) are running a trade surplus. D) are helping to finance investment in the rest of the world. Answer: A Topic: Rest of the World Sector Skill: Recognition Status: Old AACSB: Reflective Thinking

86) If U.S. net exports are positive, A) other countries borrow from the United States to pay for some of the goods they purchase from the United States. B) other countries make loans to the United States so that the United States can pay for some of the goods it purchases from other countries. C) the United States sells some of the assets it owns in other countries to pay for some of the goods it sells to other countries. D) the United States borrows from other countries to pay for some of the goods the United States purchases from them. Answer: A Topic: Rest of the World Sector Skill: Conceptual Status: Old AACSB: Reflective Thinking 87) The main item in the current account balance is A) net interest income. B) net transfers. C) net exports. D) net taxes. Answer: C Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking 88) The value of net exports increases when the value of ________. A) exports of goods and services minus imports of goods and services decreases B) imports of goods and services increase C) imports of goods and services decrease D) exports of goods and services decrease Answer: C Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking 89) The current account balance is defined as A) the value of exports - the value of imports. B) the amount of exported capital assets + net interest income. C) the value of exports - the value of imports + net interest income + net transfers. D) the difference between the import and export of official reserves. Answer: C Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking 101 Copyright © 2014 Pearson Education, Inc.

90) The current account balance is equal to A) net exports + net interest income + net transfers. B) net exports - net interest income - net transfers. C) net exports + net interest income - net transfers. D) net interest income + net transfers - net exports. Answer: A Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking 91) Which of the following are included in the U.S. current account balance? I. exports to Japan II. interest payments made to Canada III. transfer payments made to Israel A) I only B) I and II C) I and III D) I, II and III Answer: D Topic: Current Account Balance Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) All of the following are a current account transaction EXCEPT A) importing services. B) exporting goods. C) investing abroad. D) importing goods. Answer: C Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking

93) If net interest and net transfers are zero, and a country's exports exceed its imports, the country definitely has ________. A) a current account surplus B) a current account deficit C) a capital and financial account surplus D) an official settlements account surplus Answer: A Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking 94) If net interest and net transfers are $0, and a nation's purchases of foreign goods and services are $3.5 billion while its sales of goods and services to foreigners are $4.5 billion, A) it has a $1 billion surplus in its balance of payments. B) it has a $1 billion deficit in its current account. C) it has a $1 billion surplus in its current account. D) its capital and financial account shows a surplus. Answer: C Topic: Current Account Balance Skill: Conceptual Status: Old AACSB: Analytical Skills 95) The country of Pimm exports $500 billion worth of goods and services and imports $400 billion worth of goods and services. Net interest income paid abroad is $50 billion and net transfers are $0. The current account balance is ________. A) $50 billion B) $100 billion C) $150 billion D) $975 billion Answer: A Topic: Current Account Balance Skill: Analytical Status: Revised AACSB: Analytical Skills 96) The private sector surplus or deficit equals A) saving minus investment. B) net taxes minus government purchases. C) investment minus saving. D) government purchases minus net taxes. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 103 Copyright © 2014 Pearson Education, Inc.

97) Net exports equals A) exports of goods and services minus imports of goods and services. B) imports of goods and services minus exports of goods and services. C) the government sector balance plus the private sector balance. D) Both answers A and C are correct. Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 98) The government sector balance is equal to ________. A) net taxes minus government purchases of goods and services B) tariffs minus imports C) saving minus investment D) exports minus imports Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 99) The private sector balance is equal to ________. A) income minus consumption minus net taxes B) income minus consumption minus investment C) saving minus investment D) income minus consumption Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 100) A net exports deficit or surplus equals A) taxes minus savings plus public and private investment. B) the government sector balance plus the private sector balance. C) net lending by both the private and public sector plus savings minus investment. D) net worth plus the government sector balance minus the private sector balance. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking

101) Which of the following is correct? A) Net exports equals the government sector balance plus the private sector balance. B) The government sector balance equals net exports plus the private sector balance. C) The private sector balance equals net exports plus the government sector balance. D) Net exports equals the current account plus the capital account plus the official settlements account. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 102) Which of the following statements is true? A) If private saving is greater than private investment, then the private sector has a surplus. B) If private investment is greater than private saving, then the private sector has a deficit. C) If private investment is greater than private saving, then either the government or net export sector must have a surplus. D) All of the above answers are correct. Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 103) Which of the following equations represents the private sector balance? A) X - M B) T - G C) S - I D) C + S + T Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Analytical Skills 104) X is exports, M is imports, T is net taxes, G is government expenditure, C is consumption expenditure, S is saving, and I is investment. The government sector balance is equal to A) T - G B) C + S + T C) S - I D) X - M Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Analytical Skills 105 Copyright © 2014 Pearson Education, Inc.

105) Suppose X - M = net exports; T - G = government sector balance; and S - I = private sector balance. What relationship exists among these variables? A) (X - M ) + (T - G ) + (S - I ) = 0 B) (X - M ) = (T - G ) + (S - I ) C) (T - G ) + (X - M ) = (S - I ) D) (T - G ) = (X - M ) + (S - I ) Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Analytical Skills 106) Which of the following statements is INCORRECT? A) Net exports equals exports minus imports. B) The government sector balance equals net taxes minus government expenditures on goods and services. C) Private sector balance equal private investment minus private saving. D) The sum of government sector and private sector balances equals net exports. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 107) A country has a government sector deficit and a private sector surplus. If the government sector deficit increases, and the private sector surplus decreases, ________. A) net exports decrease or remain constant B) net exports increase C) net exports increase, decrease, or remain constant D) net exports decrease Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 108) If net exports is a negative number, the government sector must ________ if the private sector is in a ________. A) run a surplus; surplus B) equal zero; deficit C) run a deficit; surplus D) The statement errs because the accounts are not related. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 106 Copyright © 2014 Pearson Education, Inc.

109) If X - M = $0 and the government sector has a deficit of $250 billion, the private sector A) has a deficit that equals $0. B) has a deficit that equals $250 billion. C) has a surplus that equals $250 billion. D) has a surplus that equals $500 billion. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 110) If net exports is 100 and the private sector balance is 150, then the government sector balance is A) -50. B) 50. C) 250. D) 0. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 111) Suppose U.S. net exports are -$400 billion and the U.S. government sector surplus is $200 billion. Then in the private sector, saving minus investment equals A) -$600 billion. B) -$200 billion. C) +$600 billion. D) +$200 billion. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 112) If the government sector is running a deficit of $120 million and the private sector is running a surplus of $200 million, net exports equals a A) $80 million surplus. B) $320 million surplus. C) $80 million deficit. D) $320 million deficit. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 107 Copyright © 2014 Pearson Education, Inc.

113) Hong Kong has imports of $1,130 billion and exports of $1,255 billion. Hong Kong definitely has ________. A) negative net exports of $125 billion B) positive net exports of $125 billion C) a government budget surplus D) Both answers B and C are correct. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 114) On the island country of Sunshine where the unit of currency is fish, net exports are 50 fish, saving is 250 fish, net taxes are 100 fish, and the government budget deficit is 175 fish. What is the value of investment? A) 375 fish B) -375 fish C) 25 fish D) -25 fish Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 115) On the island country of Sunshine where the unit of currency is fish, net exports are 50 fish, saving is 250 fish, net taxes are 100 fish, and the government budget deficit is 175 fish. The private sector has a ________. A) deficit of 125 fish B) surplus of 125 fish C) deficit of 225 fish D) surplus of 225 fish Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Component Investment, I Net taxes, T Government expenditure, G Exports, X Imports, M

Amount (billions of dollars) 700 1,300 1,200 1,500 1,700

116) In the above table, the government sector balance is a A) surplus of $200 billion. B) deficit of $200 billion. C) surplus of $100 billion. D) deficit of $100 billion. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 117) In the above table, net exports equals a A) surplus of $200 billion. B) deficit of $200 billion. C) surplus of $100 billion. D) deficit of $100 billion. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 118) In the above table, the government sector balance is a ________ and net exports is a ________. A) surplus of $100 billion; deficit of $200 billion B) deficit of $100 billion; surplus of $200 billion C) surplus of $100 billion; surplus of $200 billion D) deficit of $100 billion; deficit of $200 billion Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

119) In the above table, the private sector has a A) surplus of $300 billion. B) deficit of $300 billion. C) deficit of $200 billion. D) deficit of $400 billion. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 120) In the above table, saving must be A) -$300 billion. B) $300 billion. C) $400 billion. D) -$400 billion. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Item Exports of goods and services, X Imports of goods and services, M Net taxes, T Government expenditure, G Saving, S Investment, I

Billions of dollars 500 750 1,000

121) In the above table, suppose imports = $750 billion and government expenditures = $1,000 billion. Hence investment equals A) -$500 billion. B) $1,000 billion. C) $500 billion. D) $0. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

122) Using the data in the above table, suppose imports equals $250 billion and investment equals $1,000 billion. Hence government expenditure equals A) $1,000 billion. B) $750 billion. C) $500 billion. D) $250 billion. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 123) Using the data in the above table, if the private sector runs a surplus of $250 billion, imports will equal $1,000 billion if A) government expenditure equals -$750 billion. B) investment equals -$1000 billion. C) government expenditure equals -$1000 billion. D) the government sector runs a deficit of $750 billion. Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills Billions of dollars

Item Exports of goods and services, X Imports of goods and services, M Net taxes, T Government expenditure, G Saving, S Investment, I

1,000 1,300 650

124) Using the data in the above table, if exports = $1,150 billion and the private sector runs a surplus of $300 billion, the government sector will run A) a surplus of $150 billion. B) a surplus of $450 billion. C) a deficit of $150 billion. D) a deficit of $450 billion. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

125) Using the data in the above table, if the government sector runs a deficit of $250 billion and net exports equal -$500 billion, then saving must equal A) $450 billion. B) $250 billion. C) $1,350 billion. D) $400 billion. Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 126) Using the data in the above table, if net exports = -$500 billion and the government balances its budget, A) the private sector must balance its budget. B) savings must equal $150 billion. C) the private sector runs a surplus of $850 billion. D) saving must equal $650 billion. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 127) Using the data in the above table, if saving equals $650 billion and exports are greater than imports, A) the government sector must run a deficit. B) net taxes will be greater than $1300 billion. C) net taxes will be less than $650 billion. D) government expenditures must increase. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Item Exports Imports Government expenditure Net taxes Investment Saving

Billions of dollars 234 277 887 855 760 749

128) The above table gives data for the nation of Sueland. What is the value of net exports? A) $43 billion B) $234 billion C) -$43 billion D) $511 billion Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 129) The above table gives data for the nation of Sueland. What is the government sector balance? A) $1,772 billion B) $32 billion C) -$43 billion D) -$32 billion Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 130) The above table gives data for the nation of Sueland. What is the private sector balance? A) $11 billion B) -$11 billion C) -$43 billion D) $43 billion Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Item Imports of goods and services, M Net taxes, T Government expenditure, G Savings, S Investment, I

Billions of dollars 275 300 250 125 100

131) The table above gives some of the entries in the national income and product accounts. The government sector has a ________, and the private sector has a ________. A) surplus of $50 billion; surplus of $25 billion B) deficit of $50 billion; surplus of $25 billion C) surplus of $50 billion; deficit of $25 billion D) deficit of $50 billion; deficit of $25 billion Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 132) The table above gives some of the entries in the national income and product accounts. What is the value of exports? A) $350 billion B) $300 billion C) -$25 billion D) $25 billion Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Item Exports Imports Government sector surplus Private sector deficit

Dollars 500 400 250 -150

133) The above table describes accounts for the country of Pacifica. Using this information, net exports for Pacifica equals A) $100. B) $900. C) -$100. D) $650. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 134) In the United States, since 1981 which two of the following have almost always moved in the same direction? A) net exports and the government sector balance B) net exports and the private sector balance C) the government sector balance and the private sector balance D) none of the above Answer: D Topic: The Three Sector Balances Skill: Recognition Status: Old AACSB: Reflective Thinking 135) Which of the following is one of the balance of payments accounts? A) government expenditure account B) capital and financial account C) reserve account D) net borrowing account Answer: B Topic: Study Guide Question, Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking

136) Suppose the United States initially has a trade deficit. Then U.S. firms increase their imports from Canada, financing that increase by borrowing from Canada. The current account deficit is now ________ and the capital and financial account surplus is now ________. A) larger; larger B) larger; smaller C) smaller; larger D) smaller; smaller Answer: A Topic: Study Guide Question, Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking

Component Government expenditure, G Net taxes, T Investment, I Savings, S

Amount (billions of dollars) 700 600 350 500

137) In the table above, what is the government's sector balance? A) a deficit of $700 billion B) a surplus of $600 billion C) a deficit of $100 billion D) $0 Answer: C Topic: Study Guide Question, Net Export, Gov. Budget, Saving & Investment Skill: Analytical Status: Old AACSB: Analytical Skills 138) In the table above, what does the private sector surplus equal? A) $500 billion B) $350 billion C) $150 billion D) $0 Answer: C Topic: Study Guide Question, Net Export, Gov. Budget, Saving & Investment Skill: Analytical Status: Old AACSB: Analytical Skills

139) In the table above, what do net exports equal? A) a deficit of $700 billion B) a deficit of $350 billion C) a surplus of $50 billion D) a surplus of $1,750 billion Answer: C Topic: Study Guide Question, Net Export, Gov. Budget, Saving & Investment Skill: Analytical Status: Old AACSB: Analytical Skills 5 News Based Questions 1) When the U.S. government buys aircraft from BAe, a British corporation, it pays for them using A) euros. B) pounds. C) dollars. D) foreign exchange rates. Answer: B Topic: Financing International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking 2) In 2007, the U.S. sold $73 million of cigarettes to Iran. Iran paid for these cigarettes using A) dollars. B) rials, the Iranian currency. C) euros. D) pounds. Answer: A Topic: Financing International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking 3) In July 2008, a British pound could buy $2. By October 2008, a pound could buy $1.55. Over the four months, the A) pound depreciated against the dollar. B) the real exchange rate did not change. C) pound appreciated against the dollar. D) the U.S. inflation rate increased. Answer: A Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 117 Copyright © 2014 Pearson Education, Inc.

4) In June 2008, $1 bought 0.5 pounds and in October, $1 bought 0.65 pounds. As a result of this change, ________ between June and October. A) the demand for dollars increased B) the dollar appreciated and the quantity of dollars demanded decreased C) the dollar depreciated and the quantity of dollars demanded decreased D) the demand for dollars decreased Answer: B Topic: The Exchange Rate, Currency Appreciation Skill: Analytical Status: Old AACSB: Analytical Skills 5) In June 2008, $1 bought 104 yen and in October, $1 bought 93 yen. This change means A) U.S. exports became more expensive for Japanese buyers. B) there will be a movement down along the demand curve for dollars. C) there was an increase in the value in the dollar, relative to the yen. D) the dollar appreciated relative to the yen. Answer: B Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) In June 2008, the dollar bought 1.6 Brazilian reals and in October, the dollar bought 2.4 reals. This resulted in a A) a movement upward along the supply curve for dollars. B) a movement downward along the supply curve for dollars. C) rightward shift in the supply curve for dollars. D) leftward shift in the supply curve for dollars. Answer: A Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) In June 2008, the dollar bought 1.6 Brazilian reals and in October, the dollar bought 2.4 reals. This resulted in a A) a decrease in the quantity of dollars supplied. B) an increase in the quantity of dollars supplied. C) a rightward shift in the supply curve of dollars. D) a depreciation of the dollar. Answer: B Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 118 Copyright © 2014 Pearson Education, Inc.

8) The figure above shows the demand and supply of dollars in the foreign exchange market. The equilibrium in the market occurs at a price of ________ Brazilian reals per dollar and a quantity of ________ billion dollars. A) 2.0; 100 B) 2.4; 120 C) 1.6; 100 D) 100; 2.0 Answer: A Topic: Foreign Exchange Market Skill: Analytical Status: Old AACSB: Analytical Skills 9) The figure above shows the demand and supply of dollars in the foreign exchange market. At a price of 2.40 Brazilian reals per dollar, A) there will be a shortage of dollars. B) $40 billion dollars will be demanded. C) $40 billion dollars will be supplied. D) there will be a surplus of dollars. Answer: D Topic: Equilibrium Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

10) The figure above shows the demand and supply of dollars in the foreign exchange market. At a price of 1.20 Brazilian reals per dollar, A) there will be a shortage of dollars. B) $120 billion dollars will be supplied. C) $40 billion dollars will be demanded. D) there will be a surplus of dollars. Answer: A Topic: Equilibrium Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 11) As a result of the 2008-2009 financial crisis and the decrease in GDP in many European economies, we would expect A) an increase in the demand for U.S. exports and a leftward shift in the demand curve for dollars. B) a decrease in the demand for U.S. exports and a leftward shift in the demand curve for dollars. C) a decrease in the demand for U.S. exports and a rightward shift in the demand curve for dollars. D) a decrease in the demand for U.S. imports and a movement up along the demand curve for dollars. Answer: B Topic: The Law of Demand for Foreign Exchange, Exports Skill: Analytical Status: Old AACSB: Analytical Skills 12) In October 2008, Iceland's central bank increased its lending rate to 18% in an "effort to prop up the country's frozen current and markets." (www.nytimes.com, October, 29, 2008) As a result, the ________ curve for Icelandic krona shifted ________, holding all else the same. A) supply; rightward B) demand; rightward C) demand; leftward D) A and C are both correct. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills

13) In October 2008, Iceland's central bank increased its lending rate to 18% in an "effort to prop up the country's frozen currency and markets." (www.nytimes.com, October, 29, 2008) As a result, the ________ and demand curve for Icelandic krona shifted ________, holding all else the same. A) interest rate differential between U.S. and Icelandic interest rates increased; rightward B) interest rate differential between U.S. and Icelandic interest rates decreased; leftward C) dollar appreciated relative to the krona; rightward D) value of U.S. exports to Iceland increased; leftward Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 14) In October 2008, Iceland's central bank increased its lending rate to 18% in an "effort to prop up the country's frozen current and markets." (www.nytimes.com, October, 29, 2008) As a result, there was ________, holding all else the same. A) a movement upward along the supply curve for krona B) a leftward shift in the supply curve for krona C) a rightward shift in the supply curve for krona D) an increase in the quantity supplied of krona Answer: B Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 15) In late 2010 the National Bank of Australia offered a 4 percent interest rate on a savings account while Bank of America offered 2 percent. This difference means that A) people expect the U.S. dollar to appreciate to 8 percent against the Australian dollar and interest rate parity to occur. B) there will be a surplus of U.S. dollars in the foreign exchange market. C) people expect the U.S. dollar to appreciate by 2 percent against the Australian dollar and interest rate parity to occur. D) there will be a shortage of Australian dollars in the foreign exchange markets. Answer: C Topic: Interest Rate Parity Skill: Analytical Status: Old AACSB: Analytical Skills

16) On www.yodobashi.com, you can buy a Canon EOS camera for 298,000 yen. The same camera costs $2700 on www.calumetphoto.com. If the exchange rate is ________ yen per dollar, we can determine ________ for this camera. A) 92; interest rate parity doesn't occur B) 92; purchasing power parity occurs C) 110; interest rate parity occurs D) 110; purchasing power parity occurs Answer: B Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills 17) In 2009, Germany's capital account was -$135 million. This implies that A) Germany invested more in other countries than those countries invested in Germany. B) Germany's currency must have appreciated during 2009. C) Germany imported more goods from its trading partners than it exported. D) Germany's official settlements account in 2009 must have been positive. Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) In 2007, Japan reported that its overseas assets totalled more than $4.6 trillion. This implies that Japan A) is debtor nation. B) has a current account deficit. C) has a capital account deficit. D) is a creditor nation. Answer: D Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking

19) Over a month in late 2008, the Federal Reserve Bank reduced the interest rate by 1 percentage point. Given that the United States operates under a ________ exchange rate regimes, the primary purpose of these changes was ________ exchange rate of each currency. A) flexible; not designed to influence B) flexible; designed to influence C) fixed; designed to influence D) fixed; not designed to influence Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Communication 6 Essay Questions 1) Give an example of currency depreciation and appreciation. Answer: A currency depreciates when it becomes less valuable in the foreign exchange market. For instance, if the exchange rate changes from 130 yen per dollar to 110 yen per dollar, the dollar has depreciated. A currency appreciation is the exact opposite: A currency appreciates when it becomes less valuable in the foreign exchange market. For instance, if the exchange rate changes from 130 yen per dollar to 150 yen per dollar, the dollar has appreciated. Topic: The Exchange Rate, Currency Appreciation and Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) In the foreign exchange market, what factor leads to a movement along the demand curve for dollars? Answer: A change in the exchange rate leads to a movement along the demand curve for dollars. Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

3) In the foreign exchange market, how does the quantity of U.S. dollars demanded respond to a change in the U.S. exchange rate? Why is there this response? Answer: If the U.S. exchange rate falls, the quantity of U.S. dollars demanded increases for two reasons. The first is the exports effect. If the exchange rate falls, then U.S. goods and services are cheaper in foreign nations. These nations increase the amount of U.S. exports they demand. As exports increase the quantity of dollars demanded increases so that the importing nations can pay for the exports. The second reason the quantity of U.S. dollars demanded increases is the expected profit effect. In general, the greater the expected profit from holding U.S. dollars, the greater is the quantity demanded of U.S. dollars. When the exchange rate falls, more people will believe that it will rise again in the future and so more people want to hold U.S. dollars. As a result, the quantity of U.S. dollars demanded increases. Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) In the foreign exchange market, how does 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 Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) 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 Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

6) 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: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) In the foreign exchange market, how does a change in the 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: Changes in the Demand for $, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) 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 Foreign Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 9) 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: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) 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: Changes in the Supply of $, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) "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: Changes in the Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 12) 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: Changes in the Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) How will an increase in the expected future exchange rate affect the current supply and demand curves for dollars? Answer: An increase in the expected future exchange rate increases the return from holding U.S. dollars. As a result, the demand for dollars increases and the demand curve shifts rightward while the supply of dollars decreases and the supply curve shifts leftward. Topic: Change in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) What is purchasing power parity? Answer: Purchasing power parity means "equal value of money," that is, the exchange rate adjusts so that one currency can buy the same amount of goods and services as another currency. Topic: Purchasing Power Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 15) "Fluctuations in exchange rates, other things remaining the same, creates 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: Conceptual Status: Old AACSB: Reflective Thinking 16) What role can the Fed play in the foreign exchange market? Answer: The Federal Reserve can intervene in the foreign exchange market by (temporarily) selling or buying dollars. If the Fed sells dollars, it drives the exchange rate lower and if the Fed buys dollars, it drives the exchange rate higher. The Fed cannot buy dollars forever because it will run out of the foreign exchange it using to buy the dollars. And, the Fed likely will not want to sell dollars forever because it would accumulate ever increasing amounts of foreign exchange. Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) How does the Fed intervene in the foreign exchange market and what the effects are of the Fed's actions? Answer: The Fed intervenes in the foreign exchange market and changes the value of the exchange rate by buying or selling dollars. If the Fed wants to raise the exchange rate and appreciate the dollar, the Fed will buy dollars. By buying dollars the Fed increases the demand for dollars and raises the exchange rate. If the Fed wants to lower the exchange rate and depreciate the dollar, the Fed will sell dollars. By selling dollars the Fed increases the supply of dollars and lowers the exchange rate. Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) 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: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) What are the three balance of payments accounts? Briefly describe them. What is the relationship among the three? Answer: The three balance of payment accounts are the current account, the capital account, and the official settlements account. The current account records exports, imports, net interest, and net transfers. The capital account records foreign investment in the United States and U.S. investment abroad. Finally, the official settlements account shows changes in U.S. official reserves, the government holdings of foreign currency. The relationship is that the current account balance plus capital account balance plus official settlements account must sum to zero. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) "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 account records foreign investment in a nation minus investment abroad. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking

21) What are the main components of the current account? What has been the recent U.S. experience with these items? Answer: The current account records payments for the imported of goods and services and the receipts for exported of goods and services. These two components of the current account are by far the largest components. In addition to the value of imports and exports, the current account also includes the net interest income paid abroad and net transfers. Net interest income measures the interest payments both made and received which flow from previously purchased assets. Net transfers record such items as foreign aid payments. Over recent years, the U.S. current account has been negative, that is, there has been a current account deficit. Over these years, the United States has experienced a perennial trade deficit, which means that the value of imports has exceeded the value of exports. The trade deficit has been the primary cause why the U.S. current account has been negative. Net interest income has been barely negative while net transfers are also negative and slightly larger in magnitude than net interest income. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) What balance of payment account records foreign investment between countries? Answer: The capital account records foreign investment between countries. The U.S. capital account equals foreign investment in the United States minus U.S. investment abroad. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) How do the capital account and the current account differ? Answer: The current account and the capital account differ in what is recorded in each. The current account records exports, imports, net interest, and net transfers. The capital account records foreign investment in the United States and U.S. investment abroad. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking

24) 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: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) 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: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) "If the official settlements balance is zero, a current account surplus must equal the capital 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 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 account balance must equal zero. Therefore a current account surplus must be "balanced" by an equallysized capital account deficit. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) Looking at the U.S. balance of payments for the last two decades, how have the current account and the capital account changed? Answer: Since the early 1980s and onward, the U.S. current account has been negative and sometimes quite large. The U.S. capital 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 account surplus is small and when the current account deficit is large, the capital account surplus is large. Topic: Patterns and Trends in International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking

28) 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: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 29) What is the relationship between net borrower, net lender, debtor nation, and creditor nation? Answer: If a nation is currently borrowing from the world more than it is lending to the world, the nation is a net borrower. If a nation is currently lending more to the world more than it is borrowing from the world, the nation is a net lender. If during its entire history a nation has borrowed more than it has lent, the nation is a debtor nation. If during its entire history a nation has lent more than it has borrowed, the nation is a creditor nation. The distinction between borrowing or lending and being a debtor or creditor deals is the distinction between a flow and a stock. A nation that is a net borrower is increasing its debt (or decreasing its assets). The net borrowing is the flow that adds to the stock of debt (or decreases the stock of assets). A nation that is a net lender is increasing its assets (or decreasing its debt). The net lending is the flow that adds to the stock of assets (or decreases the stock of debt). Topic: Borrowing and Lending Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) 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: Conceptual Status: Old AACSB: Reflective Thinking

31) "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: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) 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 during the 1980s means that today the United States is a debtor nation. Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 33) What is the relationship between net exports, the government sector surplus or deficit, and the private sector surplus or deficit? Answer: The relationship is that net exports equals the government surplus or deficit plus the private sector surplus or deficit. Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) Saving is S, investment is I, net taxes is NT, government expenditure is G, exports is X, and imports is M. Using these symbols, what is the relationship among the saving, investment, net taxes, government expenditure, exports, and imports? Answer: The relationship is that (X - M) = (S - I) + (NT - G), or net exports equals the private sector balance plus the government sector balance. Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Analytical Skills

7 Numeric and Graphing Questions

1) In the figure above, illustrate the effect of an increase in the U.S. interest rate. What is the effect on the 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: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

2) 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: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

3) 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: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 4) 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: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 5) 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 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 account balance plus the official settlements account balance equals zero, which means that the capital account balance must equal $200 billion. Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills

Item Imports of goods and services Exports of goods and services Net interest Net transfers Foreign investment in the United States U.S. investment abroad

Amount (billions of dollars) 1,400 1,600 0 0 480 700

6) The above gives some of the balance of payments accounts of the United States in 2020. a) What is the current account balance? b) What is the capital account balance? c) What is the official settlements account balance? Answer: a) The current account balance is $200 billion. b) The capital account balance is -$220 billion. c) The official settlements account balance is $20 billion. Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills

Item Investment Saving Government expenditure Net taxes

Amount (billions of dollars) 1,900 1,600 1,000 1,700

7) The table above gives some of the accounts of the United States in 2020. a) What is the private sector balance? b) What is the government sector balance? c) What is net exports? Answer: a) The private sector balance equals saving minus investment, or -$300 billion. b) The government sector balance equals net taxes minus government expenditure, or $700 billion. c) Net exports equals the sum of the private sector balance plus the government sector balance, so net exports equal $400 billion. Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 8) The United States has net exports of -$350 billion and the private sector balance is -$400 billion. What is the government sector balance? Answer: The sum of the private sector balance plus the government sector balance equals net exports. Therefore -$350 billion = + government sector balance, so the government sector balance is $50 billion. Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

8 True or False 1) An exchange rate is the price of one country's currency in terms of another country's currency. Answer: TRUE Topic: The Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 2) "Currency appreciation" means the price of the currency is decreasing. Answer: FALSE Topic: The Exchange Rate, Currency Appreciation Skill: Recognition Status: Old AACSB: Reflective Thinking 3) If the exchange rate rises from 100 yen per dollar to 120 yen per dollar, the dollar has appreciated. Answer: TRUE Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) If the exchange rate falls from 120 yen per dollar to 110 yen per dollar, the dollar has depreciated. Answer: TRUE Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) If the yen appreciates in value against the dollar, the dollar must have depreciated against the yen. Answer: TRUE Topic: The Exchange Rate, Currency Appreciation and Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) The demand for one money is the supply of another money. Answer: TRUE Topic: The Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 138 Copyright © 2014 Pearson Education, Inc.

7) A rise in the exchange rate leads to a decrease in the quantity of dollars demanded. Answer: TRUE Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) The lower the exchange rate, the cheaper are foreign-produced goods and services. Answer: FALSE Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) Other things remaining the same, the higher the current exchange rate, the larger is the expected profit from buying dollars. Answer: FALSE Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) In the foreign exchange market, a decrease in the exchange rate increases the quantity of dollars supplied. Answer: FALSE Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) According to the law of supply in the foreign exchange market, when the U.S. exchange rate rises, the quantity of U.S. dollars supplied will decrease. Answer: FALSE Topic: Law of Supply for Foreign Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 12) An increase in the U.S. interest rate differential increases the demand for dollars. Answer: TRUE Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking

13) If the Fed raises the interest rate, in the foreign exchange market the demand for the U.S. dollar increases. Answer: TRUE Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) If U.S. interest rates are rise relative to foreign interest rates, in the foreign exchange market the demand for U.S. dollars will decrease. Answer: FALSE Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) In the foreign exchange market, a decrease in the supply of dollars leads to an appreciation of the U.S. dollar. Answer: TRUE Topic: Changes in the Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 16) Purchasing power parity means that the expected exchange rate is such that the returns from investing in two nations are equal. Answer: FALSE Topic: Purchasing Power Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 17) Purchasing power parity means equal rates of return. Answer: FALSE Topic: Purchasing Power Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 18) In the short run, a change in the nominal exchange rate brings an equivalent change in the real exchange rate. Answer: TRUE Topic: The Real Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 140 Copyright © 2014 Pearson Education, Inc.

19) The exchange rate can be influenced by a nation's central bank. Answer: TRUE Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) In the foreign exchange market, if the demand for dollars permanently decreases, the Fed can maintain the exchange rate at its old equilibrium level indefinitely by buying dollars. Answer: FALSE Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) When the demand for a currency permanently increases, that nation's central bank can maintain its fixed exchange rate indefinitely. Answer: TRUE Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) A country's balance of payment accounts include its government budget deficit or surplus. Answer: FALSE Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 23) The current account records foreign investment in the United States minus U.S. investment abroad. Answer: FALSE Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 24) The official settlements account records the change in official U.S. reserves. Answer: TRUE Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking

25) The sum of the current, capital and official settlements accounts is always zero. Answer: TRUE Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) If the official settlements account is zero, whenever the United States has a current account deficit, it must also have a capital account deficit. Answer: FALSE Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) Over the past decade, the United States has had a current account deficit and capital account deficit. Answer: FALSE Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 28) In the market for international loans, most countries, including the United States, are net borrowers. Answer: TRUE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 29) The United States is a creditor nation. Answer: FALSE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 30) Currently, the United States is both a net borrower and a debtor nation. Answer: TRUE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking

31) A net borrower country must also be a debtor nation. Answer: FALSE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) If net exports increases, but neither government expenditure nor net taxes change, saving must increase. Answer: TRUE Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking

9 Extended Problems 1) The price of a computer in the United States is $1,000. The price of a car in Germany is 10,000 euros. The current exchange rate is 0.9 euros per dollar. a) If a computer is exported from the United States to Germany with no barriers to trade, what will be the price of the computer in Germany? b) If a car is imported to the United States from Germany with no barriers to trade, what will be the price of the car in the United States? c) Suppose the dollar appreciates by 10 percent against the euro. How will the price of a computer exported from the United States change in Germany? d) Suppose the dollar appreciates by 10 percent against the euro. How will the price of a car imported to the United States from Germany change in the United States? Answer: a) The price of an American computer in Germany is $1,000 × 0.9 euros per dollar, which is 900 euros. b) The price of a German car in the United States is 10,000 euros/0.9 euros per dollar = $11,111. c) The new exchange rate is 0.9 euros per dollar × 1.1 = 0.99 euros per dollar. So the new price of a U.S. computer in Germany is $1,000 × 0.99 euros per dollar = 990 euros. The price of a U.S. computer in Germany rises by 10 percent. d) The new price of a German car in the United States is 10,000 euros/0.99 euros per dollar = $10,101. So the price of a German car in the United States falls by about 10 percent. Topic: The Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

2) Suppose that the price of a Big Mac is a good approximation of the price level in the country. A Big Mac costs £2 in London and $3 in New York. a) If purchasing power parity holds, what is the exchange rate between the U.S. dollar and the British pound? b) If the current exchange rate is $1.6 per pound, what is the dollar price of a Big Mac in London? What do you predict will happen to the exchange rate? Explain. c) The exchange rate between the U.S. dollar and the Russian ruble is 30 rubles per dollar. If purchasing power parity holds, what is the price of a Big Mac in Moscow? Answer: a) If purchasing power parity holds, the dollar price of a Big Mac in London must be the same as that in New York. This is the case when the exchange rate is $1.5 per pound. With this exchange rate, the dollar price of a Big Mac in London is £2 × 1.5 dollars per pound = $3. b) If the current exchange rate is $1.6 per pound, the dollar price of a Big Mac in London is £2 × 1.6 dollars per pound, which is $3.20. If the price of a Big Mac represents the price level in the country, British goods are relatively more expensive than American goods. The quantity of the U.K. imports demanded decreases in the United States and the quantity of U.S. exports demanded increases in the United Kingdom. The demand for dollars in the foreign exchange market increases and the demand for pounds decreases. As a result, the dollar appreciates against the pound until the purchasing-power-parity exchange rate is restored. c) If purchasing power parity holds, the dollar price of a Big Mac in Moscow must be the same as in New York, that is, $3. Given the ruble/dollar exchange rate, the price of a Big Mac in Moscow is $3 × 30 rubles per dollar, which is 90 rubles. Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills

Item Imports of goods and services Exports of goods and services Foreign investment in Exland Exland's investment abroad Increase in the official holdings of foreign currency

Billions of buns 600 700 350 430 20

3) The citizens of Exland, whose currency is the bun, conduct the transactions outlined in the table above. a) What is Exland's current account balance? b) What is Exland's capital account balance? c) What is Exland's official settlement balance? d) What is Exland's net foreign borrowing? Answer: a) The current account balance equals exports minus imports: buns. b) The capital account balance equals foreign investment in Exland minus Exland's investment abroad: c) A country's official settlement balance is the change in its official reserves. If official reserves increase, the official settlement balance is negative. So Exland's official settlement balance is -20 billion buns. d) A country's net foreign borrowing is the difference between its borrowing from the rest of the world and its lending to the rest of the world. Exland's foreign borrowing is the foreign investment in Exland (350 billion buns). Exland's foreign lending is its investment abroad (430 billion buns) plus the increase in the official holdings of foreign currency (20 billion buns). So Exland's net foreign borrowing is which means the country is a net foreign lender. Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills

Item GDP Consumption expenditure Government expenditure on goods and services Investment Exports of goods and services Government budget deficit

Billions of bonts 320 200 60 80 40 25

4) The table above shows some data for Wiland, a country whose currency is the bont. The official settlement balance, net interest income, and net transfers from abroad are zero. a) What is Wiland's imports of goods and services? b) What is Wiland's current account balance? c) What is Wiland's capital account balance? d) What is Wiland's net taxes? e) What is Wiland's private sector balance? Answer: a) The country's net exports are GDP minus consumption minus investment minus government purchases, which is 320 - 200 - 80 - 60 = -20 billion bonts. Net exports are the difference between imports and exports. Because Wiland's exports are 40 billion bonts and its net exports are -20 billion bonts, then it imports must equal 60 billion bonts. b) Because net interest income and net transfers from abroad are zero, the current account balance equals net exports, so the current account balance is -20 billion bonts. c) Because the official settlement balance is zero, the sum of the capital account balance and current account balance is zero, which means that the capital account balance is 20 billion bonts. d) The government budget deficit is the difference between government purchases and net taxes, which means net taxes equal government purchases minus the budget deficit. So in Wiland, net taxes are 60 - 25, which is 35 billion bonts. e) The private sector balance is saving minus investment. Saving is GDP minus net taxes minus consumption. In Wiland, saving is 320 - 35 - 200 = 85 billion bonts. So the country's private sector balance is 85 - 80 = 5 billion bonts, that is, a surplus of 5 billion bonts. Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 10 Aggregate Supply and Aggregate Demand 1 Aggregate Supply 1) The supply of real GDP is a function of A) the total expenditures of consumers, investors and government. B) the sum of wages, salaries, corporate profits, rents and interest. C) only the state of technology. D) the quantities of labor, capital and the state of technology. Answer: D Topic: Aggregate Supply Fundamentals Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) The quantity of real GDP supplied depends on the A) level of aggregate demand. B) quantity of capital, bonds, and stocks. C) quantity of labor, the quantity of capital, and the state of technology. D) price level, the unemployment rate, and the quantity of government expenditures on goods and services. Answer: C Topic: Aggregate Supply Fundamentals Skill: Recognition Status: Old AACSB: Reflective Thinking 3) An aggregate supply curve depicts the relationship between A) the price level and nominal GDP. B) household expenditures and household income. C) the price level and the aggregate quantity supplied. D) the price level and the aggregate quantity demanded. Answer: C Topic: Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

4) In the macroeconomic short run, A) actual real GDP may be less than or more than potential GDP. B) the unemployment rate is zero. C) by definition, the economy is always moving away from full employment. D) actual real GDP always equals potential GDP. Answer: A Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking 5) When talking about aggregate supply, it is necessary to A) focus on the short run. B) focus on the long run. C) distinguish between long-run aggregate supply and short-run aggregate supply. D) distinguish between long-run full employment and short-run full-employment. Answer: C Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking 6) We distinguish between the long-run aggregate supply curve and the short-run aggregate supply curve. In the long run A) technology is fixed but not in the short run. B) the price level is constant but in the short run it fluctuates. C) the aggregate supply curve is horizontal while in the short run it is upward sloping. D) real GDP equals potential GDP. Answer: D Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking 7) In the macroeconomic long run, A) GDP always is below potential GDP. B) there is full employment with no unemployment. C) output always is above potential GDP. D) there is full employment and real GDP is equal to potential GDP. Answer: D Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking

8) In the macroeconomic long run, A) real GDP equals potential GDP. B) the economy is at full employment. C) regardless of the price level, the economy is producing at potential GDP. D) All of the above are correct. Answer: D Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking 9) In the long-run A) the aggregate supply curve is upward sloping. B) real GDP is equal to potential GDP. C) aggregate supply depends on the price level. D) All of the above answers are correct. Answer: B Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking 10) The long-run aggregate supply (LAS) curve A) has a positive slope. B) has a negative slope. C) is vertical. D) is horizontal. Answer: C Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 11) When the labor market is at full employment, A) real GDP equals potential GDP. B) the price level is stable. C) the price level equals the potential price level. D) the SAS curve is horizontal. Answer: A Topic: Long-Run Aggregate Supply Skill: Recognition Status: Revised AACSB: Reflective Thinking

12) The long-run aggregate supply curve is vertical because A) at full employment prices are stable. B) there is no cyclical inflation. C) potential GDP is independent of the price level. D) the money wage rate increases faster than the price level. Answer: C Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The long-run aggregate supply curve is A) horizontal at the full employment price level. B) vertical at the full employment level of real GDP. C) upward sloping because of the effects of price level changes on real GDP. D) the same as the short-run aggregate supply curve. Answer: B Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 14) Which of the following statements is TRUE? A) The long-run aggregate supply curve is upward sloping. B) The long-run aggregate demand curve is upward sloping. C) The short-run aggregate supply curve is vertical. D) The long-run aggregate supply curve is vertical. Answer: D Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 15) The long-run aggregate supply curve is ________ because along it, as prices rise, the money wage rate ________. A) vertical; falls B) vertical; rises C) upward sloping; falls D) upward sloping; stays constant Answer: B Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

16) The long-run aggregate supply curve illustrates the A) relationship of the price level and real GDP when the economy is at full employment. B) relationship of aggregate supply and aggregate demand. C) amount of products producers offer at various prices when money wages and other resource prices do not change. D) surpluses, shortages and equilibrium level of GDP. Answer: A Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 17) The long-run aggregate supply curve is the relationship between the quantity of real GDP supplied and ________ when ________. A) the price level; real GDP equals potential GDP B) real GDP demanded; the wage rate is constant C) the price level; real GDP equals nominal GDP D) real GDP demanded; the price level does not change Answer: A Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 18) When the price level rises, the long-run aggregate supply curve ________. A) shifts rightward B) does not shift C) slopes upward D) shifts leftward Answer: B Topic: Long-Run Aggregate Supply Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) For movements along the long-run aggregate supply curve, A) potential GDP is dependent on the price level. B) the prices of goods and services change while the prices of productive resources hold steady. C) the price level and the money wage rate change by the same percentage. D) All of the above are correct. Answer: C Topic: Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) The long-run aggregate supply curve shows the A) maximum GDP the nation will ever produce. B) full-employment level of real GDP. C) level of real GDP associated with a constant price level. D) level of output at which real GDP equals nominal GDP. Answer: B Topic: Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) Which of the following is true about the long-run aggregate supply curve? A) It is vertical at the level of potential GDP. B) It shows the relationship between the price level and real GDP when the economy is at full employment. C) It does not shift in response to temporary changes in aggregate demand. D) All of the above are true. Answer: D Topic: Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) Which of the following events will increase long-run aggregate supply? A) an increase in the interest rate B) an increase in resource prices C) a decrease in expected profit D) an advance in technology Answer: D Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

23) The curve labeled A in the above figure is a A) short-run aggregate demand curve. B) short-run aggregate supply curve. C) long-run aggregate demand curve. D) long-run aggregate supply curve. Answer: D Topic: Long-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 24) The curve labeled A in the above figure will shift rightward when A) the price level falls. B) technology increases. C) population falls. D) the price level rises. Answer: B Topic: Changes in Aggregate Supply, Technology Skill: Analytical Status: Old AACSB: Analytical Skills

25) The short-run aggregate supply curve A) shows what each producer is willing and able to produce at each level of income holding constant potential GDP and all resource prices. B) shows the relationship between aggregate production and the price level holding constant potential GDP and all resource prices. C) becomes vertical if there is excess production capacity within the economy. D) shows a negative relationship between the price level and real national income holding constant potential GDP and all resource prices. Answer: B Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 26) The short-run aggregate supply curve A) is vertical. B) has a negative slope. C) has a positive slope. D) is horizontal. Answer: C Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 27) The short-run aggregate supply curve is upward sloping because in the short run the A) money wage rate changes but the price level does not. B) price level changes but the money wage rate does not. C) both the money wage rate and the price level change. D) neither the money wage rate nor the price level can change. Answer: B Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 28) The positive relationship between short-run aggregate supply and the price level indicates that, in the short run, A) firms produce more output as the price level falls. B) firms produce more output as the price level rises. C) the money wage rate increases when moving along the short-run aggregate supply curve. D) lower price levels are more profitable for firms. Answer: B Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 8 Copyright © 2014 Pearson Education, Inc.

29) Moving upward along the SAS curve results in a ________ in the price level and ________ in real GDP. A) rise; an increase B) rise; a decrease C) fall; an increase D) fall; a decrease Answer: A Topic: Short-Run Aggregate Supply Skill: Recognition Status: Revised AACSB: Reflective Thinking 30) The short-run aggregate supply curve is upward sloping because A) a lower price level creates a wealth effect. B) lower taxes motivate people to work more. C) money wage rates do not immediately change when the price level changes. D) most business firms operate with long-term contracts for output but not labor. Answer: C Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 31) The short-run aggregate supply curve A) is vertical. B) shows the impact changes in the price level have on the quantity of real GDP when resource prices are constant. C) illustrates the level of potential real GDP. D) shifts whenever the price level changes. Answer: B Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 32) In the short-run A) the aggregate supply curve is upward sloping. B) real GDP is always equal to potential GDP. C) the money wage rate can change. D) the price level does not change. Answer: A Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 9 Copyright © 2014 Pearson Education, Inc.

33) Along a short-run aggregate supply curve, a decrease in the price level means that A) more output is produced as consumer demand increases. B) less output is produced as firms decrease production. C) more output is produced as firms increase production because wages fall more than the price level falls, making it profitable to hire more workers. D) output does not change because firms do not change the quantity they produce. Answer: B Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 34) In the short run, firms expand their production when the price level rises because A) the money wage rate remains constant so the higher prices for their products makes it profitable for firms to expand production. B) each firm must keep its production up to the level of its rivals, and some firms will expand production as the price level increases. C) the higher prices allow the firm to hire more workers by offering higher wages, thereby increasing productivity and profits. D) firms can increase their profits by increasing their maintenance. Answer: A Topic: Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 35) Moving along the short-run aggregate supply curve, ________. A) the real wage rate is constant B) real GDP equals potential GDP C) the money wage rate, the prices of other resources, and potential GDP remain constant D) real GDP equals nominal GDP Answer: C Topic: Short-Run Aggregate Supply Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

36) If the money wage rate and other resource prices do not change when the price level rises by 10 percent, ________. A) the long-run aggregate supply curve shifts leftward B) the short-run aggregate supply curve shifts leftward C) the long-run aggregate supply curve shifts rightward D) there is movement along the short-run aggregate supply curve Answer: D Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 37) A change in ________ results in a movement along the short-run aggregate supply curve but does not shift the short-run aggregate supply curve. A) the money wage rate B) technology C) the quantity of capital D) the price level Answer: D Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 38) Which of the following does NOT shift the short-run aggregate supply curve? A) a change in the money wage rate B) technological progress C) a reduction in the price of a raw material D) a change in the price level Answer: D Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 39) Which of the following occurs while moving along a short-run aggregate supply curve? A) The money wage rate and the price level change by the same percentage. B) The money wage rate changes and the price level is constant. C) The price level changes and the money wage rate is constant. D) Neither the price level nor the money wage rate changes. Answer: C Topic: Movements Along the SAS Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

40) For movements along the short-run aggregate supply curve, A) the money wage rate is constant. B) the real wage rate changes. C) potential GDP remains constant. D) All of the above are correct. Answer: D Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 41) Moving along a short-run aggregate supply curve, resource prices ________, the money rate wage ________, and potential GDP ________. A) do not change; changes; does not change B) do not change; does not change; changes C) change; does not change; does not change D) do not change; does not change; does not change Answer: D Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) A decrease in the price level accompanied by no change in the money wage rate leads to ________ movement along the ________ aggregate supply curve. A) a downward; short-run B) an upward; short-run C) a downward; long-run D) an upward; long-run Answer: A Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 43) The SAS curve and the LAS curve A) intersect at potential GDP. B) are parallel at potential GDP. C) are perpendicular to one another at potential GDP. D) None of the above answers is correct. Answer: A Topic: The LAS and SAS Curves Skill: Recognition Status: Old AACSB: Reflective Thinking

44) Suppose the price level, the money wage, and the price of all other resources rise by 10 percent. This set of changes leads to A) an upward movement along the LAS curve. B) a downward movement along the LAS curve. C) an upward movement along the SAS curve. D) a leftward shift of the LAS curve. Answer: A Topic: Movements Along the LAS and SAS Curves Skill: Recognition Status: Old AACSB: Reflective Thinking 45) Suppose the price level rises and the money wage remains constant. This set of changes leads to A) an upward movement along the LAS curve. B) an upward movement along the SAS curve. C) a leftward shift of the SAS curve. D) a leftward shift of the SAS curve and the LAS curve. Answer: B Topic: Movements Along the LAS and SAS Curves Skill: Recognition Status: Old AACSB: Reflective Thinking 46) Which of the following statements regarding aggregate supply are correct? A) Moving along the long-run aggregate supply curve, both the price level and the money wage rate change by the same percentage. B) Moving along the short-run aggregate supply curve, both the price level and the money wage rate change by the same percentage. C) Moving along the long-run aggregate supply curve, the money wage rate changes but the price level is constant. D) Moving along the short-run aggregate supply curve, the money wage rate changes but the price level is constant. Answer: A Topic: Movements Along the LAS and SAS Curves Skill: Recognition Status: Old AACSB: Reflective Thinking

47) In the figure above, potential GDP equals A) $12.5 trillion. B) $13.0 trillion. C) $13.5 trillion. D) None of the above answers is correct. Answer: B Topic: Long-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 48) In the figure above, the economy is at point A when the price level rises to 120. Money wage rates and other resource prices remain constant. Firms are willing to supply output equal to A) $12.5 trillion. B) $13.0 trillion. C) $13.5 trillion. D) None of the above answers is correct. Answer: C Topic: Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

49) In the figure above, the economy is at point A when the price level falls to 100. Money wage rates and all other resource prices remain constant. Firms are willing to supply output equal to A) $12.5 trillion. B) $13.0 trillion. C) $13.5 trillion. D) None of the above answers is correct. Answer: A Topic: Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

50) In the above figure, the economy will be at full employment if the price level A) is 110. B) is above 110. C) is below 100. D) All of the above are possible because the economy will be at full employment at any price level at, above, or below 110. Answer: A Topic: Short-Run and Long-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

51) In the above figure, which movement illustrates the impact of a falling price level and a constant money wage rate? A) E to I B) E to F C) E to J D) E to H Answer: A Topic: Movements Along the LAS and SAS Curves Skill: Analytical Status: Old AACSB: Analytical Skills 52) In the above figure, which movement illustrates the impact of a rising price level and a constant money wage rate? A) E to I B) E to F C) E to G D) E to K Answer: B Topic: Movements Along the LAS and SAS Curves Skill: Analytical Status: Old AACSB: Analytical Skills

53) In the above figure, which movement illustrates the impact of the price level and money wage rate falling at the same rate? A) E to H B) E to K C) E to J D) E to G Answer: C Topic: Movements Along the LAS and SAS Curves Skill: Analytical Status: Old AACSB: Analytical Skills 54) In the above figure, which movement illustrates the impact of a constant price level and a rising money wage rate? A) E to I B) E to F C) E to J D) E to H Answer: D Topic: Movements Along the LAS and SAS Curves Skill: Analytical Status: Old AACSB: Analytical Skills 55) Which of the following events will increase short-run aggregate supply? A) an advance in technology B) an increase in resource prices C) an increase in the natural unemployment rate D) an increase in foreign income Answer: A Topic: Changes in Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 56) The short-run aggregate supply curve shifts when I. the full-employment quantity of capital changes. II. technology advances. A) I only B) II only C) neither I nor II D) I and II Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 17 Copyright © 2014 Pearson Education, Inc.

57) The SAS curve shifts if there is a change in A) the price level. B) real GDP. C) nominal GDP. D) potential GDP. Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 58) Which of the following changes does NOT shift the short-run aggregate supply curve? A) an increase in the price level B) an increase in technology C) an increase in the quantity of capital D) an increase in the money wage rate Answer: A Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 59) Which of the following changes does NOT shift the long-run aggregate supply curve? A) a decrease in the labor force B) a fall in the price level C) a rise in number of college graduates in the labor force D) a tax hike that reduces the capital stock Answer: B Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 60) In a change to immigration policy during 2012, "people younger than 30 who came to the United States before the age of 16, pose no criminal or security threat, and were successful students or served in the military can get a two-year deferral from deportation, Homeland Security Secretary Janet Napolitano said," according to CNN, 06/16/2012. If many of these immigrates had previously been afraid to work, now as a result of being able to work legally, A) both the short-run and long-run aggregate supply curves shift rightward. B) only the long-run aggregate supply curve shifts rightward. C) only the short-run aggregate supply curve shifts rightward. D) neither the short-run nor the long-run supply curve shift. Answer: A Topic: Fluctuations in Aggregate Supply Skill: Conceptual Status: New AACSB: Reflective Thinking 18 Copyright © 2014 Pearson Education, Inc.

61) In a change to immigration policy during 2012, "people younger than 30 who came to the United States before the age of 16, pose no criminal or security threat, and were successful students or served in the military can get a two-year deferral from deportation, Homeland Security Secretary Janet Napolitano said," according to CNN, 06/16/2012. If many of these immigrates had previously been afraid to work, now as a result of being able to work legally, A) the long-run aggregate supply curve shifts leftward and potential GDP decreases. B) the short-run aggregate supply curve shifts rightward but potential GDP does not increase. C) the long-run aggregate supply curve shifts rightward and potential GDP increases. D) neither the short-run nor the long-run supply curve shifts. Answer: C Topic: Fluctuations in Aggregate Supply Skill: Conceptual Status: New AACSB: Reflective Thinking 62) All of the following shift the LAS curve EXCEPT A) a change in the capital stock. B) an increase in the money wage rate. C) an increase in the stock of human capital. D) technological progress. Answer: B Topic: Changes in Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 63) All of the following shift the short-run aggregate supply curve EXCEPT A) a change in the price level. B) a change in the money wage rate. C) a change in the price of a raw material. D) technological progress. Answer: A Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 64) Which of the following directly shifts the short-run aggregate supply curve? A) a change in aggregate demand B) a change in the price level C) a change in resource prices D) all of the above Answer: C Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 19 Copyright © 2014 Pearson Education, Inc.

65) Which of the following shifts the short-run aggregate supply curve? I. changes in the size of the labor force II. changes in the money wage rate A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 66) The short-run aggregate supply curve shifts leftward when the A) price level increases. B) general level of technology advances. C) money wage rate increases. D) availability of on-the-job training expands to all workers. Answer: C Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 67) Suppose there is a temporary increase in the price of oil. This is represented by A) a leftward shift of the SAS and the LAS curve. B) a leftward shift of the LAS curve. C) a rightward shift of the SAS curve. D) a leftward shift of the SAS curve. Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

68) In the above figure, the short-run aggregate supply curve is SAS1. Suppose that the price level in the economy increases. As a result there is A) an upward movement along SAS1. B) a downward movement along SAS1. C) a shift to SAS0. D) a shift to SAS2. Answer: A Topic: Changes in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 69) In the above figure, the short-run aggregate supply curve is SAS1. If technology advances, there is A) an upward movement along SAS1. B) a downward movement along SAS1. C) a shift to SAS0. D) a shift to SAS2. Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

70) In the above figure, the short-run aggregate supply curve is SAS1. If the money wage rate increases, there is A) an upward movement along SAS1. B) a downward movement along SAS1. C) a shift to SAS0. D) a shift to SAS2. Answer: C Topic: Changes in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 71) In the above figure, the short-run aggregate supply curve is SAS1. If the prices of resources fall, there is A) an upward movement along SAS1. B) a downward movement along SAS1. C) a shift to SAS0. D) a shift to SAS2. Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 72) A change in the full-employment quantity of labor ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve. A) shifts; shifts B) shifts; does not shift C) does not shift; shifts D) does not shift; does not shift Answer: A Topic: Change in Aggregate Supply; Full Employment Quantity of Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking 73) If the full-employment quantity of labor increases, then the A) LAS curve shifts rightward and the SAS curve does not shift. B) SAS curve shifts rightward and the LAS curve does not shift. C) SAS curve shifts rightward and the LAS curve shifts rightward. D) SAS curve shifts rightward and the LAS curve does shifts leftward. Answer: C Topic: Changes in Aggregate Supply; Full-Employment Quantity of Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking 22 Copyright © 2014 Pearson Education, Inc.

74) When the quantity of capital increases, then the A) LAS curve shifts rightward and the SAS curve does not shift. B) SAS curve shifts rightward and the LAS curve does not shift. C) SAS curve shifts rightward and the LAS curve shifts rightward. D) SAS curve shifts rightward and the LAS curve does shifts leftward. Answer: C Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 75) With an increase in the capital stock, the short-run aggregate supply curve A) remains as it is. B) shifts rightward. C) shifts leftward. D) becomes steeper. Answer: B Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 76) An increase in the amount of human capital ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve. A) shifts; shifts B) shifts; does not shift C) does not shift; shifts D) does not shift; does not shift Answer: A Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) A change in the capital stock ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve. A) shifts; shifts B) shifts; does not shift C) does not shift; shifts D) does not shift; does not shift Answer: A Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking

78) The land of Ur increases its capital stock. As a result, the long-run aggregate supply curve shifts ________ and so does the ________ curve. A) rightward; aggregate demand B) leftward; aggregate demand C) rightward; short-run aggregate supply D) leftward; short-run aggregate supply Answer: C Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 79) Which of the following shifts both the LAS and SAS curves? A) a change in the price level B) a change in the money wage rate C) a simultaneous change in both the price level and the money wage rate D) an advance in technology Answer: D Topic: Changes in Aggregate Supply, Technology Skill: Conceptual Status: Old AACSB: Reflective Thinking 80) A technological advance ________ the long-run aggregate supply curve and ________ the short-run aggregate supply curve. A) shifts; shifts B) shifts; does not shift C) does not shift; shifts D) does not shift; does not shift Answer: A Topic: Changes in Aggregate Supply, Technology Skill: Conceptual Status: Old AACSB: Reflective Thinking 81) Technological progress will A) shift the LAS curve rightward but will not shift the SAS curve. B) not shift either the LAS or the SAS curve. C) shift both the LAS and SAS curves rightward. D) shift the SAS curve rightward but will not shift the LAS curve. Answer: C Topic: Changes in Aggregate Supply, Technology Skill: Conceptual Status: Old AACSB: Reflective Thinking

82) The short-run aggregate supply curve shifts because of changes in all of the following EXCEPT A) the capital stock. B) technological progress. C) money wage rates. D) the price level. Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 83) If the money prices of resources changes, A) the LAS curve shifts. B) the SAS curve shifts. C) the AD curve shifts. D) the macroeconomic equilibrium is unaffected. Answer: B Topic: Change in Aggregate Supply-Money Wages & Prices of Resources Skill: Conceptual Status: Old AACSB: Reflective Thinking 84) If the money wage rate rises, then the A) SAS curve shifts rightward. B) SAS curve shifts leftward. C) LAS curve shifts rightward. D) LAS curve shifts leftward. Answer: B Topic: Change in Aggregate Supply-Money Wages & Prices of Resources Skill: Conceptual Status: Old AACSB: Reflective Thinking 85) If the money price of a resource such as oil falls, then the A) LAS curve shifts rightward. B) LAS curve shifts leftward. C) SAS curve shifts leftward. D) SAS curve shifts rightward. Answer: D Topic: Change in Aggregate Supply-Money Wages & Prices of Resources Skill: Conceptual Status: Old AACSB: Reflective Thinking

86) Suppose that the money wage in the economy increases by 8 percent. As a result the A) long-run aggregate supply will decrease. B) long-run and the short-run aggregate supply both decrease. C) short-run aggregate supply will decrease. D) long-run aggregate supply will increase and the short-run aggregate supply will decrease. Answer: C Topic: Change in Aggregate Supply-Money Wages & Prices of Resources Skill: Conceptual Status: Old AACSB: Reflective Thinking 87) A decrease in the money wage rate A) increases the long-run aggregate supply. B) decreases the long-run aggregate supply. C) increases the short-run aggregate supply. D) decreases the short-run aggregate supply. Answer: C Topic: Changes in Money Wages and Other Resource Prices Skill: Conceptual Status: Old AACSB: Reflective Thinking 88) An increase in the money wage rate A) increases the long-run aggregate supply. B) decreases the long-run aggregate supply. C) increases the short-run aggregate supply. D) decreases the short-run aggregate supply. Answer: D Topic: Changes in Money Wages and Other Resource Prices Skill: Conceptual Status: Old AACSB: Reflective Thinking 89) A change in the money wage rate shifts A) both the SAS and LAS curves. B) the LAS curve but not the SAS curve. C) the SAS curve but not the LAS curve. D) neither the SAS nor the LAS curve. Answer: C Topic: Changes in Money Wages and Other Resource Prices Skill: Conceptual Status: Old AACSB: Reflective Thinking

90) An increase in the money wage rate shifts the short-run aggregate supply curve ________; an increase in technology shifts the long-run aggregate supply curve ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: C Topic: Changes in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 91) A decrease in the money wage rate increases ________ and an increase in the full employment quantity of labor increases ________. A) the SAS and the LAS; only the SAS B) the SAS and the LAS; only the LAS C) only the SAS; the SAS and the LAS D) only the LAS; the SAS and the LAS Answer: C Topic: Changes in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) An increase in the quantity of capital increases ________ and increase in the full employment quantity of labor increases ________. A) the SAS and the LAS; only the SAS B) the SAS and the LAS; only the LAS C) the SAS and the LAS; the SAS and the LAS D) only the LAS; the SAS and the LAS Answer: C Topic: Changes in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 93) Suppose there is a increase in short-run aggregate supply with no change in long-run aggregate supply. This situation could be the result of A) an increase in the price of oil. B) a decrease in the money wage rate. C) a technological advancement. D) an increase in the quantity of capital. Answer: B Topic: Changes in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 27 Copyright © 2014 Pearson Education, Inc.

94) In the above figure, the economy is at point A when the money wage rate and the price level both fall by 10 percent. Firms will be willing to supply output equal to A) less than $13.0 trillion B) $13.0 trillion C) more than $13.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct. Answer: B Topic: Long-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 95) In the above figure, the economy is at point A. Then the price level falls to 90 while the money wage rate does not change. Firms will be willing to supply output equal to A) less than $13.0 trillion B) $13.0 trillion C) more than $13.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct. Answer: A Topic: Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

96) In the above figure, the economy is at point A. Then the price level rises to 110 while the money wage rate remains constant. Firms will be willing to supply output equal to A) less than $13.0 trillion B) $13.0 trillion C) more than $13.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct. Answer: C Topic: Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 97) In the above figure, the economy is at point A and the money wage rate falls by 10 percent. If the price level is constant, firms will be willing to supply output equal to A) less than $13.0 trillion B) $13.0 trillion C) more than $13.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct. Answer: C Topic: Changes in Money Wages and Other Resource Prices Skill: Analytical Status: Old AACSB: Analytical Skills 98) In the above figure, the economy is at point A and the money wage rate rises by 10 percent. If the price level is constant, firms will be willing to supply output equal to A) less than $13.0 trillion B) $13.0 trillion C) more than $13.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct. Answer: A Topic: Changes in Money Wages and Other Resource Prices Skill: Analytical Status: Old AACSB: Analytical Skills

99) In the above figure, B is the current long-run aggregate supply curve and E is the current short-run aggregate supply curve. If there is an increase in the full-employment quantity of labor, then the long-run aggregate supply curve and the short-run aggregate supply curve A) remain B and E. B) shift to A and D, respectively. C) shift to C and F, respectively. D) shift to A and F, respectively. Answer: C Topic: Changes in Aggregate Supply; Full-Employment Quantity of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 100) In the above figure, B is the current long-run aggregate supply curve and E is the current short-run aggregate supply curve. Technological advances mean the long-run aggregate supply curve and short-run aggregate supply curve A) remain B and E. B) shift to A and D, respectively. C) shift to C and F, respectively. D) shift to C and remain E, respectively. Answer: C Topic: Changes in Aggregate Supply, Technology Skill: Analytical Status: Old AACSB: Analytical Skills

101) In the above figure, which part corresponds to a destruction of part of the nation's capital stock? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Changes in Aggregate Supply, Capital Skill: Analytical Status: Old AACSB: Analytical Skills 102) In the above figure, which point corresponds to an increase in technology? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: Changes in Aggregate Supply, Technology Skill: Analytical Status: Old AACSB: Analytical Skills

103) In the above figure, which part corresponds to an increase in the money wage rate? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Changes in Money Wages and Other Resource Prices Skill: Analytical Status: Old AACSB: Analytical Skills 104) In the above figure, which part corresponds to a fall in the money wage rate? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Changes in Money Wages and Other Resource Prices Skill: Analytical Status: Old AACSB: Analytical Skills 105) Moving along which curve does the money wage rate and the price level change in the same proportions? A) the AD curve B) the SAS curve C) the LAS curve D) None of the above because there is no curve along which both the money wage rate and the price level change in the same proportions. Answer: C Topic: Study Guide Question, Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 106) Long-run aggregate supply will decrease for all of the following reasons EXCEPT A) reduced money wages. B) decreased human capital. C) decrease in the level of full employment. D) decreased capital. Answer: A Topic: Study Guide Question, Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

107) A fall in the money wage rate shifts A) both the SAS and LAS curves rightward. B) both the SAS and LAS curves leftward. C) the SAS curve rightward but leaves the LAS curve unchanged. D) the LAS curve rightward but leaves the SAS curve unchanged. Answer: C Topic: Study Guide Question, Change in Money Wages & Other Resource Skill: Conceptual Status: Old AACSB: Reflective Thinking 108) An increase in the level of technology shifts A) both the SAS and LAS curves rightward. B) both the SAS and LAS curves leftward. C) the SAS curve rightward but leaves the LAS unchanged. D) the LAS curve rightward but leaves the SAS curve unchanged. Answer: A Topic: Study Guide Question, Changes in Aggregate Supply, Technology Skill: Conceptual Status: Old AACSB: Reflective Thinking 2 Aggregate Demand 1) The aggregate demand curve shows A) total expenditures at different levels of national income. B) the quantity of real GDP demanded at different price levels. C) that real income is directly (positively) related to the price level. D) All of the above answers are correct. Answer: B Topic: The Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 2) The AD curve shows the sum of A) the price level, employment, and real GDP. B) consumption expenditure, investment, and real GDP. C) consumption expenditure, investment, government expenditures on goods and services, and net exports. D) consumption expenditure, investment, the price level, and real GDP. Answer: C Topic: The Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 33 Copyright © 2014 Pearson Education, Inc.

3) The aggregate demand curve A) has a negative slope. B) has a positive slope. C) is vertical. D) is horizontal. Answer: A Topic: Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 4) Aggregate demand is the relationship between the quantity of real GDP demanded and the ________. A) price level B) money wage rate C) real wage rate D) nominal GDP demanded Answer: A Topic: Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 5) Moving along the aggregate demand curve, a decrease in the quantity of real GDP demanded is a result of A) an increase in the price level. B) a decrease in the price level. C) an increase in income. D) a decrease in income. Answer: A Topic: Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) Other things constant, the economy's aggregate demand curve shows that A) as the price level falls, real GDP decreases. B) any change in the price level shifts the aggregate demand curve. C) the quantity of real GDP demanded decreases when the price level rises. D) the quantity of real GDP demanded and the price level are not related. Answer: C Topic: The Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

7) The aggregate demand curve shows the ________ relationship between the price level and ________. A) positive; the quantity of real GDP demanded B) negative; aggregate labor demanded C) positive; aggregate labor demand D) negative; the quantity of real GDP demanded Answer: D Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) Other things equal, along the aggregate demand curve, a higher price level is associated with A) an increase in the quantity of real GDP demanded. B) a decrease in the quantity of real GDP demanded. C) a decrease in the quantity of nominal GDP demanded. D) higher income levels. Answer: B Topic: Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) The aggregate demand curve shows that, if other factors are held constant, the higher the price level, the A) greater the quantity of real GDP demanded. B) smaller the quantity of real GDP demanded. C) larger consumption expenditure. D) None of the above answers is correct. Answer: B Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) The aggregate demand curve shows that, if other factors are held constant, a A) higher price level results in a decrease in the quantity of real GDP demanded. B) higher price level results in an increase in the quantity of real GDP demanded. C) higher price level results in a lower interest rate. D) lower price level results in inflationary conditions. Answer: A Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

11) The quantity of real GDP demanded equals $12.2 trillion when the price level is 90. If the price level rises to 95, the quantity of real GDP demanded equals A) less than $12.2 trillion. B) $12.2 trillion. C) more than $12.2 trillion. D) more information is needed to determine if the quantity of real GDP demanded increases, decreases, or does not change. Answer: A Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 12) The quantity of real GDP demanded equals $12.4 trillion when the price level is 95. If the price level falls to 90, the quantity of real GDP demanded equals A) less than $12.4 trillion. B) $12.4 trillion. C) more than $12.4 trillion. D) more information is needed to determine if the quantity of real GDP demanded increases, decreases, or does not change. Answer: C Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 13) Which of the following changes while moving along the aggregate demand curve? A) future incomes of households B) the price level C) the amount of money in the economy D) future profits from investment projects Answer: B Topic: Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) The AD curve slopes A) downward due to the wealth and price effects. B) downward due to the wealth and substitution effects. C) upward due to the price and substitution effects. D) upward due to the wealth and substitution effects. Answer: B Topic: The Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 36 Copyright © 2014 Pearson Education, Inc.

15) Your real wealth is measured as the A) amount of assets you have in dollar terms. B) amount of money you have. C) amount of goods and services your wealth will buy. D) amount of goods you have divided by the price level. Answer: C Topic: Aggregate Demand, Wealth Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 16) As the price level falls and other things remain the same, real wealth ________ and ________. A) decreases; short-run aggregate supply decreases B) decreases; the quantity of real GDP demanded decreases C) increases; aggregate demand increases D) increases; the quantity of real GDP demanded increases Answer: D Topic: Aggregate Demand, Wealth Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 17) If you have $1,000 of money in the bank and the price level rises 5 percent, your A) money is worth more in terms of what it can purchase. B) money is worth less in terms of what it can purchase. C) money is worth the same in terms of what it can purchase. D) purchasing power has risen. Answer: B Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Revised AACSB: Reflective Thinking 18) According to the wealth effect, if real wealth decreases then people A) decrease their consumption expenditure. B) increase their consumption expenditure. C) do not respond if their nominal wealth does not change. D) decrease their consumption expenditure only if their nominal wealth also decreases. Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

19) An individual holds $10,000 in a checking account and the price level rises significantly. Hence A) the individual's real wealth and consumption expenditure decrease. B) the individual's real wealth decreases but real national wealth increases. C) there is no change in the individual's real wealth. D) the individual's wealth increases. Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) If you have $1,000 in wealth and the price level increases 20 percent, then A) the $1,000 will buy fewer goods and services. B) the $1,000 dollars will buy 20 percent more goods and services. C) the real value of the $1,000 increases. D) you will be able to buy fewer goods, but the real value of those goods will increase. Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) If you have $5,000 in wealth and the price level decreases 20 percent, then A) the $5,000 will buy fewer goods and services. B) the $5,000 will buy more goods and services. C) the real value of the $5,000 decreases. D) the real value of the $5,000 remains constant. Answer: B Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) A rise in the price level changes aggregate demand because A) firms increase their investment when prices are higher. B) the real value of people's wealth varies directly with the price level and so does their spending. C) the real value of people's wealth decreases and so they decrease their consumption. D) the more money people have, the more it is worth and hence the more goods and services they demand. Answer: C Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 38 Copyright © 2014 Pearson Education, Inc.

23) One reason that the aggregate demand curve has a negative slope is because A) people buy fewer goods and save more when the price level rises because their real wealth decreases. B) firms produce more when the price rises. C) people earn more money when output rises. D) The premise of the question is wrong because the aggregate demand curve has a positive slope. Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) The intertemporal substitution effect refers to substitution of A) goods for services. B) goods and services for less expensive goods and services. C) goods and services today for goods and services in the future. D) goods and services produced domestically for goods and services produced in another country. Answer: C Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 25) According to the intertemporal substitution effect, when the price level rises and other things remain the same A) the interest rate falls. B) the interest rate rises. C) the quantity of money increases. D) government taxes rise. Answer: B Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Recognition Status: Old AACSB: Reflective Thinking

26) Substitution effects help explain the slope of the aggregate demand curve. One substitution effect refers to the A) inverse relationship between the interest rate and the price level. B) direct relationship between the interest rate and the real value of wealth. C) effect on investment expenditures that result from a change in interest rates produced by a change in the price level. D) change in wealth that results from a change in the interest rate. Answer: C Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) According to the intertemporal substitution effect, a fall in the price level will A) decrease the real value of wealth, which increases the quantity of real GDP demanded. B) cause the interest rate to fall so that investment increases and the quantity of real GDP demanded increases. C) increase net exports, which causes the quantity of real GDP demanded to increase. D) increase the real value of wealth, which raises the interest rate so that the quantity of real GDP demanded decreases. Answer: B Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 28) According to the intertemporal substitution effect, when the price level increases, the interest rate A) rises and the quantity of real GDP demanded increases. B) rises and the quantity of real GDP demanded decreases. C) falls and the quantity of real GDP demanded decreases. D) is not affected. Answer: B Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

29) According to the intertemporal substitution effect, a higher price level A) decreases the quantity of real GDP demanded. B) lowers the costs of building new plants and equipment. C) increases the quantity of real GDP demanded. D) makes it less costly for people to buy houses and cars. Answer: A Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) The intertemporal substitution effect of the price level on aggregate demand A) is the same as the real wealth effect. B) is one reason that the aggregate demand curve has a negative slope. C) explains why aggregate demand increases when the amount of money increases. D) is one reason that the aggregate demand curve has a positive slope. Answer: B Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 31) One reason that the aggregate demand curve has a negative slope is that when the domestic price level rises, A) firms produce more goods and services. B) firms produce fewer goods and services. C) people substitute toward more imported goods and services. D) peoples' wealth increases. Answer: C Topic: Aggregate Demand, International Price Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) One reason that the aggregate demand curve has a negative slope is because A) firms supply more when prices rise. B) people buy more foreign goods when the domestic price level rises. C) the amount of money in the economy increases when the price level rises. D) firms supply less when prices rise. Answer: B Topic: Aggregate Demand, International Price Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

33) There are several reasons why the aggregate demand curve is downward sloping. Which of the following correctly describes one of these explanations? A) A rise in the price level raises the purchasing power wealth and increases desired consumption. B) A rise in the price level raises interest rates and increases investment spending. C) A fall in the price level, holding foreign prices and the exchange rate constant, increases net exports. D) A rise in the price level lowers the interest rate and increases investment spending. Answer: C Topic: Aggregate Demand, International Price Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) When the prices of U.S.-produced goods rise and the price of foreign-produced goods do not change, the result is A) an increase in exports. B) a decrease in exports. C) a decrease in imports. D) no change in imports or exports. Answer: B Topic: Aggregate Demand, International Price Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 35) When the price level in France increases while the exchange rate and the price level in the United States remain the same, the result is A) U.S.-made goods become relatively cheaper compared to French-made goods. B) French citizens are more likely to buy U.S.-made goods. C) U.S. citizens are less likely to buy French-made goods. D) All of the above answers are correct. Answer: D Topic: Aggregate Demand, International Price Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

36) A change in ________ creates a movement along the aggregate demand curve but does not shift the aggregate demand curve. A) tax rates B) the price level C) fiscal policy D) None of the above because they all shift the aggregate demand curve. Answer: B Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

37) In the above figure, the economy is initially at point B. Then the price level falls by 10. The wealth effect will help A) move the economy to point A. B) move the economy to point C. C) move the economy to point D. D) keep the economy to point B. Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Analytical Status: Old AACSB: Analytical Skills

38) In the above figure, the economy initially is at point B. Then price level rises by 10. The wealth effect will help A) move the economy to point A. B) move the economy to point C. C) move the economy to point D. D) keep the economy to point B. Answer: B Topic: Aggregate Demand, Wealth Effect Skill: Analytical Status: Old AACSB: Analytical Skills 39) In the above figure, the economy initially is at point C. Then the domestic price level rises by 10. A A) substitution effect would help move the economy to point D. B) substitution effect would help move the economy to point B. C) substitution effect would keep the economy at point C. D) wealth effect would help move the economy to point B. Answer: A Topic: Aggregate Demand, International Price Substitution Effect Skill: Analytical Status: Old AACSB: Analytical Skills 40) An increase in aggregate demand is shown by a A) rightward shift the AD curve. B) movement upward along the AD curve. C) movement downward along the AD curve. D) leftward shift the AD curve. Answer: A Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking 41) Which of the following does NOT shift the aggregate demand curve? A) a decrease in the quantity of money B) an increase in people's expected future incomes C) an increase in the price level D) an increase in current foreign income Answer: C Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

42) Which of the following would NOT shift the U.S. aggregate demand curve? A) a change in income in Canada B) a change in the quantity of capital in the United States C) an expectation that inflation will be lower in the future D) U.S. monetary and fiscal policy Answer: B Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking 43) Which of the following changes would NOT shift the aggregate demand curve? A) a change in fiscal policy B) a change in monetary policy C) a change in expectations about future income D) an increase in technology Answer: D Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking 44) Aggregate demand increases when A) foreign incomes fall. B) interest rates rise. C) the exchange rate rises. D) None of the above answers is correct. Answer: D Topic: Changes in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 45) Which of the following does NOT shift the aggregate demand curve? A) a decrease in the quantity of money B) an increase in investment C) an increase in the price level D) a decrease in taxes Answer: C Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

46) A key issue in the presidential election of 2012 between President Obama and Mr. Romney concerned tax rates. President Obama favored increasing taxes, especially on the rich. As a result of a tax increase, A) the aggregate demand curve shifts leftward. B) the aggregate demand curve shifts rightward. C) the aggregate supply curve shifts leftward. D) the aggregate supply curve shifts rightward. Answer: A Topic: Changes in Aggregate Demand Skill: Conceptual Status: New AACSB: Reflective Thinking 47) Which of the following issues prominent in the presidential election of 2012 shifts the aggregate demand curve rightward? A) raising taxes on the rich B) increasing Medicare, Medicaid, and Social Security payments C) loosening immigration policies D) allowing more oil drilling on Federal lands Answer: B Topic: Changes in Aggregate Demand Skill: Conceptual Status: New AACSB: Reflective Thinking 48) A change in ________ creates a movement along the aggregate demand curve, while a change in ________ shifts the aggregate demand curve. A) expected profits; tax rates B) the price level; government expenditures C) foreign income; the foreign exchange rate D) real wealth; human capital Answer: B Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking 49) Which of the following shifts the aggregate demand curve rightward? A) a decrease in consumption B) an increase in investment C) a decrease in net exports D) a decrease in government expenditure on goods and services Answer: B Topic: Changes in Aggregate Demand, Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 46 Copyright © 2014 Pearson Education, Inc.

50) Suppose consumers decrease their consumption expenditure because they worry about what their income will be in the future. There is A) a rightward shift of the aggregate demand curve. B) an upward movement along the aggregate demand curve. C) a downward movement along the aggregate demand curve. D) a leftward shift of the aggregate demand curve. Answer: D Topic: Changes in Aggregate Demand, Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 51) If the expected future inflation rate decreases, then A) aggregate demand increases. B) short-run aggregate supply increases. C) aggregate demand decreases. D) long-run aggregate supply decreases. Answer: C Topic: Changes in Aggregate Demand, Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 52) If higher inflation is expected in the future, then the A) SAS curve shifts rightward. B) AD curve shifts rightward. C) LAS curve shifts rightward. D) None of the above answers is correct. Answer: B Topic: Changes in Aggregate Demand, Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 53) People expect their incomes will decrease next year. As a result, the ________ will shift ________. A) short-run aggregate supply curve; rightward B) aggregate demand curve; rightward C) aggregate demand curve; leftward D) long-run aggregate supply curve; rightward Answer: C Topic: Changes in Aggregate Demand, Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 47 Copyright © 2014 Pearson Education, Inc.

54) People expect that the El Nino effect will cause drought in Australia in coming years. If most Australian firms expect their profits will fall during the next five years, Australia's ________ this year. A) aggregate demand will increase B) long-run aggregate supply will increase C) aggregate demand will decrease D) short-run aggregate supply will increase Answer: C Topic: Changes in Aggregate Demand, Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 55) Which of the following statements is FALSE? A) Fiscal policy is the attempt to influence the economy using taxes, transfer payments, and government expenditures. B) Government expenditure affects aggregate demand directly because government expenditure is a component of aggregate demand. C) Taxes and transfer payments affect aggregate demand by changing disposable income. D) An increase in disposable income leads to a decrease in aggregate demand. Answer: D Topic: Changes in Aggregate Demand, Fiscal Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 56) A decrease in government transfer payments A) increases aggregate demand. B) increases the aggregate quantity demanded. C) decreases the aggregate quantity demanded. D) decreases aggregate demand. Answer: D Topic: Changes in Aggregate Demand, Transfer Payments Skill: Conceptual Status: Old AACSB: Reflective Thinking 57) An increase in government expenditure on goods and services A) increases aggregate demand. B) increases the aggregate quantity demanded. C) decreases the aggregate quantity demanded. D) decreases aggregate demand. Answer: A Topic: Changes in Aggregate Demand, Government Expenditure Skill: Conceptual Status: Old AACSB: Reflective Thinking 48 Copyright © 2014 Pearson Education, Inc.

58) A decrease in government expenditure on goods and services A) increases aggregate demand. B) increases the aggregate quantity demanded. C) decreases the aggregate quantity demanded. D) decreases aggregate demand. Answer: D Topic: Changes in Aggregate Demand, Government Expenditure Skill: Conceptual Status: Old AACSB: Reflective Thinking 59) A decrease in government expenditure shifts the AD curve ________ and a decrease in taxes shifts the AD curve ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: C Topic: Changes in Aggregate Demand, Government Expenditure Skill: Conceptual Status: Old AACSB: Reflective Thinking 60) Which of the following shifts the aggregate demand curve leftward? A) an increase in consumption expenditures B) a decrease in taxes C) a decrease in government expenditures on goods and services D) an increase in net exports of goods and services Answer: C Topic: Changes in Aggregate Demand, Government Expenditure Skill: Conceptual Status: Old AACSB: Reflective Thinking 61) Disposable income ________ when ________. A) decreases; taxes increase B) decreases; transfer payments increase C) increases; government expenditures decrease D) decreases; aggregate income increases Answer: A Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking

62) The aggregate demand curve A) shifts rightward when the price level increases and leftward when the price level falls. B) shifts rightward when taxes are decreased. C) shifts rightward when foreign incomes decrease and shifts leftward when foreign incomes increase. D) does not shift, unlike market demand curves. Answer: B Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking 63) If taxes are increased, the AD curve A) is not affected because a change in taxes is a nominal change not real change. B) shifts rightward and aggregate demand decreases. C) shifts leftward and aggregate demand decreases. D) does not shift but there is a movement down along the curve. Answer: C Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking 64) Which of the following shifts the aggregate demand curve rightward? A) a decrease in government expenditure B) expectations that future incomes will fall C) a decrease in the quantity of money and an increase in interest rates D) a tax cut Answer: D Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking 65) Which of the following decreases aggregate demand? A) The government increases taxes on both business and personal income. B) Foreign incomes rise. C) The quantity of money in the economy increases. D) Households believe that the economy is headed for good times, with higher future incomes. Answer: A Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking

66) Which of the following increases aggregate demand? A) a decrease in taxes B) a decrease in foreign income C) a decrease in government expenditure D) a rise in the interest rate Answer: A Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking 67) Which of the following shifts the aggregate demand curve rightward? A) an increase in the tax rate B) a decrease in the price level C) an increase in the quantity of money D) an increase in the exchange rate Answer: C Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 68) Which of the following increases aggregate demand? A) an increase in taxes B) an increase in the quantity of money C) an increase in the exchange rate D) a decrease in government expenditures Answer: B Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 69) If the quantity of money increases, the A) price level rises and the AD curve does not shift. B) AD curve shifts leftward and aggregate demand decreases. C) AD curve does not shift and there is a movement upward along the curve. D) AD curve shifts rightward and aggregate demand increases. Answer: D Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

70) Which of the following shifts the aggregate demand curve rightward? A) a decrease in the price level B) a decrease in government expenditures C) an increase in the quantity of money D) a decrease in transfer payments Answer: C Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 71) The U.S. aggregate demand curve shifts leftward if A) the economic conditions in Europe improve so that European incomes increase. B) there is a tax cut. C) the Federal Reserve hikes the interest rate. D) the exchange rate falls. Answer: C Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 72) Which of the following increases aggregate demand and shifts the AD curve rightward? A) a fall in the price level B) an increase in the quantity of money and a resulting fall in the interest rate C) predictions of a recession that lead to expectations of lower future income D) an increase in the exchange rate that makes imports less expensive Answer: B Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 73) Aggregate demand increases if the quantity of money ________. A) decreases or tax rates increase B) or transfer payments decrease C) remains constant or tax rates increase D) increases or tax rates decrease Answer: D Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

74) The U.S. exchange rate rises. As a result, there is a A) movement along the U.S. aggregate demand curve but the curve does not shift. B) rightward shift in the U.S. aggregate demand curve. C) leftward shift in the U.S. aggregate demand curve. D) rightward shift in the long-run U.S. aggregate supply curve. Answer: C Topic: Changes in Aggregate Demand, Foreign Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 75) When the exchange rises, then the A) AD curve shifts rightward. B) AD curve shifts leftward. C) LAS curve shifts rightward. D) LAS curve shifts leftward. Answer: B Topic: Changes in Aggregate Demand, Foreign Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 76) Suppose the exchange rate falls from $1.20 Canadian per U.S. dollar to $1.10 Canadian per U.S. dollar. U.S. exports will ________, U.S. imports will ________, and U.S. aggregate demand will ________. A) decrease; increase; decrease B) decrease; increase; increase C) increase; decrease; increase D) increase; increase; increase Answer: C Topic: Changes in Aggregate Demand, Foreign Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) A decrease in foreign incomes A) increases aggregate demand in the United States. B) increases the aggregate quantity demanded in the United States. C) decreases the aggregate quantity demanded in the United States. D) decreases aggregate demand in the United States. Answer: D Topic: Changes in Aggregate Demand, Foreign Incomes Skill: Conceptual Status: Old AACSB: Reflective Thinking

78) An increase in foreign incomes A) increases aggregate demand in the United States. B) increases the aggregate quantity demanded in the United States. C) decreases the aggregate quantity demanded in the United States. D) decreases aggregate demand in the United States. Answer: A Topic: Changes in Aggregate Demand, Foreign Incomes Skill: Conceptual Status: Old AACSB: Reflective Thinking

79) In the above figure, the economy is initially at point B. If the government decreases transfer payments, there is A) a movement to point C. B) a movement to point A. C) a shift to AD2. D) a shift to AD1. Answer: C Topic: Changes in Aggregate Demand, Transfer Payments Skill: Analytical Status: Old AACSB: Analytical Skills

80) In the above figure, the economy is initially at point B. If taxes increase, there is A) a movement to point C. B) a movement to point A. C) a shift to AD2. D) a shift to AD1. Answer: C Topic: Changes in Aggregate Demand, Taxes Skill: Analytical Status: Old AACSB: Analytical Skills 81) In the above figure, the economy is initially at point B. If the Fed decreases the quantity of money, there is A) a movement to point C. B) a movement to point A. C) a shift to AD2. D) a shift to AD1. Answer: C Topic: Changes in Aggregate Demand, Money Skill: Analytical Status: Old AACSB: Analytical Skills 82) In the above figure, the economy is initially at point B. If the Fed increases the quantity of money, there is A) a movement to point C. B) a movement to point A. C) a shift to AD2. D) a shift to AD1. Answer: D Topic: Changes in Aggregate Demand, Money Skill: Analytical Status: Old AACSB: Analytical Skills

83) In the above figure, if the economy is at point a, an increase in ________ will move the economy to ________. A) real wealth from the fall in the price level; point b B) real wealth from the fall in the price level; point c C) expected future income; point c D) expected future income; point d Answer: B Topic: Aggregate Demand, Wealth Effect Skill: Analytical Status: Old AACSB: Analytical Skills 84) In the above figure, if the economy is at point a, an increase in ________ will move the economy to ________. A) real wealth; point d B) real wealth from a fall in the price level; point d C) expected future income; point b D) expected future income; point d Answer: C Topic: Changes in Aggregate Demand, Expectations Skill: Analytical Status: Old AACSB: Analytical Skills

85) In the above figure, the movement from point B to point A might be the result of A) an increase in government expenditures because of a war. B) an increase in government expenditures because of increases in education expenditures. C) an increase in the demand for manufacturing goods because of new technology. D) a fall in the price level. Answer: D Topic: The Aggregate Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills 86) In the above figure, the shift from point C to point B might be the result of A) an increase in the price level. B) a decrease in the price level. C) a decrease in government expenditures. D) an increase in the quantity of money. Answer: C Topic: Changes in Aggregate Demand, Government Expenditure Skill: Analytical Status: Old AACSB: Analytical Skills

87) The curve labeled A in the above figure is A) a short-run aggregate supply curve. B) an aggregate demand curve. C) a long-run aggregate supply curve. D) a production possibilities curve. Answer: B Topic: The Aggregate Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills 88) In the above figure, the curve labeled A shifts rightward if A) expected future profits decrease. B) the quantity of money decreases. C) the substitution effect occurs. D) taxes decrease. Answer: D Topic: Changes in Aggregate Demand, Taxes Skill: Analytical Status: Old AACSB: Analytical Skills

89) The U.S. fiscal policy implemented in 2008 was an attempt to A) give billions of dollars to businesses and low- and middle-income Americans in order stimulate business investment and consumption expenditure, thereby increasing AD. B) give billions of dollars to businesses and low- and middle-income Americans in order stimulate business investment and consumption expenditure, thereby increasing SAS. C) decrease interest rates in order to stimulate business investment and consumption expenditure, thereby increasing AD. D) decrease the exchange rate in order to boost net exports, thereby increasing AD. Answer: A Topic: Recession of 2008 Skill: Recognition Status: Old AACSB: Reflective Thinking 90) The U.S. monetary policy implemented in 2008 was an attempt to A) give billions of dollars to businesses and low- and middle-income Americans in order stimulate business investment and consumption expenditure, thereby increasing AD. B) decrease interest rates in order to stimulate business investment and consumption expenditure, thereby increasing SAS. C) decrease interest rates in order to stimulate business investment and consumption expenditure, thereby increasing AD. D) decrease the exchange rate in order to boost net exports, thereby increasing AD. Answer: C Topic: Recession of 2008 Skill: Recognition Status: Old AACSB: Reflective Thinking 91) The aggregate demand curve illustrates that, as the price level rises, A) the quantity of real GDP demanded increases. B) the quantity of real GDP demanded decreases. C) the AD curve shifts rightward. D) the AD curve shifts leftward. Answer: B Topic: Study Guide Question, Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

92) As the price level falls, the quantity of real wealth ________ and the aggregate quantity of real GDP demanded ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Study Guide Question, Aggregate Demand, Wealth Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 3 Explaining Macroeconomic Trends and Fluctuations 1) The AS/AD model studies the relationship between A) the price level and unemployment. B) the price level and real GDP. C) unemployment and real GDP. D) nominal GDP and inflation. Answer: B Topic: The AS-AD Model Skill: Recognition Status: Old AACSB: Reflective Thinking 2) By using only the aggregate demand curve, we can determine A) only the price level. B) only the quantity of real GDP. C) both the price level and quantity of real GDP. D) neither the price level nor the quantity of real GDP. Answer: D Topic: Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 3) In short-run macroeconomic equilibrium A) real GDP equals potential GDP and aggregate demand determines the price level. B) the price level is fixed and short-run aggregate supply determines real GDP. C) real GDP and the price level are determined by short-run aggregate supply and aggregate demand. D) real GDP is less than potential GDP. Answer: C Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 60 Copyright © 2014 Pearson Education, Inc.

4) The economy is in its short run equilibrium at the point where the A) price level is stable. B) SAS curve intersects the LAS curve. C) AD curve intersects the LAS curve. D) AD curve intersects the SAS curve. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 5) Short-run equilibrium occurs at the intersection of A) the SAS and AD curves. B) the SAS, LAS, and AD curves. C) the SAS and LAS curves. D) the LAS and AD curves. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 6) If the economy is in short run equilibrium then A) real GDP equals potential GDP. B) nominal GDP equals potential GDP. C) real GDP cannot be equal to potential GDP. D) real GDP can be greater than, less than, or equal to potential GDP. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 7) In the short-run, real GDP can be greater than or less than potential GDP because in the short run the A) money wage rate is fixed. B) quantity of capital is fixed. C) full-employment level of employment is fixed. D) price level is fixed. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking

8) Short-run macroeconomic equilibrium occurs when the quantity of real GDP demanded ________. A) equals potential GDP B) equals full-employment GDP C) does not equal full-employment GDP D) equals the quantity of real GDP supplied Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 9) In the short run, the equilibrium level of real GDP A) is necessarily less than potential GDP. B) is necessarily equal to potential GDP. C) is necessarily greater than potential GDP. D) could be less than, equal to, or greater than potential GDP. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 10) In the short run, the intersection of the aggregate demand and the short-run aggregate supply curves, A) determines the equilibrium price level. B) is a point where there is neither a surplus nor a shortage of goods. C) determines the equilibrium level of real GDP. D) All of the above answers are correct. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking

11) A short-run macroeconomic equilibrium occurs A) at the intersection of the short-run aggregate supply curve and the long-run aggregate supply curve. B) at the intersection of the short-run aggregate supply curve and the aggregate demand curve. C) at the intersection of the short-run aggregate supply curve, the long-run aggregate supply curve, and the aggregate demand curve. D) when the rate at which prices of goods and services increase equals the rate at which money wage rates increase. Answer: B Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 12) Last year in the country of Union, the price level increased and real GDP increased. Such an outcome might have occurred because short-run aggregate supply ________ and aggregate demand ________. A) decreased; decreased B) increased; did not change C) increased; decreased D) did not change; increased Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) At long-run macroeconomic equilibrium, ________. A) an inflationary gap exists B) real GDP equals potential GDP C) a recessionary gap exists D) real GDP is less than potential GDP but is as close as it is possible to be Answer: B Topic: Long-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking

14) If the economy is at long run equilibrium then A) real GDP equals potential GDP. B) nominal GDP equals potential GDP. C) real GDP cannot be equal to potential GDP. D) real GDP can be greater than, less than, or equal to potential GDP. Answer: A Topic: Long-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 15) Full-employment equilibrium occurs when A) real GDP exceeds potential GDP. B) real GDP equals potential GDP. C) potential GDP exceeds real GDP. D) a result of an increase in long-run aggregate supply. Answer: B Topic: Long-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 16) In long-run macroeconomic equilibrium, A) real GDP equals potential GDP. B) the price level is fixed and aggregate demand determines real GDP. C) real GDP and the price level are determined by short-run aggregate supply and aggregate demand and long-run aggregate supply is irrelevant. D) real GDP is less than potential GDP. Answer: A Topic: Long-Run Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

Real GDP supplied Real GDP Short run Long run Price level demanded (dollars) (dollars) (dollars) 90 700 300 600 100 600 400 600 110 500 500 600 120 400 600 600 17) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. With no changes in aggregate demand or long-run aggregate supply, in long-run macroeconomic equilibrium, the price level will be ________ and real GDP will be ________. A) 120; $400 B) 110; $500 C) 90; $400 D) 100; $600 Answer: D Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Aggregate Price demand level (trillions of 2005 dollars) 130 120 110 100 90

8 9 10 11 12

Short-run Long-run aggregate aggregate supply supply (trillions of (trillions of 2005 dollars) 2005 dollars) 12 10 11 10 10 10 9 10 8 10

18) The data in the above table indicate that when the price level is 120, A) inventories fall and the price level rises. B) the economy is in a long-run macroeconomic equilibrium. C) inventories rise and the price level falls. D) the unemployment rate is at its equilibrium level. Answer: C Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

19) The data in the above table indicate that when the price level is 100, A) inventories fall and the price level rises. B) the economy is in a long-run macroeconomic equilibrium. C) inventories rise and the price level falls. D) the unemployment rate is at its equilibrium level. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 20) The data in the above table indicate that when the price level is 100, A) firms have unexpectedly low inventories, so prices will rise. B) inventories are at levels planned by firms. C) firms will plan to decrease the level of output. D) firms have unexpectedly high inventories, so prices fall. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 21) The data in the above table indicate that when the price level is 120, A) firms have unexpectedly low inventories, so prices will rise. B) inventories are at levels planned by firms. C) firms will plan to increase the level of output. D) firms have unexpectedly high inventories, so prices fall. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

22) In the above figure, curve A is the ________ curve, curve B is the ________ curve, and curve C is the ________ curve. A) long-run aggregate supply; short-run aggregate supply; aggregate demand B) aggregate demand; short-run aggregate supply; long-run aggregate supply C) short-run aggregate supply; long-run aggregate supply; aggregate demand D) long-run aggregate supply; aggregate demand; short-run aggregate supply Answer: A Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

23) In the figure above, in the short-run macroeconomic equilibrium, A) there is no structural unemployment. B) real GDP is greater than potential GDP. C) real GDP equals potential GDP. D) real GDP is less than potential GDP. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

24) The above figure depicts an economy with a short-run equilibrium A) at full employment. B) below full employment. C) at higher than full-employment. D) None of the above answers are correct. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

25) In the above figure, at the price level of 140 and real GDP of A) $12 trillion, firms will not be able to sell all their output. B) $4 trillion, firms will not be able to sell all their output. C) $4 trillion, consumers will not be able to buy all the goods and services they demand. D) $12 trillion, consumers will not be able to buy all the goods and services they demand. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 26) Based on the figure above, short-run equilibrium occurs at the price level of A) 120 and real GDP of $4 trillion. B) 130 and real GDP of $8 trillion. C) 140 and real GDP of $12 trillion. D) 130 and real GDP of $12 trillion. Answer: B Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

27) The data in the above figure indicate that the economy will be in a long-run macroeconomic equilibrium at a price level of A) 140. B) 130. C) 100. D) 120. Answer: D Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 28) Which of the following can be said about economic growth? I. Economic growth is the result of increases in long-run aggregate supply. II. Economic growth is the result of increases in aggregate demand. A) I only B) II only C) I and II D) neither I or II Answer: A Topic: Economic Growth Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 29) Economic growth is best defined as A) decreases in potential GDP. B) increases in potential GDP. C) rightward shifts of the AD curve. D) rightward shifts of the SAS curve. Answer: B Topic: Economic Growth Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

30) Which of the following helps determine the growth rate of potential GDP? I. capital accumulation II. technology advances III. growth in the quantity of money A) I B) I and II C) I and III D) I, II and III Answer: B Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 31) Economic growth A) occurs when the long-run aggregate supply curve shifts upward. B) is an increase in potential GDP as the long-run aggregate supply curve shifts rightward. C) requires a compensating decrease in aggregate demand to offset the increase in aggregate supply. D) All of the above answers are correct. Answer: B Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) Over time in a growing economy, the long-run aggregate supply curve will A) become horizontal at the long-run potential price level. B) shift rightward. C) shift leftward. D) become increasingly steep. Answer: B Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

33) The country of Mu has continuous strong economic growth and a steady price level. This situation is most likely the result of aggregate demand growing ________ aggregate supply. A) at the same pace as long-run B) slower than long-run C) slower than short-run D) faster than long-run Answer: A Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) If aggregate demand grows only slightly faster than potential GDP, then the economy will ________. A) experience economic growth with high inflation B) experience recession C) experience economic growth with low inflation D) be at a business-cycle peak Answer: C Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 35) In the United States, of the following decades economic growth was most rapid during the ________. A) 1960s B) 1990s C) 1970s D) 2000s Answer: A Topic: Economic Growth Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 36) In the United States, of the following decades inflation was highest during the ________., A) 1970s B) 1990s C) 1960s D) 2000s Answer: A Topic: Inflation Skill: Recognition Status: Old AACSB: Reflective Thinking 73 Copyright © 2014 Pearson Education, Inc.

37) Inflation occurs over time as a result of A) long-run aggregate supply increasing faster than aggregate demand. B) long-run aggregate supply increasing faster than short-run aggregate supply. C) decreases in aggregate demand. D) aggregate demand increasing faster than long-run aggregate supply. Answer: D Topic: Inflation Skill: Conceptual Status: Old AACSB: Reflective Thinking 38) If the aggregate demand curve shifts ________ faster than the long-run aggregate supply curve, then ________ occurs. A) leftward; economic growth B) leftward; inflation C) rightward; economic growth D) rightward; inflation Answer: D Topic: Inflation Skill: Conceptual Status: Old AACSB: Reflective Thinking 39) When an increase in aggregate demand exceeds the increase in aggregate supply, A) real GDP decreases while nominal GDP increases. B) the price level falls while real GDP increases. C) nominal GDP decreases and real GDP decreases. D) the economy will experience inflation as the price level rises. Answer: D Topic: Inflation Skill: Conceptual Status: Old AACSB: Reflective Thinking 40) Business cycles are the result of A) regular shifts of the AD curve only. B) irregular shifts of the SAS curve only. C) regular shifts of both the AD and SAS curves. D) irregular shifts of both the AD and SAS curves. Answer: D Topic: Business Cycle Skill: Recognition Status: Old AACSB: Reflective Thinking

41) One result of a decrease in aggregate demand and no change in aggregate supply is A) a recession. B) an increase in employment levels. C) an economic expansion. D) a rise in the price level. Answer: A Topic: Business Cycle Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) Starting at full employment, a business cycle can be described by the following sequence: ________ equilibrium, ________ equilibrium, ________ equilibrium. A) full-employment; below full-employment; above full-employment B) below full-employment; full-employment; above full-employment C) above full-employment; below full-employment; full-employment D) below full-employment; full-employment; below full-employment Answer: B Topic: Business Cycle Skill: Conceptual Status: Old AACSB: Reflective Thinking 43) When real GDP exceeds potential GDP, then the economy has A) an inflationary gap. B) a below full-employment equilibrium. C) a recessionary gap. D) None of the above answers are correct. Answer: A Topic: Inflationary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking 44) An inflationary gap is occurs when A) real GDP is less than potential GDP. B) real GDP exceeds potential GDP. C) real GDP equals potential GDP. D) the economy is at full employment. Answer: B Topic: Inflationary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking

45) When the economy is at an above full-employment equilibrium, ________. A) nominal GDP exceeds real GDP B) an inflationary gap exists C) a recessionary gap exists D) real GDP is less than potential GDP Answer: B Topic: Inflationary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking 46) An above full-employment equilibrium is A) a theoretical possibility but cannot happen in reality. B) the equilibrium in which the economy is in most of the time. C) when real GDP exceeds potential GDP. D) the period of time when prices are falling. Answer: C Topic: Inflationary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking 47) A recessionary gap means that short-run macroeconomic equilibrium GDP A) is less than full-employment GDP. B) equals full-employment GDP. C) is more than full-employment GDP. D) may be less than, more than, or the same as full-employment GDP depending on the level of potential GDP. Answer: A Topic: Recessionary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking 48) If real GDP is less than potential GDP, then the economy is ________ equilibrium. A) at an above full-employment B) not in short-run macroeconomic C) at a below full-employment D) in long-run macroeconomic Answer: C Topic: Recessionary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking

49) A recessionary gap occurs when A) real GDP is less than potential GDP. B) nominal GDP is less than potential GDP. C) high rates of inflation occur. D) nominal GDP is greater than potential GDP. Answer: A Topic: Recessionary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking 50) If aggregate demand decreases and neither short-run nor long-run aggregate supply changes, then A) the price level increases in the short-run and decreases in the long-run. B) there is an inflationary gap. C) there is a recessionary gap. D) in the long run, the long-run aggregate supply will decrease. Answer: C Topic: Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking 51) A below full-employment equilibrium A) is not possible in the U.S. economy. B) occurs when real GDP is less than potential GDP. C) occurs when the price level is rising very quickly. D) occurs when real GDP exceeds potential GDP. Answer: B Topic: Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking 52) An economy is at full employment. Which of the following events can create a recessionary gap? A) an increase in foreign income B) an increase in taxes C) a decrease in the quantity of capital D) a decrease in money wages Answer: B Topic: Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking

53) The Great Depression, in which real GDP fell and unemployment rose, can be characterized as a ________. A) inflationary gap B) long-run equilibrium C) recessionary gap D) full-employment equilibrium Answer: C Topic: Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking 54) Suppose the economy is experiencing a recessionary gap. In the long run, if aggregate demand does not change the money wage rate ________, unemployment ________, and the price level ________. A) falls; rises; falls B) falls; falls; falls C) rises; rises; rises D) rises; falls; rises Answer: B Topic: Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking 55) An above full-employment equilibrium occurs when A) aggregate demand decreases while neither the short-run nor long-run aggregate supply changes. B) short-run aggregate supply decreases while neither aggregate demand nor long-run aggregate supply changes. C) the equilibrium level of real GDP is greater than potential GDP. D) the equilibrium level of real GDP is less than potential GDP. Answer: C Topic: Above Full-Employment Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

Real GDP supplied Real GDP Short run Long run Price level demanded (dollars) (dollars) (dollars) 90 700 300 600 100 600 400 600 110 500 500 600 120 400 600 600 56) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. The short-run macroeconomic equilibrium is a price level of ________ and a real GDP of ________. A) 90; $400 B) 100; $400 C) 110; $500 D) 120; $400 Answer: C Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 57) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. In short-run equilibrium, there is ________. A) an inflationary gap of $100 B) a recessionary gap of $100 C) a recessionary gap of $200 D) an inflationary gap of $200 Answer: B Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 58) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. Lotus Land is in short-run macroeconomic equilibrium. In the long run, if aggregate demand does not change then Lotus Land will return to full-employment as ________. A) the money wage rate rises B) the money wage rate falls C) businesses cut their imports D) the government cuts taxes Answer: B Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 79 Copyright © 2014 Pearson Education, Inc.

59) In the above figure, the inflationary gap when AD2 is the aggregate demand curve equals A) the difference between 110 and 100. B) the difference between $13.5 trillion and $13.0 trillion. C) LAS minus SAS at a price level of 100. D) AD1. Answer: B Topic: Inflationary Gap Skill: Analytical Status: Revised AACSB: Analytical Skills 60) The reason that it is possible for the economy in the above figure to be at equilibrium E2 rather than at E1 is that A) in the long run there is always less than full employment. B) in the short run the economy can produce more than it can in a long-run situation. C) AD always shifts rightward and never shifts leftward. D) the economy must be in a recession. Answer: B Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

61) The above figure illustrates A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) an equilibrium at the economy's physical limits. Answer: B Topic: Full-Employment Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 62) An inflationary gap means that short-run macroeconomic equilibrium GDP A) is less than full-employment GDP. B) equals full-employment GDP. C) is more than full-employment GDP. D) may be less than, more than, or the same as full-employment GDP depending on the level of potential GDP. Answer: C Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

63) The above figure illustrates A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) an equilibrium at the economy's physical limits. Answer: C Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

64) In the above figure, point A represents A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) an increase in aggregate demand. Answer: A Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 65) In the above figure, point B represents A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) a decrease in aggregate demand. Answer: B Topic: Full-Employment Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

66) In the above figure, point C represents A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) a decrease in aggregate demand. Answer: C Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

67) In the above figure, the short-run aggregate supply curve is SAS and the aggregate demand curve is AD. A recessionary gap exists A) if the long-run aggregate supply curve is LAS1. B) if the long-run aggregate supply curve is LAS2. C) if the long-run aggregate supply curve is LAS3. D) All of the above answers are correct. Answer: C Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

68) In the above figure, the short-run aggregate supply curve is SAS and the aggregate demand curve is AD. An inflationary gap exists A) if the long-run aggregate supply curve is LAS1. B) if the long-run aggregate supply curve is LAS2. C) if the long-run aggregate supply curve is LAS3. D) All of the above answers are correct. Answer: A Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

69) In the above figure, if the economy is at point A, which of the following is true? A) Point A is the long-run equilibrium point. B) The economy is in a recession. C) Money wages can be expected to fall. D) The economy might be at point A as a result of a recent cut in the tax rate. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

70) In the above figure, if the economy is at point A, which of the following is true? A) There is a recessionary gap. B) There is an inflationary gap. C) Point A is the long-run equilibrium point. D) None of the above answers are correct. Answer: B Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

71) The above figure depicts an economy A) with an inflationary gap. B) with a recessionary gap. C) producing at full employment. D) None of the above answers is correct. Answer: A Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

72) In the above figure, the short-run equilibrium will eventually adjust to a long-run equilibrium with a A) lower price level and smaller real GDP B) higher price level and larger real GDP. C) higher price level and smaller real GDP. D) lower price level and larger real GDP. Answer: C Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

73) The above figure illustrates A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) an equilibrium at the economy's physical limits. Answer: A Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

74) In the above figure, if aggregate demand does not change the short-run equilibrium will A) eventually adjust to a long-run equilibrium with a higher price level. B) will not adjust on its own. C) eventually adjust to a long-run equilibrium with a lower price level. D) None of the above answers are correct. Answer: C Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 75) Suppose the economy was initially in a long-run equilibrium. Then the world economy expands so that foreign incomes rise. U.S. aggregate demand ________ and eventually the money wage rate ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 76) If the economy is in long run equilibrium and aggregate demand increases, then in the short run A) nothing happens because the economy is in long run equilibrium. B) the price level rises and real GDP does not change. C) real GDP increases and the price level does not change. D) the price level rises and real GDP increases. Answer: D Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) The Federal Reserve lowers interest rates. As a result, in the short run, real GDP ________ and the price level ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 88 Copyright © 2014 Pearson Education, Inc.

78) The government increases taxes. As a result, in the short run, real GDP ________ and the price level ________. A) increases; rises B) decreases; falls C) decreases; rises D) increases; falls Answer: B Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 79) In the short run, an increase in government expenditure on goods and services ________ real GDP and ________ the price level. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 80) In the short-run, a decrease in government expenditure ________ real GDP and ________ the price level. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 81) In the short run, an increase in aggregate demand A) lowers the price level and decreases real GDP. B) lowers the price level and increases real GDP. C) raises the price level and increases real GDP. D) raises the price level and decreases real GDP. Answer: C Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 89 Copyright © 2014 Pearson Education, Inc.

82) A lower price level combined with a decrease in real GDP occurs when the A) short-run aggregate supply curve shifts rightward. B) short-run aggregate supply curve shifts leftward. C) aggregate demand curve shifts rightward. D) aggregate demand curve shifts leftward. Answer: D Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

83) In the above figure, suppose the economy had been at point A and now is at B. What could have lead to the movement to B? A) A tax hike. B) Government expenditures on goods and services increased. C) Winter storms cause factories in the north to be shut down for several weeks. D) Money wage rates rose. Answer: B Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills

84) Suppose the economy is at point B. If firms expect profits will be higher in the future, to what point might the economy's move in the short run? A) It stays at point B. B) It shifts to a point such as A. C) It shifts to a point such as C. D) None of the above answers are correct because it is the SAS curve that shifts, not the AD curve. Answer: C Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills 85) Suppose the economy is at point B. If a recession in another country decreases exports, to what point might economy move in the short run? A) It stays at point B. B) It shifts to a point such as A. C) It shifts to a point such as C. D) None of the above answers are correct because it is the SAS curve that shifts, not the AD curve. Answer: B Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills

86) The figure illustrates aggregate demand and aggregate supply in Sparta. Which of the following events will decrease Sparta's real GDP in the short run? A) a decrease in taxes B) a fall in resource prices C) a decrease in government expenditure D) an increase in investment Answer: C Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Analytical Skills 87) The figure above illustrates aggregate demand and aggregate supply in Sparta. Sparta's price level will rise above 100 if ________. A) government expenditure decreases B) the quantity of money increases C) the quantity of capital increases D) taxes increase Answer: B Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

88) In November, 2012, U.S. lawmakers were faced with a "fiscal cliff:" if they did not agree on how to reduce the federal deficit, automatic tax increases and drastic cuts in government spending would take effect. What would happen if the fiscal cliff occurred? A) The aggregate demand curve shifts leftward, the price level falls and real GDP decreases. B) The aggregate demand curve shifts rightward, the price level rises and real GDP increases. C) The short run aggregate supply curve shift leftward, the price level rises and real GDP decreases. D) The short run aggregate supply curve shifts rightward, the price level falls and real GDP increases. Answer: A Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: New AACSB: Reflective Thinking 89) In November, 2012, U.S. lawmakers were faced with a "fiscal cliff:" if they did not agree on how to reduce the federal deficit, automatic tax increases and drastic cuts in government spending would take effect. What would be the result if the fiscal cliff occurred? A) a recessionary gap B) an inflationary gap C) stagflation D) nothing Answer: A Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: New AACSB: Reflective Thinking 90) In a short-run macroeconomic equilibrium, potential GDP exceeds real GDP. If aggregate demand does not change, then the A) short-run aggregate supply curve will shift rightward as the money wage rate falls. B) short-run aggregate supply curve will shift leftward as the money wage rate rises. C) long-run aggregate supply curve will shift leftward as the money wage rate rises. D) long-run aggregate supply curve will shift leftward as the money wage rate falls. Answer: A Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

91) In a short-run macroeconomic equilibrium, real GDP exceeds potential GDP. If aggregate demand does not change, then the A) short-run aggregate supply curve will shift rightward as the money wage rate falls. B) short-run aggregate supply curve will shift leftward as the money wage rate rises. C) long-run aggregate supply curve will shift leftward as the money wage rate rises. D) long-run aggregate supply curve will shift leftward as the money wage rate falls. Answer: B Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) The country of Stanley is at an above-full employment equilibrium. Which of the following events will return Stanley to full-employment? A) an increase in government expenditures B) a decrease in the interest rate C) an increase in the money wage rate D) an increase in the quantity of money Answer: C Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 93) An economy currently has a inflationary gap. An increase in the money wage rate will ________ the inflationary gap and ________ the price level. A) decrease; decrease B) increase; increase C) increase; decrease D) decrease; increase Answer: D Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

94) Suppose the current situation is such that the price level is 120, real GDP is $13 trillion, and GDP along the long-run aggregate supply curve is $12.6 trillion. What will take place to restore the long-run equilibrium? A) The price level will fall until long-run aggregate supply increases to $13 trillion. B) The price level will fall and money wage rates will rise until real GDP along the long-run aggregate supply curve is $13 trillion. C) Money wage rates will rise until real GDP is $12.6 trillion. D) Aggregate demand will increase until both short-run and long-run aggregate supply equal $13 trillion. Answer: C Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 95) The long-run aggregate supply curve is vertical at $12 trillion but the short-run aggregate supply curve intersects the aggregate demand curve at $13 trillion. We know that A) the economy is producing below full employment in the short run, and will adjust by hiring more workers, thus decreasing unemployment. B) the price level is too high. The long-run equilibrium will occur with a lower price level. C) adjustments will occur so that the long-run aggregate supply equals $13 trillion. D) adjustments will occur so that the short-run aggregate supply eventually intersects the aggregate demand curve at $12 trillion. Answer: D Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 96) In long-run macroeconomic equilibrium, the A) real wage rate has adjusted so that the economy is on the short-run aggregate supply curve but not on the long-run aggregate supply curve. B) long-run aggregate supply curve has shifted so that potential GDP equals real GDP. C) aggregate demand curve adjusts to the point where the long-run aggregate supply curve and the short-run aggregate supply curve intersect. D) None of the above answers is correct. Answer: D Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

97) If the economy is in long run equilibrium and then aggregate demand increases, in the long run the increase in aggregate demand means that the A) price level will be higher but real GDP will be unaffected. B) real GDP will be larger but the price level will be unaffected. C) the price level will be higher and real GDP will be larger. D) neither the price level nor real GDP will be unaffected. Answer: A Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 98) In the long-run equilibrium, an increase in the quantity of capital leads to A) an increase in the equilibrium price level and an increase in equilibrium real GDP. B) a decrease in the equilibrium price level and an increase in equilibrium real GDP. C) a decrease in the equilibrium price level, but no change in equilibrium real GDP. D) no change in the equilibrium price level, but an increase in equilibrium real GDP. Answer: B Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

99) In the above figure, at the point where AD equals SAS, A) real GDP exceeds potential GDP. B) potential GDP exceeds real GDP. C) the economy is in a recession. D) the unemployment rate is zero. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 100) In the above figure, as the economy adjusts toward equilibrium, the A) AD curve will shift rightward. B) SAS curve will shift rightward. C) AD curve will shift leftward. D) SAS curve will shift leftward. Answer: D Topic: Movement to the Long-Run Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

101) In the above figure, when the economy is in a long-run equilibrium, the price level will be A) 90. B) 100. C) 110. D) 120. Answer: D Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 102) In the above figure, when the economy is in a long-run equilibrium, real GDP will be A) $12.5 trillion. B) $13.0 trillion. C) $13.5 trillion. D) $14.0 trillion. Answer: B Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Aggregate Price demand level (trillions of 2005 dollars) 140 130 120 110 100

9.0 9.5 10.0 10.5 11.0

Short-run Long-run aggregate aggregate supply supply (trillions of (trillions of 2005 dollars) 2005 dollars) 11.5 10.0 11.0 10.0 10.5 10.0 10.0 10.0 9.5 10.0

103) The data in the above table indicate that the economy will be in a short-run macroeconomic equilibrium at a price level A) between 130 and 121. B) between 119 and 111. C) of 120. D) of 110. Answer: B Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

104) From the data in the above table, when the economy is at its short-run equilibrium, if aggregate demand does not change, then as time passes the A) short-run aggregate supply curve shifts rightward. B) short-run aggregate supply curve shifts leftward. C) long-run aggregate supply curve shifts rightward. D) long-run aggregate supply curve shifts leftward. Answer: B Topic: Movement to the Long-Run Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills Aggregate demand Short-run aggregate Long-run aggregate Price level (trillions of 2005 supply (trillions of supply (trillions of dollars) 2005 dollars) 2005 dollars) 100 11 7 10 110 10 8 10 120 9 9 10 130 8 10 10 140 7 11 10 105) Based on the data in the table above, the economy will be in short-run equilibrium at a price level of A) 90. B) 110. C) 100. D) 120. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 106) Based on the data in the table above, at the short-run equilibrium A) the unemployment rate is less than the natural unemployment rate. B) the unemployment rate is greater than the natural unemployment rate. C) money wage rates will rise in long-run. D) the economy is at full employment. Answer: B Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

107) Based on the data in the table above, in the adjustment towards the long-run equilibrium A) money wage rates will rise. B) the aggregate demand curve will shift leftward. C) the short-run aggregate supply curve will shift leftward. D) the short-run aggregate supply curve will shift rightward. Answer: D Topic: Movement to the Long-Run Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Aggregate Price demand level (trillions of 2005 dollars) 140 130 120 110 100

4 5 6 7 8

Short-run Long-run aggregate aggregate supply supply (trillions of (trillions of 2005 dollars) 2005 dollars) 8 7 7 7 6 7 5 7 4 7

108) The data in the above table show that the economy will be in a short-run macroeconomic equilibrium at a price level of A) 90. B) 110. C) 100. D) 120. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 109) The data in the above table show that when the price level is 120, A) the unemployment rate is below its natural rate. B) the unemployment rate is above its natural rate. C) money wages rates will rise in the future. D) the long-run aggregate supply curve will shift leftward in the future. Answer: B Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

110) The data in the above table show that when the price level is 120, the economy A) is in a long-run macroeconomic equilibrium. B) has an inflationary gap. C) has a recessionary gap. D) will have falling money wage rates sometime in the future. Answer: C Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 111) The data in the above table show that when the price level is 120, if aggregate demand does not change then the A) money wage rate will rise in the future. B) money wage rate will fall in the future. C) short-run aggregate supply curve will shift leftward. D) long-run aggregate supply curve will shift leftward. Answer: B Topic: Movement to the Long-Run Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 112) The data in the above table show that when the price level is 120, if aggregate demand does not change then the A) short-run aggregate supply curve will shift rightward. B) short-run aggregate supply curve will shift leftward. C) long-run aggregate supply curve will shift rightward. D) long-run aggregate supply curve will shift leftward. Answer: A Topic: Movement to the Long-Run Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

113) In the above figure, point B depicts A) an inflationary gap with real GDP in excess of potential GDP. B) an inflationary gap with real GDP less than potential GDP. C) a recessionary gap with real GDP in excess of potential GDP. D) a recessionary gap with real GDP less than potential GDP. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 114) In the above figure, real GDP at full employment is A) $13 trillion. B) $13.5 trillion. C) more than $13 and less than $13.5 trillion. D) None of the above answers is correct. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

115) In the above figure, the aggregate demand curve is AD2, so the short-run equilibrium level of real GDP is A) $13 trillion. B) $13.5 trillion. C) more than $13 and less than $13.5 trillion. D) None of the above answers is correct. Answer: B Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 116) In the above figure, the aggregate demand curve is AD2, so the long-run equilibrium level of real GDP is A) $13 trillion. B) $13.5 trillion. C) more than $13 and less than $13.5 trillion. D) None of the above answers is correct. Answer: A Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 117) In the above figure, the shift from AD1 to AD2 might have been the result of A) an increase in government expenditure. B) a decrease in taxes. C) an increase in the quantity of money. D) All of the above answers are correct. Answer: D Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills

118) Higher resource prices shift the A) long-run aggregate supply curve leftward, decreasing real GDP and increasing potential GDP. B) short-run aggregate supply curve leftward, raising the price level and decreasing potential GDP. C) short-run aggregate supply curve leftward, raising the price level and decreasing real GDP so it is less than potential GDP. D) short-run aggregate supply curve rightward, raising the price level and decreasing real GDP so it is less than potential GDP. Answer: C Topic: Fluctuations in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 119) Suppose that the economy begins at a long-run equilibrium. Which of the following raises the price level and decrease real GDP in the short run? A) a decrease in the quantity of money B) an increase in the price of oil that decreases aggregate supply C) an increase in the stock of capital that increases aggregate supply D) an increase in government expenditures Answer: B Topic: Fluctuations in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 120) A decrease in short-run aggregate supply ________ the equilibrium price level and ________ the equilibrium quantity of real GDP. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

121) In the short run, a rightward shift of the short-run aggregate supply curve ________ real GDP and ________ the price level. A) decreases; lowers B) increases; raises C) decreases; raises D) increases; lowers Answer: D Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 122) In the short run, a supply shock that shifts the short-run aggregate supply curve leftward ________ real GDP and ________ the price level. A) increases; raises B) decreases; raises C) increases; lowers D) decreases; lowers Answer: B Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 123) Assume the economy is at long run equilibrium and oil prices rise. As a result, the ________ shifts ________. A) AD; rightward B) AD; leftward C) SAS; rightward D) SAS; leftward Answer: D Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 124) In the short-run, a rise in the money wage rate leads to A) an increase in the price level and an increase in real GDP. B) an increase in the price level and a decrease in real GDP. C) an increase in the price level, but no change in real GDP. D) no change in the price level, but an increase in real GDP. Answer: B Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 105 Copyright © 2014 Pearson Education, Inc.

125) Stagflation is the combination of A) inflation and increasing real GDP. B) deflation and recession. C) inflation and recession. D) deflation with increasing real GDP. Answer: C Topic: Stagflation Skill: Recognition Status: Old AACSB: Reflective Thinking

126) In the above figure, the economy is at point A when changes occur. If the new equilibrium has a price level of 120 and real GDP of $12.0 trillion, then it must be the case that A) aggregate demand has increased. B) aggregate demand has decreased. C) aggregate supply has decreased. D) aggregate supply has increased. Answer: C Topic: Fluctuations in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

127) In the above figure, the economy is at point A when changes occur. If the new equilibrium has a price level of 100 and real GDP of $14.0 trillion, then it must be the case that A) aggregate demand has decreased. B) aggregate supply has decreased. C) aggregate demand has increased. D) aggregate supply has increased. Answer: D Topic: Fluctuations in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 128) In the above figure, the economy is at point A when changes occur. If the new equilibrium has a price level of 100 and real GDP of $12.0 trillion, then it must be the case that A) aggregate demand has increased. B) aggregate demand has decreased. C) aggregate supply has decreased. D) aggregate supply has increased. Answer: B Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills 129) If the actual real GDP is less than potential real GDP, the economy is A) not in macroeconomic equilibrium. B) at full employment. C) in an above full-employment equilibrium. D) in a below full-employment equilibrium. Answer: D Topic: Study Guide Question, Below Full-Employment Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

Aggregate Price demand level (trillions of 2005 dollars) 100 105 110 115

13 12 11 10

Short-run Long-run aggregate aggregate supply supply (trillions of (trillions of 2005 dollars) 2005 dollars) 9 10 10 10 11 10 13 10

130) Using the data in the above table, in the short-run macroeconomic equilibrium, the price level is ________ and the level of real GDP is ________. A) 105; $10 trillion B) 110; $10 trillion C) 110; $11 trillion D) 115; $10 trillion Answer: C Topic: Study Guide Question, Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 131) Using the data in the above table, in the short-run macroeconomic equilibrium, there is A) an inflationary gap of $1 trillion. B) an inflationary gap of $2 trillion. C) a recessionary gap of $1 trillion. D) a recessionary gap of $2 trillion. Answer: A Topic: Study Guide Question, Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 132) Using the data in the above table, in the long-run macroeconomic equilibrium, the price level is ________ and the level of real GDP is ________. A) 115; $10 trillion B) 110; $10 trillion C) 105; $11 trillion D) 115; $11 trillion Answer: A Topic: Study Guide Question, Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

4 Macroeconomic Schools of Thought 1) ________ economists believe that the economy is self-regulating and always at full employment. A) Keynesian B) Monetarist C) Classical D) All Answer: C Topic: Classical View Skill: Recognition Status: Old AACSB: Reflective Thinking 2) A classical economist believes that A) if the economy was left alone, it would rarely operate at full employment. B) the economy is self-regulating and always at full employment. C) the economy is self-regulating and will normally, though not always, operate at full employment if monetary policy is not erratic. D) the economy is self-regulating and will normally, though not always, operate at full employment if fiscal policy is not erratic. Answer: B Topic: Classical View Skill: Recognition Status: Old AACSB: Reflective Thinking 3) Which of the following statements is INCORRECT? A) A monetarist believes that recessions are the result of erratic monetary policy. B) A new classical macroeconomist believes the business cycle is the efficient response to the uneven pace of technological change. C) A Keynesian believes the business cycle is mainly influenced by changes in people's expectations. D) A classical macroeconomist believes that the money wage rate adjusts slowly. Answer: D Topic: Classical View Skill: Recognition Status: Old AACSB: Reflective Thinking

4) Which of the following statements correctly describes the policy stance of a macroeconomist? A) A monetarist believes that the quantity of money should be constantly changed in order to offset changes in aggregate demand. B) A new classical macroeconomist believes that fiscal and monetary policy are required to maintain full employment. C) A Keynesian would believes that if taxes are always kept low and the quantity of money is kept on a steady growth path, no policy actions will be needed to maintain full employment. D) A classical macroeconomist believes that maintaining consistently low taxes will allow the economy to expand at an appropriate and rapid pace. Answer: D Topic: Schools of Thought Skill: Recognition Status: Old AACSB: Reflective Thinking 5) A Keynesian economist believes that A) if the economy was left alone, it would rarely operate at full employment. B) the economy is self-regulating and always at full employment. C) the economy is self-regulating and will normally, though not always, operate at full employment if monetary policy is not erratic. D) the economy is self-regulating and will normally, though not always, operate at full employment if fiscal policy is not erratic. Answer: A Topic: Keynesian View Skill: Recognition Status: Old AACSB: Reflective Thinking 6) ________ economists believe that active help from fiscal and monetary policy is needed to insure that the economy is operating at full employment. A) Keynesian B) Monetarist C) Classical D) All Answer: A Topic: Keynesian View Skill: Recognition Status: Old AACSB: Reflective Thinking

7) In 2009, just after taking office, President Obama approved an $800 billion stimulus package of tax cuts and increased government spending to combat the recession brought on by the financial crisis of 2007. Which group of economists most approved of President Obama's actions? A) Keynesian economists B) classical economists C) monetarists D) free market economists Answer: A Topic: Keynesian View Skill: Conceptual Status: New AACSB: Reflective Thinking 8) What could Keynes have meant by his now famous statement, "in the long run we are all dead?" A) Government intervention is destabilizing, will lead to slower growth in the long run, and will prevent an economy from self-regulating. B) Government intervention in the economy is necessary in times of recession because an economy rarely restores itself to full-employment. C) Government intervention in the economy is useless because it takes too long to take effect. D) Government intervention in the economy is only effective if it is not erratic. Answer: B Topic: Keynesian View Skill: Conceptual Status: New AACSB: Reflective Thinking 9) ________ economists believe that the economy is self-regulating and will be at full employment as long as monetary policy is not erratic. A) Keynesian B) Monetarist C) Classical D) All Answer: B Topic: Monetarist View Skill: Recognition Status: Old AACSB: Reflective Thinking

10) A monetarist economist believes that A) if the economy was left alone, it would rarely operate at full employment. B) the economy is self-regulating and always at full employment. C) the economy is self-regulating and will normally, though not always, operate at full employment if monetary policy is not erratic. D) the economy is self-regulating and will normally, though not always, operate at full employment if fiscal policy is not erratic. Answer: C Topic: Monetarist View Skill: Recognition Status: Old AACSB: Reflective Thinking 11) Which school of thought believes that recessions are the result of inappropriate monetary policy? A) only classical B) only Keynesian C) Monetarist D) both Keynesian and classical Answer: C Topic: Study Guide Question, Monetarist View Skill: Recognition Status: Old AACSB: Reflective Thinking 12) Which school of thought believes that real GDP always equals potential GDP? A) only classical B) only Keynesian C) Monetarist D) both Keynesian and classical Answer: A Topic: Study Guide Question, Classical View Skill: Recognition Status: Old AACSB: Reflective Thinking

5 News Based Questions 1) Consider a BMW automobile plant. If the price of BMWs increase by 10 percent and the money wage rate and other costs ________, there will be ________. A) increase by 10 percent; an increase in BMWs profits B) do not change; an increase in BMW's production and profit C) increase by 10 percent; an increase in BMWs production D) do not change; no change in production Answer: B Topic: Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) In Japan in 2000 the price level fell by 5 percent and the money wage rate did not change. As a result, there was a A) movement down along Japan's short-run aggregate demand curve. B) movement down along Japan's short-run aggregate supply curve. C) rightward shift in Japan's short-run aggregate supply curve. D) movement down along Japan's long-run aggregate supply curve. Answer: B Topic: Short-Run Aggregate Supply Curve Skill: Analytical Status: Old AACSB: Analytical Skills 3) In recent years, Japan's capital stock has increased by about 6 percent from one year to the next. As a result, we would expect A) a leftward shift in Japan's aggregate demand curve. B) a movement up along Japan's short-run aggregate supply curve. C) only Japan's long-run aggregate supply curve to shift rightward. D) rightward shifts in both Japan's short-run aggregate supply and long-run aggregate supply curves. Answer: D Topic: Short-Run and Long-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

4) According to www.oecd.org, the United States spends a larger portion of expenditures on higher education compared to any other country. Increasing the amount of higher education produces I. rightward shifts in the U.S. long-run aggregate supply curve II. movements up along the U.S. aggregate demand curve III. increases in U.S. human capital. A) I and III only. B) I, II and III. C) II and III only. D) III only. Answer: A Topic: Aggregate Supply Skill: Analytical Status: Old AACSB: Reflective Thinking 5) In 2008 the money wage rate in Ireland increased by 4 percent while the price level increased by 8 percent. As a result, Ireland's A) short-run aggregate supply curve shifted leftward. B) short-run aggregate supply curve shifted rightward. C) long-run aggregate supply curve shifted rightward. D) short-run and long-run aggregate supply curves shifted rightward. Answer: B Topic: Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 6) If the price level in Great Britain increases from 102 to 105 (holding all else constant), real wealth ________ and there is a movement ________ along Great Britain's aggregate demand curve. A) decreases; upward B) increases; upward C) decreases; downward D) increases; downward Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

7) The price level in India increases from 131 to 137 while its trading partners' price levels remain constant. As a result, people will buy ________ Indian-made goods and there will be a movement ________ along India's aggregate demand curve. A) more; upward B) more; downward C) less; downward D) less; upward Answer: D Topic: Aggregate Demand, International Price Substitution Effect Skill: Analytical Status: Old AACSB: Analytical Skills 8) In 2008, the Bank of England increased the country's money supply and lowered its interest rate. This policy was designed to A) encourage people to buy more goods and services. B) shift the aggregate demand curve rightward. C) cause a movement up along the aggregate demand curve. D) Both A and B are correct. Answer: D Topic: Changes in Aggregate Demand, Monetary Policy Skill: Analytical Status: Old AACSB: Analytical Skills 9) In 2008, Japan's government approved a $1 trillion fiscal stimulus plan comprised of both tax cuts and government expenditure increases. As a result, A) Japan's aggregate demand curve shifted rightward. B) Japan's aggregate supply curve shifted leftward. C) Japan's aggregate demand curve shifted leftward. D) Japan's long-run aggregate supply curve shifted leftward. Answer: A Topic: Changes in Aggregate Demand, Fiscal Policy Skill: Analytical Status: Old AACSB: Analytical Skills

10) China is one of the world's largest exporters. As the world's economies slipped into a worldwide recession in 2008, there was a ________ China's aggregate demand curve as China's exports ________. A) rightward shift of; decreased B) movement upward along; increased C) leftward shift of; decreased D) movement upward along; decreased Answer: C Topic: Changes in Aggregate Demand, Foreign Incomes Skill: Analytical Status: Old AACSB: Analytical Skills 11) In 2008, the dollar appreciated relative to the euro. This appreciation caused ________ and a ________. A) a movement up along the U.S. aggregate demand curve; decrease in U.S. exports to Europe B) a decrease in U.S. exports to Europe; leftward shift in the U.S. aggregate demand curve C) an increase in U.S. exports to Europe; movement up along the U.S. aggregate demand curve D) a decrease in U.S. exports to Europe; a movement up along the U.S. aggregate demand curve Answer: B Topic: Changes in Aggregate Demand, Foreign Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 12) As world economies start to recover from the 2008 financial crisis and firms expect profits to increase, A) the price level in the U.S. will decrease as firms increase investment. B) the U.S. short-run aggregate supply curve immediately will shift rightward. C) investment will increase and there will be a movement up along the aggregate demand curve. D) both investment and aggregate demand will increase. Answer: D Topic: Changes in Aggregate Demand, Investment Skill: Analytical Status: Old AACSB: Analytical Skills

13) Use the figure above to answer this question. At a price level of 110, A) real GDP is greater than the aggregate quantity demanded and firms will cut production. B) real GDP is less than the aggregate quantity demanded and firms will increase production. C) inventories will decrease. D) real GDP less than the aggregate quantity demanded and firms will increase prices. Answer: A Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Old AACSB: Analytical Skills 14) Use the figure above to answer this question. At a price level of 90, A) people will be forced to cut consumption so that aggregate demand will decrease. B) the aggregate quantity demanded exceeds real GDP and inventories will decrease. C) inventories increase and firms will increase production. D) the aggregate quantity demanded exceeds real GDP, inventories increase and the price level will rise. Answer: B Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Old AACSB: Analytical Skills

15) The table below shows data for India's economy. Real GDP is measured in millions of rupees.

Price level a b c d e

114 120 125 131 138

Real GDP supplied in the short Real GDP demanded run 23,501 35,898 25,355 32,341 27,670 27,670 30,366 18,569 33,164 15,898

If potential GDP in India is ________ million rupees, India is experiencing ________. A) 26,500; an inflationary gap B) 28,500; an above full-employment gap C) 26,500; a recessionary gap D) 30,000; a potential GDP gap Answer: A Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 16) Economic growth in India has averaged about 8.5 percent in recent years and while inflation averaged almost 9 percent. The AS-AD model shows this process as A) rightward shifts in the short-run aggregate supply curve. B) rightward shifts in the both the aggregate demand and long-run aggregate supply curves. C) movements upward along the aggregate demand curve. D) rightward shifts in the aggregate demand curve and leftward shifts in the short-run aggregate supply curve. Answer: B Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills 17) Aggregate demand in India increased in 2008. In addition, real GDP grew strongly and inflation approached 10 percent. The best explanation for this inflation is that A) aggregate supply did not change. B) potential GDP decreased. C) there was a movement up along the aggregate demand curve in 2008. D) potential GDP increased, but at a slower rate than aggregate demand. Answer: D Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills 118 Copyright © 2014 Pearson Education, Inc.

18) The table below shows data for India's economy. Real GDP is measured in millions of rupees. Suppose that full employment occurs when real GDP is 27,000 million rupees.

Price level a b c d e

114 120 125 131 138

Real GDP supplied in the short Real GDP demanded run 23,501 35,898 25,355 32,341 27,670 27,670 30,366 18,569 33,164 15,898

The economy is experiencing ________ gap and firms will ________. A) an inflationary gap; increase production B) an inflationary gap; increase money wages paid to workers C) a recessionary gap; increase production D) a recessionary gap; decrease money wages paid to workers Answer: B Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 19) In the first half of 2008, food and energy costs in the United States increased. At the same time, the financial crisis slowed production. As a result, economists warned that the economy would A) suffer an inflationary gap. B) see a decrease in aggregate demand and an increase in long-run aggregate supply. C) experience stagflation. D) see an increase in potential GDP. Answer: C Topic: Stagflation Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) In the first half of 2008, food and energy costs in the United States increased. At the same time, the financial crisis slowed production as firms predicted lower profits. A ________ macroeconomist would support the use of ________. A) classical; taxes to push the economy back to full employment B) Keynesian; fiscal or monetary policy to stimulate aggregate demand C) classical; monetary policy to stimulate aggregate demand D) Keynesian; technology to push the economy back to full employment Answer: B Topic: Keynesian Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) In 2008, Japan's economy suffered as world economies slowed. If authorities in Japan followed the monetarist viewpoint, ________ to bring the economy back to full employment. A) taxes would be decreased and the money supply should be increased B) nothing should be done C) aggregate supply would shift leftward D) the money supply would be kept growing at a steady pace Answer: D Topic: Monetarist Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) In 2008, Germany passed a stimulus package of $29 billion as its economy slowed. This policy action follows the ________ to restore full employment. A) Keynesian viewpoint that supports increases in federal government expenditure B) Keynesian viewpoint that supports increases in the money supply C) monetarist viewpoint that supports increases in expenditure by the federal government D) new classical viewpoint that discourages the use of expenditure by the federal government Answer: A Topic: Keynesian Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking

6 Essay Questions 1) In the aggregate demand-aggregate supply framework, how does an increase in the price level affect potential GDP? Answer: An increase in the price level has no effect on potential GDP. Potential GDP is independent of the price level, so increases or decreases in the price level have no effect on potential GDP. Topic: Changes in Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 2) How are potential GDP, full employment and the LAS curve related? Answer: When the economy is at full employment there is no cyclical unemployment and the economy is at its potential level of real GDP. The LAS curve is vertical at the level of potential real GDP. Topic: Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) Give examples of factors that decrease short-run aggregate supply. Which way does the SAS curve shift? Answer: Aggregate supply decreases if potential GDP decreases. In addition, cost hikes such as a rise in the money wage rate or the price of oil, decreases short-run aggregate supply. Whenever short-run aggregate supply decreases, the SAS curve shifts leftward. Topic: Changes in Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 4) What is the difference between the long-run aggregate supply and the short-run aggregate supply curves? Answer: The long-run aggregate supply curve, LAS, is the relationship between the price level and real GDP when real GDP equals potential GDP. The LAS curve is vertical. Along the LAS curve, both the prices of goods and services and the prices of resources, such as the money wage rate, change. The short-run aggregate supply curve, SAS, is the relationship between the price level and the quantity of real GDP supplied in the short run when the money wage rate and other resource prices are constant. The SAS curve slopes upward. Along the SAS curve, only the price level changes; the money wage rate and other resource prices are constant. The SAS curve shifts leftward when the money wage rate (or other costs) rise. Topic: Long-Run and Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Communication

5) How do changes in the money wage rate affect the LAS and SAS curves? Explain your answer. Answer: If the money wage rate changes, the LAS curve is not affected but the SAS curve shifts. For instance, if the money wage rate rises, the LAS curve does not change but the SAS curve shifts leftward. The difference occurs because moving along the LAS curve both the money wage rate and price level change in the same proportion. So in this case, a change in the money wage rate is matched by a change in the price level and firms have no incentive to change their production of goods and services. But moving along the SAS curve, only the price level changes. So when the money wage rate changes and the price level does not change, firms have an incentive to change their production. For instance, if the money wage rate rises and the price level does not change, then firms decrease their production of goods and services and the SAS curve shifts leftward. Topic: Long-Run and Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Communication 6) What are the factors that can shift the short-run aggregate supply curve but not the long-run aggregate supply curve? Explain your answer. Answer: The only factor that shifts the short-run aggregate supply curve but not the long-run aggregate supply curve is a change in the money wage rate or the money prices of other resources. For instance, an increase in the money wage rate shifts the SAS curve leftward, but does not shift the LAS curve. Topic: Long-Run and Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) Explain the reasons why the AD curve slopes downward. Answer: There are two reasons why the AD curve slopes downward: the wealth effect and substitution effects. The wealth effect points out how changes in the price level cause changes in the real value of wealth. Price increases decrease real wealth and so people consume less in order to increase their wealth through saving. As a result, an increase in the price level decreases the aggregate quantity of goods and services demanded. There are two substitution effects. The first is the intertemporal substitution effect: an increase in the price level raises the interest rate because the amount of real loans banks can make decreases. The higher interest rate leads consumers to decrease their consumption expenditure and firms to decrease their investment spending. The second substitution effect is the international price substitution effect: an increase in the U.S. price level raises the price of U.S.-made goods relative to foreign-made goods. So people and firms decrease the quantity of U.S.-made goods they purchase and increase the quantity of foreign-made goods they purchase. So both substitution effects also lead to a rise in the price level decreasing the aggregate quantity demanded. Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Communication 122 Copyright © 2014 Pearson Education, Inc.

8) 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. Factors that change aggregate demand and shift the aggregate demand curve are changes in the interest rate, in the quantity of money, in government expenditure, in taxes, in the exchange rate, and in real GDP in the rest of the world. Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) What are the substitution effects that affect aggregate demand? Answer: There are two substitution effects that affect aggregate demand and help account for the negative slope of the AD curve. First, an increase in the price level raises the interest rate, which reduces the quantity of real GDP demanded. Second, an increase in the U.S. price level raises the price of U.S. goods relative to foreign goods which also decreases the quantity of U.S. real GDP demanded. Topic: Aggregate Demand, Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) How does the aggregate demand curve reflect an increase in aggregate demand? Answer: A rightward shift of the aggregate demand curve reflects an increase in aggregate demand. Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking 11) Give examples of factors that decrease aggregate demand. Which way does the aggregate demand curve shift? Answer: Anything that decreases aggregate spending decreases aggregate demand. A rise in the interest rate, a decrease in the quantity of money, a decrease in government expenditure, a tax hike, a rise in the exchange rate, and a decrease in real GDP in the rest of the world all decrease aggregate demand. The aggregate demand curve shifts leftward. Topic: Changes in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) What are fiscal and monetary policies? Do they have an immediate effect on the AD curve or the SAS curve? Answer: Fiscal policy is defined as changes in government spending and taxation to affect the level of economic activity. Monetary policy consists of changing interest rates and changing the quantity of money in the economy in order to affect the level of economic activity. Both policies have an impact on the AD curve. Topic: Changes in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) What are the components of fiscal policy? Explain how fiscal policy affects aggregate demand. Answer: Fiscal policy affects aggregate demand through government expenditure, transfer payments and taxes. Because government purchases are a component of total spending, a change in government expenditure directly changes aggregate demand. A change in transfer payments changes disposable income which, in turn, changes consumption expenditure and aggregate demand. Finally, taxes alter disposable income and thus impact consumption expenditure and aggregate demand. Topic: Changes in Aggregate Demand, Fiscal Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) What happens to the aggregate demand curve in the United States if the exchange rate increases so that U.S.-made products become more expensive? Answer: Net exports decrease so U.S. aggregate demand decreases. Topic: Changes in Aggregate Demand, Foreign Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) What two variables are determined in an aggregate supply-aggregate demand figure? Is the slope of the short-run 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: Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) Explain the relationship of the long-run aggregate supply curve, the short-run aggregate supply curve and the aggregate demand curve in determining a long-run and short-run macroeconomic equilibrium. Answer: Short-run macroeconomic equilibrium occurs when the quantity of GDP demanded equals the quantity supplied, which is where the AD and SAS curves intersect. The short-run equilibrium does not necessarily take place at full employment. The long-run macroeconomic equilibrium occurs when real GDP equals potential GDP. This means that the economy is on the LAS curve, where the AD and SAS curves both intersect the LAS curve. Topic: Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) Assume the equilibrium price level is 140 and the equilibrium real GDP is $15 trillion. What happens if the current price level equals 125? Answer: The quantity of real GDP demanded is greater than the quantity of real GDP supplied. The price level rises to 140 because of the excess aggregate demand and when the price level reaches 140, macroeconomic equilibrium would be established. Topic: Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) Suppose that during 2009, 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, inflationary gap equilibrium. Topic: Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) What is the difference between a recessionary gap and an inflationary gap? Answer: A recessionary gap exists when the economy is in a below full-employment equilibrium when potential GDP exceeds real GDP. The recessionary gap is the amount by which potential GDP exceeds real GDP. An inflationary gap occurs when the economy is in an above full-employment equilibrium when real GDP exceeds potential GDP. In this case, the inflationary gap is the difference between real GDP and potential GDP. Topic: Inflationary Gap and Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) What happens if the economy is at its long-run equilibrium and aggregate demand increases? Answer: The increase in aggregate demand means that the AD curve shifts rightward. Initially short-run aggregate supply does not change, so the SAS curve remains stationary. As a result, the price level rises and real GDP increases. The economy is an above full-employment equilibrium. Eventually, however, the tight labor market leads to a rise in the money wage rate. When the money wage rate rises, short-run aggregate supply decreases and the SAS curve shifts leftward. The price level rises and real GDP decreases. In the long run, the short-run aggregate supply decreases so that real GDP returns to potential level of GDP and the only effect is that the price level is permanently higher. Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Communication 21) If the world economy expands so that foreign demand for U.S.-made goods increases, in the short run what will happen to aggregate demand, the price level, and real GDP in the U.S.? Answer: Net exports increase so U.S. aggregate demand increases. The U.S. price level and real GDP both increase. Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) Compare the policy prescriptions of Keynesian, Classical, and Monetarist economists. Answer: Keynesians believe that without assistance the economy would almost never be at full employment. They prescribe activist fiscal and monetary policy to drive the economy to full employment. Classical economists believe the economy is self-regulating and will always tend towards full employment. Their main policy initiatives center on removing tax created disincentives for growth. Monetarists call for low taxes and consistent money growth because Monetarists believe that recessions are the result of fluctuations in the quantity of money. Topic: Schools of Thought Skill: Conceptual Status: Old AACSB: Reflective Thinking

7 Numeric and Graphing Questions Quantity of real Quantity of real Price level GDP demanded GDP supplied (GDP deflator, (trillions of 2005 (trillions of 2005 2005 = 100) dollars) dollars) 115 8.8 12.0 110 9.4 11.0 105 10.0 10.0 100 10.6 9.0 95 11.2 8.0 90 11.8 7.0 1) 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. c) If potential GDP is $9.0 trillion, then the economy is at an equilibrium that is an above fullemployment equilibrium. Topic: Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

2) In the above figure, what is the short-run equilibrium real GDP and the short-run equilibrium price level? Answer: The short-run equilibrium occurs where the AD curve intersects the SAS curve. So in the figure the short run equilibrium real GDP is $13.5 trillion and the short-run equilibrium price level is 110. Topic: Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 8 True or False 1) The long-run aggregate supply curve is upward sloping. Answer: FALSE Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 2) The long-run aggregate supply curve is vertical. Answer: TRUE Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

3) The level of output when there is full employment is called actual GDP. Answer: FALSE Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 4) In the long-run, the quantity of real GDP supplied increases when the price level increases. Answer: FALSE Topic: Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) The short-run aggregate supply curve shows a positive relationship between the price level and real GDP. Answer: TRUE Topic: Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) The SAS curve shifts if there is a change in the price level. Answer: FALSE Topic: Changes in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) If there is an increase in technology, the long-run aggregate supply curve shifts rightward, but the short-run aggregate supply curve does not shift. Answer: FALSE Topic: Changes in Aggregate Supply, Technology Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) If the money prices of resources changes, the LAS curve shifts. Answer: FALSE Topic: Change in Aggregate Supply; Money Wages & Prices of Resource Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) If the money prices of resources changes, the SAS curve shifts. Answer: TRUE Topic: Change in Aggregate Supply; Money Wages & Prices of Resource Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) An increase in the quantity of capital shifts both the long-run and short-run aggregate supply curves. Answer: TRUE Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) If the money wage rate increases, the short-run aggregate supply curve shifts rightward. Answer: FALSE Topic: Changes in Money Wages and Other Resource Prices Skill: Conceptual Status: Old AACSB: Reflective Thinking 12) The aggregate demand curve shows total expenditures at different levels of national income. Answer: FALSE Topic: The Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 13) A change in the price level does not shift the aggregate demand curve. Answer: TRUE Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) The wealth effect points out that consumption decreases when people's real wealth decreases. Answer: TRUE Topic: Aggregate Demand Curve, Wealth and Substitution Effects Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) Wealth and substitution effects explain why the aggregate demand curve has a positive slope. Answer: FALSE Topic: Aggregate Demand Curve, Wealth and Substitution Effects Skill: Conceptual Status: Old AACSB: Reflective Thinking 16) An increase in the quantity of money shifts the aggregate demand curve rightward. Answer: TRUE Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) In the short-run, real GDP can be greater than or less than potential GDP because in the short run the money wage rate is fixed. Answer: TRUE Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 18) The level of output at which the short-run aggregate supply curve and the aggregate demand curve intersect is the full employment level of GDP. Answer: FALSE Topic: Short-Run Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) In the short run, a supply shock that shifts the short-run aggregate supply curve leftward raises the price level and increases real GDP. Answer: FALSE Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) In the short run, a supply shock that shifts the short-run aggregate supply curve leftward raises the price level and decreases real GDP. Answer: TRUE Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

21) Long-run macroeconomic equilibrium is achieved when the money wage rate has adjusted so that employment is such that real GDP equals potential GDP. Answer: TRUE Topic: Long-Run Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) During an above full-employment equilibrium, actual GDP is greater than potential GDP. Answer: TRUE Topic: Above Full-Employment Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) Fluctuations in aggregate demand and aggregate supply explain why real GDP fluctuates. Answer: TRUE Topic: U.S. Economic Growth, Inflation and Cycles Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) The business cycle occurs because aggregate demand and aggregate supply change at uneven rates. Answer: TRUE Topic: U.S. Economic Growth, Inflation and Cycles Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) The Keynesian theory of business cycle views volatile expectations of future sales and profits as the main source of economic fluctuations. Answer: TRUE Topic: Keynesian Theory Skill: Recognition Status: Old AACSB: Reflective Thinking 26) A monetarist economist believes that if the economy was left alone, it would rarely operate at full employment. Answer: FALSE Topic: Monetarist View Skill: Recognition Status: Old AACSB: Reflective Thinking

9 Extended Problems

Price level 70 80 90 100 110 120 130 140

Real GDP Real GDP demanded supplied (billions (billions of 2005 of 2005 dollars) dollars) 825 375 750 450 675 525 600 600 525 675 450 750 375 825 300 900

1) The table above shows Purpleland's economy aggregate demand and supply schedules. Purpleland's potential GDP is $675 billion. a) Plot the aggregate demand curve, the short-run aggregate supply curve, and the long-run aggregate supply curve. b) What are the short-run equilibrium real GDP and price level in Purpleland? c) What is the long-run equilibrium real GDP? d) Is Purpleland's short-run macroeconomic equilibrium a full-employment equilibrium, below full-employment equilibrium, or above full-employment equilibrium? What is the recessionary gap (if any)? What is the inflationary gap (if any)? e) Suppose aggregate demand increases by $150 billion. Plot the new aggregate demand curve. How do real GDP and the price level change in the short run? f) Is Purpleland's new short-run macroeconomic equilibrium a full-employment equilibrium, below full-employment equilibrium, or above full-employment equilibrium? What is the recessionary gap (if any)? What is the inflationary gap (if any)?

Answer:

a) See the figure above. The aggregate demand curve is AD0. b) A short-run macroeconomic equilibrium occurs where the aggregate demand curve, AD0, intersects the short-run aggregate supply curve, SAS. As the figure shows, the short-run equilibrium real GDP is $600 billion, and the short-run equilibrium price level is 100. c) Long-run equilibrium real GDP equals potential GDP. So the long-run equilibrium real GDP in Purpleland is $675 billion. d) Purpleland's short-run macroeconomic equilibrium is a below full-employment equilibrium because the short-run equilibrium GDP is less than potential GDP. The amount by which potential GDP exceeds real GDP is a recessionary gap, so the recessionary gap is $75 billion. An inflationary gap exists when real GDP is above potential GDP, so there is no inflationary gap in Purpleland. e) As the figure above shows, the aggregate demand curve shifts from AD0 to AD1. As a result, real GDP increases from $600 billion to $675 billion, and the price level rises from 100 to 110. f) Purpleland's new short-run macroeconomic equilibrium is a full-employment equilibrium because the equilibrium real GDP equals the potential GDP. When real GDP equals potential GDP, there is neither a recessionary gap nor an inflationary gap. Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

Price level 90 100 110 120 130

Real GDP demanded Real GDP supplied (billions of 2005 (billions of 2005 dollars) dollars) 450 150 400 250 350 350 300 450 250 550

2) The table above shows Yellowland's economy aggregate demand and supply schedules. Yellowland's potential GDP is $300 billion. a) Plot the aggregate demand curve, the short-run aggregate supply curve, and the long-run aggregate supply curve. b) What are the short-run equilibrium real GDP and price level in Yellowland? c) What is the long-run equilibrium real GDP? d) Is Yellowland's short-run macroeconomic equilibrium a full-employment equilibrium, below full-employment equilibrium, or above full-employment equilibrium? What is the recessionary gap (if any)? What is the inflationary gap (if any)? e) Suppose aggregate supply decreases by $150 billion. Plot the new aggregate supply curve. How do real GDP and the price level change in the short run? f) Is Yellowland's new short-run macroeconomic equilibrium a full-employment equilibrium, below full-employment equilibrium, or above full-employment equilibrium? What is the recessionary gap (if any)? What is the inflationary gap (if any)?

Answer:

a) See the figure above. The short-run aggregate supply curve is SAS0. b) A short-run macroeconomic equilibrium occurs where the aggregate demand curve, AD, intersects the short-run aggregate supply curve, SAS0. As the figure shows, the short-run equilibrium real GDP is $350 billion, and the short-run equilibrium price level is 110. c) Long-run equilibrium real GDP equals potential GDP. So the long-run equilibrium real GDP in Yellowland is $300 billion. d) Yellowland's short-run macroeconomic equilibrium is an above full-employment equilibrium because the short-run equilibrium GDP exceeds potential GDP. The amount by which real GDP exceeds potential GDP is an inflationary gap. So the inflationary gap is $50 billion. A recessionary gap exists when real GDP is below potential GDP. So there is no recessionary gap in Yellowland. e) As the figure above shows, the short-run aggregate supply curve shifts from SAS0 to SAS1. As a result, real GDP decreases from $350 billion to $300 billion, and the price level rises from 110 to 120. f) Yellowland's new short-run macroeconomic equilibrium is a full-employment equilibrium because the equilibrium real GDP equals the potential GDP. When real GDP equals potential GDP, there is neither a recessionary gap nor an inflationary gap. Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 11 Expenditure Multipliers 1 Fixed Prices and Expenditure Plans 1) In the Keynesian model of aggregate expenditure, real GDP is determined by the A) price level. B) level of aggregate demand. C) level of aggregate supply. D) level of taxes. Answer: B Topic: Keynesian Model Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 2) The Keynesian model of aggregate expenditure describes the economy in A) the short run. B) the long run. C) both the short run and the long run. D) only a strong expansion. Answer: A Topic: Keynesian Model Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) The Keynesian model of aggregate expenditure assumes that A) individual firms' prices are flexible but the price level is fixed. B) both individual firms' prices and the price level are flexible. C) both individual firms' prices and the price level are fixed. D) individual firms' prices are fixed but the price level is flexible. Answer: C Topic: Keynesian Model Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) In the Keynesian model of aggregate expenditure, we assume that firms will A) not change prices. B) change prices only when inventory levels rise. C) raise prices when inventory levels fall. D) lower prices when inventory levels rise. Answer: A Topic: Keynesian Model Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 5) According to the Keynesian theory, the typical firm A) changes its prices frequently in response to fluctuations in aggregate demand. B) lowers its prices when inventories are decreasing. C) does not change its prices immediately when aggregate demand fluctuates. D) lowers its prices if sales exceed production. Answer: C Topic: Aggregate Implications of Fixed Prices Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 6) If firms set prices and then keep them fixed for a period of time, their fixed prices imply that A) the aggregate price level is fixed and that aggregate demand determines the quantity of goods and services sold. B) prices are set by aggregate demand and supply. C) the aggregate price level adjusts continuously. D) the aggregate price level is fixed and that aggregate supply determines the quantity of goods and services sold. Answer: A Topic: Aggregate Implications of Fixed Prices Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 7) In the very short term, in the Keynesian model, which of the following is fixed and does not change when GDP changes? A) planned investment B) planned consumption C) planned imports D) All of the above answers are correct Answer: A Topic: Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 2 Copyright © 2014 Pearson Education, Inc.

8) In the very short term, planned investment ________ when GDP changes and planned consumption expenditure ________ when GDP changes. A) changes; changes. B) changes; does not change C) does not change; changes D) does not change; does not change Answer: C Topic: Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) The components of aggregate expenditure include I. imports. II. consumption. III. government transfer payments. A) I and II B) II only C) II and III D) I, II and III Answer: A Topic: Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 10) In the very short run, the components of aggregate planned expenditure that depend on the level of real GDP are A) planned consumption expenditure and planned imports. B) planned investment and planned imports. C) planned investment and planned exports. D) planned government expenditure on goods and services and planned imports. Answer: A Topic: Expenditure Plans Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

11) An increase in real GDP leads to A) a decrease aggregate planned expenditure. B) no change in aggregate planned expenditure. C) an increase in aggregate planned expenditure. D) a change in aggregate planned expenditure but whether the change is an increase or a decrease depends on whether nominal GDP increases or decreases. Answer: C Topic: Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 12) Disposable income is A) income minus saving. B) income minus taxes plus transfer payments. C) income plus transfer payments minus consumption expenditure. D) total income divided by the price level. Answer: B Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 13) Which of the following statements is FALSE? A) Disposable income - saving = consumption expenditure. B) Consumption expenditure + saving = disposable income. C) Saving = disposable income - consumption expenditure. D) Consumption expenditure = saving - disposable income. Answer: D Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 14) Disposable income is equal to A) consumption expenditure minus taxes plus transfer payments. B) aggregate income minus taxes plus government expenditures on goods and services. C) aggregate income minus taxes plus transfer payments. D) aggregate income plus transfer payments. Answer: C Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

15) Real GDP A) is always greater then aggregate income. B) is always less than aggregate income. C) might be less than or more than aggregate income depending on consumption. D) is equal to aggregate income. Answer: D Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 16) Disposable income is divided into A) consumption and taxes. B) saving and taxes. C) consumption, saving, and taxes. D) consumption and saving. Answer: D Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 17) Saving equals A) disposable income minus taxes. B) disposable income minus consumption expenditure. C) disposable income plus consumption expenditure. D) consumption expenditure minus disposable income. Answer: B Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 18) A consumption function shows a A) negative (inverse) relationship between consumption expenditure and saving. B) positive (direct) relationship between consumption expenditure and price level. C) negative (inverse) relationship between consumption expenditure and disposable income. D) positive (direct) relationship between consumption expenditure and disposable income. Answer: D Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

19) The consumption function relates consumption expenditure to A) the interest rate. B) disposable income. C) saving. D) the price level. Answer: B Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 20) The consumption function relates the consumption expenditure decisions of households to A) the level of disposable income. B) investment decisions of firms. C) saving decisions of households. D) the nominal interest rate. Answer: A Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) The graph of the consumption function has consumption expenditure on the vertical axis and A) the interest rate on the horizontal axis. B) time on the horizontal axis. C) disposable income on the horizontal axis. D) the Consumer Price Index on the horizontal axis. Answer: C Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 22) The consumption function shows how much A) all households plan to consume at each level of real disposable income. B) all households plan to consume at each possible real interest rate. C) real disposable income people will earn at each income tax bracket. D) all households plan to consume at each level of savings. Answer: A Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

23) The slope of the consumption function is A) less than 1. B) 1. C) greater than 1. D) negative. Answer: A Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 24) The slope of the consumption function is A) less than the slope of the 45-degree line but not equal to zero. B) greater than the slope of the 45-degree line. C) equal to the slope of the 45-degree line. D) equal to zero. Answer: A Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 25) A movement along the consumption function is the result of changes in A) the real interest rate. B) disposable income. C) expected future income. D) All of the above answers are correct. Answer: B Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 26) There is a movement along the consumption function if there is ________. A) an increase in autonomous consumption B) a decrease in the real interest rate C) an increase in the expected future income D) an increase in disposable income Answer: D Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

27) A movement along the consumption function to higher levels of consumption expenditure arises because A) the level of disposable income decreases. B) household wealth rises. C) the level of disposable income increases. D) the level of desired saving rises. Answer: C Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 28) If disposable income increases, A) the consumption function shifts upward. B) there is a movement upward along the consumption function. C) the consumption function shifts downward. D) there is movement downward along the consumption function. Answer: B Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 29) The positive slope of the consumption function indicates that A) consumers spend less out of each extra dollar of income. B) the amount of household wealth is subject to change. C) when prices fall consumers spend more. D) consumers increase their total consumption expenditure when disposable income increases. Answer: D Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 30) As disposable income increases, consumption expenditures A) increase by the same amount. B) increase by a smaller amount. C) increase by a larger amount. D) remain constant. Answer: B Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

31) If real disposable income increases by $1500, consumption expenditures will A) stay constant. B) decrease by less than $1500. C) increase by less than $1500. D) increase by more than $1500. Answer: C Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 32) Between 2008 and 2009 the government estimates that disposable income in the United States decreased. Consequently, as a result of this change consumption expenditure A) remained constant. B) decreased. C) increased. D) More information is needed about how taxes changed between 2008 and 2009. Answer: B Topic: Consumption Function Skill: Conceptual Status: New AACSB: Reflective Thinking 33) Which of the following will NOT shift the consumption function upward? A) an increase in disposable income B) a fall in the real interest rate C) an increase in wealth D) None of the above shift the consumption function upward. Answer: A Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 34) An increase in expected future income ________. A) decreases consumption expenditure B) increases saving C) shifts the consumption function upward D) shifts the saving function upward Answer: C Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

35) Autonomous consumption is that portion of consumption expenditure that is not influenced by A) income. B) preferences. C) prices. D) the legal authorities. Answer: A Topic: Autonomous Consumption Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 36) Autonomous consumption A) increases with income. B) is independent of income. C) is independent of income and must be equal to zero. D) decreases with income. Answer: B Topic: Autonomous Consumption Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 37) ________ consumption is consumption that will occur ________ the level of GDP and disposable income. A) Autonomous; independent of B) Autonomous; depending on C) Induced; independent of D) None of the above answers is correct. Answer: A Topic: Autonomous Consumption Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 38) Autonomous consumption is equal to A) saving when consumption equals disposable income. B) consumption when disposable income is zero. C) consumption caused by an increase in disposable income. D) dissaving when disposable income is greater than zero. Answer: B Topic: Autonomous Consumption Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

39) In the above figure, consumption and disposable income are equal at A) any point along the consumption function. B) a saving level of $1 trillion and disposable income level of $4 trillion. C) a disposable income level of $0. D) a disposable income level of $2 trillion. Answer: D Topic: Consumption Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 40) In the above figure, at a disposable income level of $2 trillion, saving equals A) disposable income. B) zero. C) $4 trillion. D) consumption expenditures. Answer: B Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

41) In the above figure, the line AB is called A) the saving function. B) the consumption function. C) the 45-degree line. D) the expenditure function. Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 42) Induced consumption is equal to A) saving when consumption equals disposable income. B) consumption when disposable income is zero. C) consumption caused by an increase in disposable income. D) dissaving when disposable income is greater than zero. Answer: C Topic: Induced Consumption Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 43) In a diagram with the consumption function, the 45-degree line indicates all points where A) consumption expenditures and saving are equal. B) saving and investment are equal. C) consumption expenditures and disposable income are equal. D) saving and disposable income are equal. Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 44) In a diagram with the consumption function, the ________ shows all points where disposable income equals consumption expenditures. A) consumption function B) aggregate demand curve C) 45-degree line D) saving function Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

45) Consumption expenditures equal disposable income A) at every point on the consumption function. B) at every point on the saving function. C) at every point on the 45-degree line. D) when saving equals disposable income. Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 46) With consumption expenditure on the vertical axis and disposable income on the horizontal axis, the consumption function intersects the 45-degree line at $8 trillion. This result indicates that A) autonomous consumption spending is $8 trillion. B) consumption spending is $8 trillion when disposable income is $8 trillion. C) consumption spending is less than $8 trillion because taxes must be paid. D) consumption spending is more than $8 trillion because taxes have been paid. Answer: B Topic: Consumption Function and the 45-Degree Line Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

47) In the above figure, line ABC is called A) the 45-degree line. B) the consumption function. C) the saving function. D) aggregate supply. Answer: B Topic: Consumption Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 48) In the above figure, autonomous consumption equals A) 0. B) $4 trillion. C) $12 trillion. D) -$4 trillion. Answer: B Topic: Autonomous Consumption Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

49) When disposable income equals $800 billion, planned consumption expenditure equals $600 billion, and when disposable income equals $1,000 billion, planned consumption expenditure equals $640 billion. What is planned saving when disposable income is $800 billion? A) $200 billion B) $360 billion C) $560 billion D) $1,400 billion Answer: A Topic: Consumption and Saving Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 50) As real disposable income increases, consumption expenditure ________ and saving ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Consumption Function and Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 51) Planned saving equals A) disposable income minus planned consumption expenditure. B) planned consumption expenditure minus disposable income. C) zero when disposable income is less than planned consumption expenditure. D) planned consumption expenditure plus disposable income. Answer: A Topic: Saving Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 52) "Dissaving" occurs when A) income exceeds consumption expenditure. B) saving is negative. C) the consumption function is below the 45-degree line drawn from the origin. D) saving is positive. Answer: B Topic: Saving Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 15 Copyright © 2014 Pearson Education, Inc.

53) Dissaving A) is equal to consumption expenditure when disposable income is greater than zero. B) is equal to the amount of saving when consumption is less than disposable income. C) is equal to taxation when disposable income is zero. D) occurs when consumption is greater than disposable income. Answer: D Topic: Saving Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 54) ________ consumption expenditure is greater than disposable income. A) It is always the case that B) Saving is positive whenever C) Dissaving occurs whenever D) None of the above answers is correct because it is impossible for consumption expenditure to be greater than disposable income. Answer: C Topic: Saving Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 55) When disposable income equals consumption expenditure, then A) saving is zero. B) the MPC = zero. C) the MPS = zero. D) None of the above is correct. Answer: A Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 56) Where the consumption function crosses the 45° line A) consumption expenditure equals saving. B) saving is positive. C) saving is negative. D) consumption expenditure equals disposable income. Answer: D Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

57) When the consumption function lies above the 45-degree line, households A) spend on consumption an increasing percentage of any increase in income. B) spend on consumption a decreasing percentage of any increase in income. C) are dissaving. D) save all of any increase in income. Answer: C Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 58) If the consumption function lies below the 45-degree line, then saving at these levels of disposable income will A) be positive. B) be negative. C) equal zero. D) be some amount that cannot be determined without additional information. Answer: A Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 59) The vertical distance between the 45-degree line and the consumption line represents A) investment. B) total consumption expenditure. C) the difference between consumption expenditure and investment. D) saving or dissaving. Answer: D Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 60) Saving rather than dissaving occurs at any level of disposable income at which A) the consumption function is above the 45-degree line. B) the consumption function intersects the saving/income curve. C) the consumption function is below the 45-degree line. D) autonomous consumption is positive. Answer: C Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

61) The saving function shows a ________ relationship between ________. A) positive; disposable income and saving B) positive; disposable income and dissaving C) negative; disposable income and consumption expenditure D) negative; real GDP and saving Answer: A Topic: Saving Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 62) An increase in disposable income A) shifts the saving function upward. B) results in a movement upward along the saving function. C) shifts the saving function downward. D) results in a movement downward along the saving function. Answer: B Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 63) A movement along the saving function occurs when A) the real interest rate rises. B) wealth increases. C) disposable income decreases. D) None of the above answers is correct. Answer: C Topic: The Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 64) As disposable income increases, there is a ________ the saving function. A) leftward shift of the B) movement along C) rightward shift of D) change in the slope of Answer: B Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

65) At a level of disposable income of $0, consumption expenditure is $3500. Therefore when disposable income is $0, A) saving and dissaving equal $0. B) saving equals -$3500. C) saving equals $3500. D) the MPC = zero. Answer: B Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 66) When disposable income is 0, consumption is $2000. Then A) saving = $0. B) saving = -$2000. C) saving = $2000. D) the MPC = 0.2. Answer: B Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 67) An increase in disposable income shifts A) both the consumption and savings functions upward. B) the consumption function upward and leads to a movement along the savings function. C) both the consumption and savings functions downward. D) neither the consumption function or the savings function because it leads to a movement along both the consumption and savings function. Answer: D Topic: The Consumption Function and the Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 68) What is the marginal propensity to consume? A) the change in consumption expenditure divided by the change in disposable income B) the percentage of disposable income that is consumed C) one minus the fraction of total disposable income that is saved D) the percentage of total income that is consumed Answer: A Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

69) The marginal propensity to consume refers to A) the additional saving that occurs out of an additional dollar of disposable income. B) the additional consumption expenditure that occurs out of an additional dollar of disposable income. C) the additional consumption expenditure that occurs out of an additional dollar of investment. D) total consumption expenditure divided by total disposable income. Answer: B Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 70) The marginal propensity to consume is the A) fraction of a change in disposable income spent on consumption expenditure. B) amount saving increases when consumption expenditure decreases. C) fraction of a change in saving spent on consumption expenditure. D) fraction of a change in consumption expenditure that is not saved. Answer: A Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 71) The marginal propensity to consume is the ________. A) fraction of total disposable income consumed B) fraction of GDP consumed C) fraction of a change in disposable income that is consumed. D) total amount of disposable income consumed Answer: C Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 72) The MPC is the fraction of A) total disposable income that is consumed. B) total disposable income that is not consumed. C) a change in disposable income that is consumed. D) a change in disposable income that is saved. Answer: C Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

73) The marginal propensity to consume is equal to A) what people spend out of total disposable income. B) the desired amount of consumption expenditure as a proportion of disposable income. C) the average, after-tax consumption amount. D) the change in consumption expenditure from a change in disposable income. Answer: D Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 74) The marginal propensity to consume measures A) how much of a given level of disposable income is consumed. B) what percentage of disposable income goes to saving. C) how much consumption expenditure occurs at the equilibrium level of income. D) the fraction of a change in disposable income that is spent on consumption expenditure. Answer: D Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 75) The marginal propensity to consume is A) total consumption expenditure divided by the change in disposable income. B) the change in consumption expenditure divided by total disposable income. C) the change in consumption expenditure divided by the change in disposable income. D) the change in consumption expenditure divided by total saving. Answer: C Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 76) The marginal propensity to consume is found by A) dividing consumption expenditure by disposable income. B) dividing disposable income by consumption expenditure. C) dividing the change in disposable income by the change in consumption expenditure. D) dividing the change in consumption expenditure by the change in disposable income. Answer: D Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

77) The MPC is equal to A) △C / △S. B) △S / △C. C) △C / △YD. D) △S / △YD. Answer: C Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 78) The value of the marginal propensity to consume is A) between 0 and 1. B) between 1 and 10. C) between -1 and +1. D) between 1 percent and 10 percent. Answer: A Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 79) The marginal propensity to consume is A) the slope of the savings function. B) never greater than 1. C) the percentage or fraction of income that is consumed. D) the percentage change in disposable income. Answer: B Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 80) The size of the marginal propensity to consume A) is negative if dissaving is present. B) is between 0 and 1. C) equals 1. D) exceeds 1. Answer: B Topic: Marginal Propensity to Consume Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

81) If consumption expenditures for a household increase from $1000 to $1800 when disposable income rises from $1000 to $2000, the marginal propensity to consume is A) 0.8. B) 0.18. C) 0.3. D) 0.2. Answer: A Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 82) If the marginal propensity to consume is 0.8, every $10 increase in disposable income increases A) consumption expenditure by $0.80. B) consumption expenditure by $18.00. C) saving by $0.20. D) consumption expenditure by $8.00. Answer: D Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 83) Suppose disposable income increases from $7 trillion to $8 trillion. At the same time, consumption expenditure increases from $6.8 trillion to ________. Thus the MPC must equal ________. A) $7.8 trillion; 0.80 B) $7.6 trillion; 0.80 C) $7.4 trillion; 0.40 D) $8 trillion; 1.00 Answer: B Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

84) When disposable income increases from $6 trillion to $6.5 trillion, consumption expenditure increase from $5.5 trillion to $5.9 trillion. The MPC equals A) 0.75. B) 0.76. C) 0.8. D) 0.2. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 85) Between 2008 and 2009 the government reported that disposable income decreased by $300 billion. If the MPC equals 0.8, then consumption expenditure A) decreases by $40 billion. B) decreases by $1,500 billion. C) decreases by $24 billion. D) decreases by $32 billion. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: New AACSB: Analytical Skills 86) Between 2008 and 2009 the government reported that disposable income decreased by $300 billion and consumption expenditure decreased by $180 billion. Based on these data, the MPC equals A) 4.4. B) 0.80. C) 0.60. D) $120 billion. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: New AACSB: Analytical Skills

87) Suppose disposable income increases from $5 trillion to $6 trillion. As a result, consumption expenditure increases from $4 trillion to ________. This result means the MPC equals ________. A) $4.5 trillion; 4.50 B) $5 trillion; 0.80 C) $4.8 trillion; 0.80 D) $6 trillion; 1.00 Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 88) The marginal propensity to save is A) total saving divided by total disposable income. B) total saving divided by the change in disposable income. C) the change in saving divided by the change in consumption expenditure. D) the change in saving divided by the change in disposable income. Answer: D Topic: Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 89) The size of the marginal propensity to save A) is negative if dissaving is present. B) is between 0 and 1. C) equals 1. D) exceeds 1. Answer: B Topic: Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 90) The MPS equals the ratio of A) saving to real GDP. B) the change in saving to the change in consumption expenditure. C) saving to consumption expenditure. D) None of the above answers is correct. Answer: D Topic: Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

91) The marginal propensity to save equals the A) change in savings resulting from a one dollar change in disposable income. B) change in savings from a change in consumption expenditure. C) average amount of income saved. D) ability to save the same percentage of income each month. Answer: A Topic: Marginal Propensity to Save Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 92) When disposable income increases from $7 trillion to $7.5 trillion, consumption expenditure increase from $6.5 trillion to $6.9 trillion. The MPS is equal to A) 0.75. B) 0.76. C) 0.8. D) 0.2. Answer: D Topic: Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 93) When disposable income equals $800 billion, planned consumption expenditure equals $600 billion, and when disposable income equals $1,000 billion, planned consumption expenditure equals $760 billion. What is the marginal propensity to save? A) 0.80 B) 0.64 C) 0.25 D) 0.20 Answer: D Topic: Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 94) Suppose real GDP increases from $13 trillion to $14 trillion. Consequently, consumption expenditure increases from $13 trillion to $13.75 trillion. This result implies the MPS equals A) 0.75. B) 0.25. C) 0. D) some amount that cannot be determined without more information. Answer: B Topic: Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills 26 Copyright © 2014 Pearson Education, Inc.

95) Between 2008 and 2009 the government reported that disposable income decreased by $300 billion and consumption expenditure decreased by $180 billion. Based on these data, the MPS equals A) 2.5. B) 0.40. C) 0.60. D) $120 billion. Answer: C Topic: Marginal Propensity to Save Skill: Analytical Status: New AACSB: Analytical Skills 96) The MPC and MPS measure changes in consumption expenditure and saving that result from changes in A) expected inflation. B) disposable income. C) expected future income. D) government expenditures on goods and services. Answer: B Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 97) Which of the following is true? A) MPS = MPC B) MPS + MPC = 1 C) MPS + MPC = 0 D) MPS - MPC = 1 Answer: B Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 98) The MPC and MPS A) sum to 1. B) can sum to anything greater than 0. C) sum to 100. D) each are usually less than .5. Answer: A Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 27 Copyright © 2014 Pearson Education, Inc.

99) If the marginal propensity to save is 0.6, then the marginal propensity to consume is A) 0.6. B) 0.4. C) 1.0. D) not determinable. Answer: B Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 100) For a household, the marginal propensity to save plus the marginal propensity to consume A) equals 1. B) equals 0. C) equals a number that is larger the larger the household's disposable income. D) equals a number that is smaller the larger the household's disposable income. Answer: A Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 101) 1 - MPC equals A) autonomous consumption. B) the marginal propensity to save. C) induced consumption. D) the net national product. Answer: B Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 102) If the MPC equals 0.75, then A) for every $100 increase in consumption expenditure, disposable income increases by $75. B) consumption expenditure is always more than disposable income. C) for every $100 increase in disposable income, saving increases by $75. D) for every $100 increase in disposable income, saving increases by $25. Answer: D Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Disposable income (thousands of dollars) 200 300 400 500

Consumption expenditure (thousands of dollars) 225 300 375 450

103) According to the data in the above table, at what level of disposable income is savings negative? A) 200 B) 300 C) 400 D) Never because saving cannot be negative. Answer: A Topic: The Consumption Function and the Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 104) According to the data in the above table, what is the marginal propensity to consume? A) 75. B) 100. C) 0.75. D) 1. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Disposable income (dollars) 0 100 300 500 700 900

Consumption expenditure (dollars) 100 180 340 500 660 820

105) In the above table, savings are positive when disposable income is greater than A) zero. B) $100. C) $300. D) $500. Answer: D Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 106) In the above table, savings equal zero when disposable income equals A) 0. B) $200. C) $300. D) $500. Answer: D Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 107) In the above table, the marginal propensity to consume equals A) 0.90. B) 0.75. C) 0.80. D) 0.85. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Disposable income Consumption expenditure (billions of dollars) (billions of dollars) 400 450 600 600 800 750 1000 900 1200 1050 108) Based upon the above table, if disposable income is $400 billion, saving equals A) -$50 billion. B) $0 billion. C) $50 billion. D) $100 billion. Answer: A Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 109) Based upon the above table, saving equals $100 billion when disposable income equals A) $800 billion. B) $1000 billion. C) $1200 billion. D) some amount but we need more information to calculate the amount. Answer: B Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 110) Based upon the above table, the MPC for the consumption function is A) increasing as income rises. B) equal to 1.0 at $600 billion. C) constant at 0.75. D) constant at 0.25. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Disposable income (dollars) 100 200 300 400 500 600

Consumption expenditure (dollars) 225 300 375 450 525 600

111) Using the above table, if disposable income is $400, saving is A) -$50. B) $0. C) $50. D) $100. Answer: A Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 112) Using the data in above table, the marginal propensity to consume is A) increasing as disposable income increases. B) equal to 1.0 when disposable income equals $600. C) constant at 0.75. D) constant at 0.25. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 113) Using the data from the above table, the marginal propensity to save is A) falling as disposable income is rising. B) 0 when disposable income is $600. C) constant at 0.25. D) constant at 0.75. Answer: C Topic: Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

114) The slope of the consumption function A) is positive and equals 1 - MPC. B) is negative. C) equals the MPC. D) is undefined below the 45-degree line. Answer: C Topic: Slopes and Marginal Propensities Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 115) The slope of the consumption function is A) perfectly horizontal at the equilibrium level. B) equal to 1. C) equal to the MPC. D) vertical at the full employment level of income. Answer: C Topic: Slopes and Marginal Propensities Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 116) When the consumption function becomes steeper, A) less of every dollar is consumed. B) the saving function also become steeper. C) the MPC rises. D) the MPC falls. Answer: C Topic: Slopes and Marginal Propensities Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 117) Which of the following concerning the marginal propensity to consume and the consumption function is true? I. The larger the marginal propensity to consume, the greater the amount of autonomous consumption. II. The larger the marginal propensity to consume, the steeper the consumption function. A) I is true. B) II is true. C) I and II are true. D) Neither I nor II is true. Answer: B Topic: Slopes and Marginal Propensities Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 33 Copyright © 2014 Pearson Education, Inc.

118) If an increase in a household's disposable income from $10,000 to $12,000 boosts its consumption expenditure from $8,000 to $9,000, the A) household is dissaving. B) slope of the consumption function is 0.2 C) slope of the consumption function is 0.5 D) slope of the consumption function is 1000. Answer: C Topic: Slopes and Marginal Propensities Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 119) The marginal propensity to save is ________. A) always greater than the marginal propensity to consume B) equal to the slope of the saving function C) equal to 1 plus the slope of the consumption function D) equal to the inverse of the marginal propensity to consume Answer: B Topic: Slopes and Marginal Propensities Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 120) The marginal propensity to save (MPS) is equal to the A) slope of the savings function. B) slope of the 45 degree. C) reciprocal value of the MPC. D) difference between consumption and income. Answer: A Topic: Slopes and Marginal Propensities Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 121) The slope of the saving function is equal to A) the MPS. B) the MPC. C) 1- MPS. D) None of the above answers is correct. Answer: A Topic: Slopes and Marginal Propensities Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

122) If the slope of the saving function is 0.27, then the marginal propensity to ________. A) import is less than 0.27 B) save is 0.73 C) consume is 0.73 D) consume is 0.27 Answer: C Topic: Slopes and Marginal Propensities Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

123) In the figure above, autonomous consumption is A) zero. B) $2 trillion. C) $4 trillion. D) $6 trillion. Answer: C Topic: Consumption Function Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

124) In the figure above, the induced consumption when real GDP is $12 trillion is A) zero. B) $2 trillion. C) $8 trillion. D) $12 trillion. Answer: C Topic: Consumption Function Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 125) In the figure above, negative saving occurs A) at all levels of disposable income. B) when disposable income is $8 trillion. C) when disposable income is $12 trillion. D) when disposable income is $16 trillion. Answer: B Topic: Saving Function Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 126) In the figure above, the marginal propensity to consume is A) 3.00. B) 1.00. C) 0.67. D) 0.25. Answer: C Topic: Slopes and Marginal Propensities Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

127) The figure above illustrates an economy's consumption function. What is the marginal propensity to consume in this economy? A) 0.67 B) 1.00 C) 0.75 D) 0.33 Answer: D Topic: Slopes and Marginal Propensities Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 128) The figure above illustrates an economy's consumption function. What is the marginal propensity to save in this economy? A) 0.67 B) 1.00 C) 0.75 D) 0.33 Answer: A Topic: Slopes and Marginal Propensities Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

129) The figure above illustrates an economy's consumption function. What is autonomous consumption in this economy? A) $0 B) $4 trillion C) $6 trillion D) None of the above answers is correct. Answer: B Topic: Consumption Function Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

130) In the above figure, when disposable income is greater than $12 trillion, then A) savings are negative. B) the MPC is greater than 1. C) savings are positive. D) the MPS is negative. Answer: C Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

131) In the above figure, the marginal propensity to consume equals A) 0.80. B) 0.90. C) 0.75. D) 0.85. Answer: B Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 132) In the above figure, a change in autonomous consumption to $4 trillion with no change to the MPC would cause the consumption function to A) become steeper. B) become flatter. C) shift downward. D) shift upward. Answer: D Topic: Shifts in the Consumption Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 133) In the short run, a factor that leads to changes in U.S. imports is A) the level of income in foreign nations. B) the real interest rate. C) U.S. real GDP. D) U.S. exports. Answer: C Topic: Import Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 134) When U.S. real GDP increases, then quantity of U.S. imports A) decreases. B) increases. C) remains constant. D) at first decreases and then increases. Answer: B Topic: Import Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

135) The marginal propensity to import reflects the relationship between changes in imports and changes in A) consumption expenditure. B) investment spending. C) exports. D) real GDP. Answer: D Topic: Import Function Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 136) As globalization has increased, the trend in the U.S. marginal propensity to import has been for it to A) decrease to less than 0.8. B) increase. C) remain steady. D) decrease to more than 0.8. Answer: B Topic: Import Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 137) The marginal propensity to import is the ________ that is spent on imports. A) fraction of an increase in real GDP B) total amount of real GDP C) total amount of potential GDP D) fraction of an increase in potential GDP Answer: A Topic: Marginal Propensity to Import Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 138) Between 2011 and 2012 real GDP increased by $600 billion and imports increased by $80 billion. Based on these data, the marginal propensity to import equals A) 0.13. B) 7.5. C) 0.87 D) 0.08. Answer: A Topic: Marginal Propensity to Import Skill: Analytical Status: New AACSB: Reflective Thinking 40 Copyright © 2014 Pearson Education, Inc.

139) The U.S. consumption function A) has shifted upward over time. B) has a positive slope. C) has a slope of about 0.9. D) All of the above answers are correct. Answer: D Topic: The U.S. Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 140) Since 1970, U.S. consumption function has generally shifted ________ because of ________. A) upward; higher expected future income and rising wealth B) upward; higher real interest rates C) downward; higher real interest rates D) downward; falling wealth Answer: A Topic: The U.S. Consumption Function Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 141) Consumption expenditure decreases when ________ decreases. A) the interest rate B) the price level C) disposable income D) saving Answer: C Topic: Study Guide Question, Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 142) The slope of the saving function is equal to the A) marginal propensity to save. B) marginal propensity to consume. C) marginal propensity to consume divided by the marginal propensity to save. D) marginal propensity to save divided by the marginal propensity to consume. Answer: A Topic: Study Guide Question, Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

2 Real GDP with a Fixed Price Level 1) Read the two statements below and indicate if they are true or false. I. Autonomous expenditures change when GDP changes. II. Aggregate planned expenditure is the sum of planned consumption expenditure, investment, government expenditure, and net exports. A) I and II are both true. B) I and II are both false. C) I is true and II is false D) I is false and II is true. Answer: D Topic: Aggregate Planned Expenditure Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 2) Aggregate expenditure equals A) C + I + G + X - M. B) G + X - M. C) C + I + G. D) C + I + G + X. Answer: A Topic: Aggregate Expenditure Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) The aggregate expenditure curve shows A) how consumption changes in response to a change in disposable income. B) how planned aggregate expenditure and real GDP are related. C) a negative relationship between the price level and real GDP. D) Both answers B and C are correct. Answer: B Topic: Aggregate Expenditure Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) The graph of the aggregate expenditure curve has ________ on the y-axis and ________ on the x-axis. A) real GDP; aggregate planned expenditure B) aggregate actual expenditure; real GDP C) household expenditures; real GDP D) aggregate planned expenditure; real GDP Answer: D Topic: Aggregate Expenditure Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 5) The slope of the aggregate expenditure curve equals the change in A) planned expenditure divided by the change in real GDP. B) autonomous expenditure divided by the change in real GDP. C) government expenditure divided by the change in real GDP. D) real GDP divided by the change in planned expenditure. Answer: A Topic: Aggregate Expenditure Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 6) The slope of the aggregate expenditure curve is A) 0. B) greater than 0 and less than 1. C) 1. D) greater than 1. Answer: B Topic: Aggregate Expenditure Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 7) One reason the aggregate expenditure curve slopes upward is because ________ increases when real GDP increases. A) investment B) consumption expenditure C) government expenditure on goods and services D) exports Answer: B Topic: Aggregate Expenditure Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) The sum of the components of aggregate expenditure that vary with real GDP is called A) induced expenditures. B) the MPC. C) autonomous expenditures. D) autonomous consumption. Answer: A Topic: Induced Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) Induced expenditure includes ________. A) induced consumption and government expenditure B) induced consumption expenditure and imports C) all autonomous expenditure D) induced consumption expenditure and exports Answer: B Topic: Induced Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 10) Any expenditure component that depends on the level of real GDP is called A) spurious expenditure. B) equilibrium expenditure. C) induced expenditure. D) autonomous expenditure. Answer: C Topic: Induced Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 11) As a nation's GDP increases, that nation's A) autonomous consumption increases. B) autonomous consumption decreases. C) exports increase. D) imports increase. Answer: D Topic: Induced Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

12) A change in imports caused by rising U.S. incomes is A) an increase in autonomous expenditure. B) a decrease in autonomous expenditure. C) an increase in induced exports. D) a change in induced expenditure. Answer: D Topic: Induced Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 13) The part of aggregate planned expenditure that does not vary with real GDP ________. A) equals equilibrium expenditure B) is autonomous expenditure C) is induced expenditure D) equals zero Answer: B Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 14) The sum of the components of aggregate expenditure that are not influenced by real GDP is called A) induced expenditures. B) the MPC. C) autonomous expenditures. D) autonomous consumption. Answer: C Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 15) Autonomous expenditure is not influenced by A) the price level. B) the interest rate. C) real GDP. D) any other variable. Answer: C Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

16) Expenditure that does NOT depend on real GDP is called A) spurious expenditure. B) equilibrium expenditure. C) induced expenditure. D) autonomous expenditure. Answer: D Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 17) Autonomous expenditure refers to A) aggregate expenditure solely prompted by policy. B) changes in short-run aggregate supply. C) aggregate expenditure that does not change when real GDP changes. D) aggregate expenditure that varies because of changes in real GDP. Answer: C Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 18) All else being constant, autonomous expenditure A) increases as real GDP increases. B) increases as real GDP decreases. C) does not change with changes in real GDP. D) is assumed to be zero. Answer: C Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 19) An increase in U.S. exports because of increasing foreign incomes is ________ in the United States. A) an increase in autonomous expenditure B) a decrease in autonomous expenditure C) an increase in induced expenditure D) a decrease in induced expenditure Answer: A Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

20) An increase in investment by U.S. firms that is intended to maintain U.S. competitiveness in world markets is ________ in the United States. A) an increase in autonomous expenditure B) a decrease in autonomous expenditure C) an increase in induced expenditure D) a decrease in induced expenditure Answer: A Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) Which of the following is NOT an autonomous expenditure in the aggregate expenditures model? A) investment B) government expenditures C) imports D) exports Answer: C Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 22) A decrease in autonomous consumption will A) shift the aggregate expenditure function downward. B) decrease the marginal propensity to save. C) decrease the marginal propensity to consume. D) change the slope of the aggregate expenditure curve Answer: A Topic: Autonomous Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 23) Aggregate planned expenditure A) always equals actual aggregate expenditure. B) is always less than actual aggregate expenditure. C) is always greater than actual aggregate expenditure. D) equals actual aggregate expenditure at the equilibrium level of real GDP. Answer: D Topic: Actual Expenditures and Planned Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

24) Actual aggregate expenditure is A) always equal to real GDP. B) only equal to real GDP at the equilibrium level of aggregate planned expenditure. C) never greater than real GDP but can be less than real GDP. D) never less than real GDP but can be greater than real GDP. Answer: A Topic: Actual Expenditures and Planned Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 25) When aggregate planned expenditure is less than real GDP, unplanned A) consumption expenditure occurs. B) investment occurs. C) government expenditures are made. D) exports are made. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 26) The difference between planned and unplanned spending is ________. A) always negative B) inventories C) unplanned changes in inventories D) always positive Answer: C Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 27) When there is unplanned inventory investment, aggregate planned expenditure is ________ real GDP and actual investment is ________ planned investment. A) greater than; greater than B) greater than; less than C) less than; greater than D) less than; less than Answer: C Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

28) If aggregate planned expenditure exceeds real GDP, A) firms are not maximizing their profits. B) planned investment is greater than planned savings. C) actual inventories decrease below their target. D) planned consumption expenditure is less than actual consumption expenditure. Answer: C Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 29) If planned expenditures equal $13 trillion when real GDP is $13.5 trillion, then A) inventories will decrease by $0.5 trillion. B) actual investment will exceed planned investment. C) there will be excess demand for most goods. D) the economy must have a trade surplus to sell the excess goods and services. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 30) Suppose that in 2013, firms discover that their inventories are falling below their planned levels. Which of the following statements is correct? A) The level of aggregate savings must equal the level of desired investment. B) Even though firms are trying, they are unable to maximize profits. C) Aggregate demand is less than aggregate supply. D) Real GDP is less than equilibrium expenditure. Answer: D Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 31) Actual expenditure might differ from planned expenditure because A) actual consumption expenditure differs from planned consumption expenditure. B) actual investment differs from planned investment. C) actual government expenditure differ from planned government expenditure. D) actual net exports differ from planned net exports. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

32) If real GDP is $13 trillion and planned aggregate expenditure is $13.5 trillion, inventories will be A) below their target and real GDP will increase. B) below their target and real GDP will decrease. C) above their target and real GDP will decrease. D) above their target and real GDP will increase. Answer: A Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 33) Which of the following statements is correct? A) Actual aggregate expenditures does not always equal real GDP. B) Planned investment exceeds actual investment when real GDP is greater than aggregate planned expenditures. C) Actual investment exceeds planned investment when real GDP is less than aggregate planned expenditures. D) None of the above is correct. Answer: D Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 34) If prices are fixed, when aggregate planned expenditure exceeds real GDP, then A) inventories decrease, signaling firms to increase production and increase real GDP. B) inventories increase, signaling firms to decrease production and decrease real GDP. C) profits fall, signaling firms to decrease production and decrease real GDP. D) None of the above answers are correct. Answer: A Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 35) When real GDP exceeds aggregate planned expenditure, A) actual inventories decrease below their target. B) the circular flow will increase. C) GDP will decrease. D) a higher level of equilibrium income will prevail. Answer: C Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 50 Copyright © 2014 Pearson Education, Inc.

36) If aggregate planned expenditure is less than real GDP, A) real GDP will increase. B) real GDP remain unchanged. C) real GDP will either decrease or increase, depending on the MPC. D) inventories will increase above their target level and real GDP will decrease. Answer: D Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 37) Suppose the equilibrium level of expenditure is $13 trillion. If real GDP is $12 trillion, then inventories are ________ their target levels and real GDP will ________. A) above; increase B) above; decrease C) below; increase D) below; decrease Answer: C Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 38) Suppose the equilibrium level of expenditure is $13 trillion. If real GDP is $14 trillion, then planned expenditures A) exceed real GDP, and real GDP will increase. B) are less than real GDP, and real GDP will decrease. C) are equal to real GDP, and there will be no change in real GDP. D) are less than real GDP, and real GDP will increase. Answer: B Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 39) If aggregate planned expenditure is less than real GDP then A) consumers increase their planned expenditure until aggregate planned expenditure increases to equal real GDP. B) firms increase their planned expenditure until aggregate planned expenditure increases to equal real GDP. C) firms' inventories will increase and real GDP will decrease as production falls. D) firms' inventories will decrease and real GDP will decrease as production falls. Answer: C Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 51 Copyright © 2014 Pearson Education, Inc.

40) When investment is less than planned investment, aggregate planned expenditure is ________ than actual aggregate expenditure and inventories are ________ than planned. A) greater; greater B) greater; less C) less; greater D) less; less Answer: B Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 41) When investment exceeds planned investment, aggregate planned expenditure is ________ than actual aggregate expenditure and inventories are ________ than planned. A) greater; greater B) greater; less C) less; greater D) less; less Answer: C Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 42) In the aggregate expenditure model, when real GDP is greater than aggregate planned expenditure, A) unplanned inventories are being accumulated. B) inventories are being depleted. C) inventories are not being changed. D) this cannot happen, because the two variables are always equal. Answer: A Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 43) Equilibrium expenditure is defined as the level of aggregate expenditure where A) actual aggregate expenditure equals real GDP. B) total inventories equal zero. C) aggregate planned expenditure equals real GDP. D) spending equals output. Answer: C Topic: Equilibrium Expenditure Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 52 Copyright © 2014 Pearson Education, Inc.

44) When the economy is in equilibrium, A) planned investment equals actual investment. B) planned savings will equal zero. C) there can be no unemployment. D) changes in autonomous spending will have no impact on real GDP. Answer: A Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 45) At equilibrium expenditure A) consumers' expenditures on goods and services equal firms' purchases of investment goods. B) firms hold no inventories of raw materials or final goods. C) aggregate planned expenditure equals real GDP. D) aggregate planned expenditure equals real GDP minus net exports. Answer: C Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 46) At equilibrium expenditure, unplanned changes in inventory A) must be positive. B) must be zero. C) must be negative. D) might be either positive or negative. Answer: B Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 47) Equilibrium expenditure occurs where A) the aggregate expenditure curve crosses the 45-degree line. B) planned expenditures exceed national income. C) savings exceed planned investment. D) All of the answers are correct. Answer: A Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

48) Equilibrium expenditure occurs where the aggregate expenditure curve crosses the A) 45-degree line. B) horizontal axis. C) vertical axis. D) consumption function. Answer: A Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking Real GDP 2500 2400 2300 2200 2100

C 1430 1360 1290 1220 1150

I 540 540 540 540 540

G 400 400 400 400 400

X-M 90 100 110 120 130

49) In the above table, C is consumption expenditure, I is investment, G is government expenditure, and X - M is net exports. All entries are in dollars. The equilibrium level of real GDP is A) $2,500. B) $2,400. C) $2,300. D) $2,200. Answer: B Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 50) In the above table, C is consumption expenditure, I is investment, G is government expenditure, and X - M is net exports. All entries are in dollars. The slope of the aggregate expenditure function is A) -0.10. B) 0.10. C) 0.60. D) 0.70. Answer: C Topic: Slope of the AE Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Real GDP 100 200 300 400 500 600 700 800 900 1000

75 150 225 300 375 450 525 600 675 750

25 25 25 25 25 25 25 25 25 25

95 95 95 95 95 95 95 95 95 95

10 10 10 10 10 10 10 10 10 10

1 2 3 4 5 6 7 8 9 10

51) In the above table, C is consumption expenditure, I is investment, G is government expenditure, X is exports, and M is imports. All entries are in dollars. What is the marginal propensity to consume? A) 0.20 B) 0.25 C) 0.75 D) 0.80 Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 52) In the above table, C is consumption expenditure, I is investment, G is government expenditure, X is exports, and M is imports. All entries are in dollars. What is the level of aggregate planned expenditure when real GDP is equal to $900 billion? A) $675 B) $796 C) $814 D) $1,714 Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

53) In the above table, C is consumption expenditure, I is investment, G is government expenditure, X is exports, and M is imports. All entries are in dollars. What is the unplanned inventory change when GDP is equal to $400? A) $26 B) -$26 C) $5 D) -$5 Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 54) In the above table, C is consumption expenditure, I is investment, G is government expenditure, X is exports, and M is imports. All entries are in dollars. What is the equilibrium expenditure? A) $200 B) $500 C) $700 D) $1,000 Answer: B Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 55) In the above table, C is consumption expenditure, I is investment, G is government expenditure, X is exports, and M is imports. All entries are in dollars. If investment increased by $26 to $51 then equilibrium expenditure will A) increase by $25. B) decrease by $50. C) increase by $100. D) decrease by $100. Answer: C Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

56) In the above figure, at the equilibrium, induced expenditure is A) $4 trillion. B) $8 trillion. C) $12 trillion. D) some amount not given in the above answers. Answer: A Topic: Induced Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 57) In the above figure, autonomous expenditure is A) $4 trillion. B) $8 trillion. C) $12 trillion. D) some amount not given in the above answers. Answer: B Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

58) In the above figure, if real GDP is below $12 trillion, inventories will be A) below target levels, so firms increase production. B) below target levels, so firms decrease production. C) above target levels, so firms increase production. D) above target levels, so firms decrease production. Answer: A Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 59) In the above figure, if real GDP is greater than $12 trillion, inventories will be A) below target levels so firms increase production. B) below target levels so firms decrease production. C) above target levels so firms increase production. D) above target levels so firms decrease production. Answer: D Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

60) The figure shows Tropical Isle's aggregate planned expenditure curve. When aggregate planned expenditure is $2 trillion, aggregate planned expenditure is ________ than real GDP, firms' inventories ________, and firms ________ their production. A) greater; increase; decrease B) less; decrease; increase C) less; increase; decrease D) greater; decrease; increase Answer: D Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 61) Real GDP equals $20 billion and aggregate planned expenditure is $30 billion. There is an unplanned ________ in inventories of ________ and real GDP will ________. A) increase; $10 billion; increase B) increase; $50 billion; decrease C) decrease; $10 billion; increase D) decrease; $10 billion; decrease Answer: C Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

62) In the above figure, if real GDP equals $12 trillion, there would be A) an increase in autonomous consumption expenditure. B) an increase in autonomous inventories. C) no change in GDP. D) an unplanned increase in firms' inventories. Answer: C Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 63) In the above figure, if real GDP equals $15 trillion, A) actual and planned investment will both increase. B) unplanned inventories will increase. C) actual investment will decrease but planned investment will increase. D) unplanned inventories will decrease. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

64) In the above figure, if real GDP equals $11 trillion, A) actual and planned investment will both increase. B) unplanned inventories will increase. C) actual investment will decrease but planned investment will increase. D) unplanned inventories will decrease. Answer: D Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

65) In the above figure, if the marginal propensity to consume increases, the slope of the AE curve would A) increase. B) decrease. C) stay the same but the AE curve would shift upwards. D) stay the same but the AE curve would shift downwards. Answer: A Topic: Aggregate Expenditure Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

66) In the above figure, point d represents planned expenditures ________ real GDP. A) greater than B) equal to C) less than D) There is not enough information to answer the question. Answer: C Topic: Actual Expenditures and Planned Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 67) In the above figure, at point d firms would find themselves with inventories ________ their target level and so would ________ production. A) increasing above; increase B) increasing above; decrease C) decreasing below; increase D) decreasing below; decrease Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 68) The equilibrium in the above figure is shown at point A) a. B) b. C) c. D) d. Answer: C Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

69) In the above figure, equilibrium expenditure is A) less than $12 trillion. B) $12 trillion. C) more than $12 trillion. D) some amount that cannot be determined without more information. Answer: B Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 70) In the above figure, if the level of real GDP is $13 trillion, A) inventories are above the levels planned by firms. B) inventories are below the levels planned by firms. C) inventories are equal to the levels planned by firms. D) planned expenditures are zero. Answer: A Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

71) In the above figure, if the level of real GDP is $11 trillion, A) inventories are above the levels planned by firms. B) inventories are below the levels planned by firms. C) inventories are equal to the levels planned by firms. D) planned expenditures are zero. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 72) If firms' inventories are less than they planned, aggregate planned expenditure is ________ real GDP and firms ________ their production. A) greater than; increase B) greater than; decrease C) less than; increase D) less than; decrease Answer: A Topic: Study Guide Question, Convergence to Equilibrium Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 73) If aggregate planned expenditure is less than real GDP, in the short run A) aggregate planned expenditure will increase. B) exports change to restore equilibrium. C) the price level will fall. D) real GDP will decrease. Answer: D Topic: Study Guide Question, Convergence to Equilibrium Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

3 The Multiplier 1) When autonomous expenditure decreases, ________. A) the AE curve shifts downward B) there is a movement down along the AE curve C) the AE curve becomes less steep D) the AE curve shifts upward Answer: A Topic: Changes in Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

2) In the above figure the economy is initially at point A on aggregate expenditure curve AE0. Suppose firms expect profits to increase and decide to increase investment. As a result A) the AE curve shifts upward to a curve such as AE2. B) the AE curve shifts downward to a curve such as AE1. C) there is a movement along AE1 to a point such as B. D) there is a movement along AE1 to a point such as C. Answer: A Topic: Changes in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

3) In the above figure the economy is initially at point A on aggregate expenditure curve AE0. Suppose investment decreases. As a result A) the AE curve shifts upward to a curve such as AE2. B) the AE curve shifts downward to a curve such as AE1. C) there is a movement along AE1 to a point such as B. D) there is a movement along AE1 to a point such as C. Answer: B Topic: Changes in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 4) If prices are fixed, an increase in aggregate expenditures results in an increase in equilibrium GDP that A) is greater than the change in aggregate expenditure. B) is equal to the change in aggregate expenditure. C) is less than the change in aggregate expenditure. D) has no necessary relationship to the size of the change in aggregate expenditure. Answer: A Topic: The Multiplier Effect Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 5) The multiplier effect on real GDP occurs because A) changes in price levels affect our willingness to invest, consume, import and export. B) an autonomous change in expenditure causes an induced change in consumption expenditure. C) of government stabilization policies. D) of income taxes. Answer: B Topic: The Multiplier Effect Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 6) The multiplier effect exists because a change in autonomous expenditure A) leaves the economy in the form of imports. B) leads to changes in income, which generate further spending. C) prompts further exports. D) will undergo its complete effect in one round. Answer: B Topic: The Multiplier Effect Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 66 Copyright © 2014 Pearson Education, Inc.

7) The multiplier effect A) generates instability in autonomous expenditure. B) promotes stability of the general price level. C) magnifies small changes in spending into larger changes in real GDP. D) increases the MPC. Answer: C Topic: The Multiplier Effect Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 8) When autonomous expenditure increases, equilibrium aggregate expenditure A) decreases by an equal amount to offset the unplanned portion. B) increases by an equal amount. C) decreases by a greater amount due to the multiplier. D) increases by a greater amount due to the multiplier. Answer: D Topic: The Multiplier Effect Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) In the short run with fixed prices, an increase in investment of $100 billion A) increases real GDP by $100 billion. B) increases real GDP by less than $100 billion. C) increases real GDP by more than $100 billion. D) decreases real GDP because of the decrease in induced expenditures. Answer: C Topic: The Multiplier Effect Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 10) The multiplier is the amount by which ________ is multiplied to determine ________. A) autonomous expenditure; real GDP B) induced expenditure; real GDP C) a change in autonomous expenditure; the change in equilibrium expenditure D) a change in induced expenditure; the change in equilibrium expenditure Answer: C Topic: The Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

11) The multiplier is the ratio of the A) change in real GDP to the change in autonomous expenditures. B) equilibrium level of real GDP to the change in induced expenditures. C) change in induced expenditures to the change in autonomous expenditures. D) change in autonomous expenditures to the change in real GDP. Answer: A Topic: The Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 12) When prices are fixed and there are no imports or income taxes, the value of the multiplier is A) less than one. B) greater than one. C) equal to one. D) equal to zero. Answer: B Topic: The Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 13) The multiplier shows that as ________ changes, real GDP changes by a ________ amount. A) induced expenditure; larger B) induced expenditure; smaller C) autonomous expenditure; larger D) autonomous expenditure; smaller Answer: C Topic: The Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 14) Because of the multiplier, a one-time change in expenditure will A) have little secondary effect on real GDP. B) expand real GDP by an infinite amount. C) generate more additional real GDP than the initial change in expenditure. D) decrease saving and investment activity and thereby decrease future real GDP. Answer: C Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

15) The multiplier is greater than 1 because A) most households are unable to save. B) household spending exceeds income. C) one person's spending becomes another's income. D) corporate spending exceeds corporate income. Answer: C Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 16) The multiplier is greater than 1 because the change in autonomous expenditure leads to ________. A) more investment B) more saving C) less consumption expenditure D) more induced expenditure Answer: D Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 17) If a $75 billion increase in autonomous expenditure increases equilibrium expenditure by $150 billion, then the multiplier is ________. A) $225 billion B) 0.625 C) $75 billion D) 2 Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 18) If investment increases by $300 and, in response, equilibrium aggregate expenditure increases by $600, the multiplier is A) 0.2. B) 0.5. C) 2. D) 5. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 69 Copyright © 2014 Pearson Education, Inc.

19) If the multiplier is 6 and exports decrease by $30, what impact will that have on aggregate expenditure? A) increase by $30 B) increase by $180 C) decrease by $30 D) decrease by $180 Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 20) The multiplier is larger if the A) marginal propensity to consume is larger. B) marginal propensity to save is larger. C) income tax rate is higher. D) marginal propensity to import is larger. Answer: A Topic: The Multiplier and the MPC Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) If the MPC increases from 0.75 to 0.80 and there are no income taxes or imports, A) the multiplier becomes larger. B) the multiplier becomes smaller. C) the slope of the consumption function becomes smaller. D) the slope of the savings function becomes larger. Answer: A Topic: The Multiplier and the MPC Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 22) An increase in the size of the multiplier can be caused by A) an increase in the MPS. B) an increase in the MPC. C) a decrease in induced expenditures. D) an increase in the marginal propensity to import. Answer: B Topic: The Multiplier and the MPC Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

23) The relationship between the multiplier and the MPC is A) that as the MPC increases, so does the value of the multiplier. B) that as the MPC increases, the value of the multiplier decreases. C) unrelated because the multiplier relates to the MPS not the MPC. D) converging at higher incomes. Answer: A Topic: The Multiplier and the MPC Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 24) Which of the following makes the multiplier larger? A) an increase in the marginal propensity to import B) an increase in the tax rate C) an increase in the marginal propensity to consume D) an increase in the marginal propensity to save Answer: C Topic: The Multiplier and the MPC Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 25) An increase in the value of the multiplier can be caused by A) a decrease in the marginal propensity to consume. B) an increase in the marginal propensity to import. C) an increase in autonomous consumption expenditure. D) an increase in the marginal propensity to consume. Answer: D Topic: The Multiplier and the MPC Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 26) In an economy with no income taxes or imports, the multiplier equals A) 1/MPC. B) 1/MPS. C) 1/(1 - MPS). D) 1/(MPC + MPS). Answer: B Topic: The Multiplier and the MPS Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

27) The larger the slope of the AE curve, the A) larger the value of the multiplier. B) smaller the value of the multiplier. C) less likely that the multiplier will be affected. D) more likely that the multiplier will be inconsequential. Answer: A Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 28) If the slope of the AE curve increases, the multiplier A) decreases. B) increases. C) stays the same. D) can either increase or decrease depending on what happens to the MPC. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 29) The expenditure multiplier equals A) APC - APS where APC is the average propensity to consume and APS is the average propensity to save. B) 1/(1 - slope of AE curve). C) MPC - MPS where MPC is the marginal propensity to consume and MPS is the marginal propensity to consume. D) 1/(slope of AE curve). Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 30) If there are no income taxes or imports, the multiplier equals A) 1/(1 - marginal propensity to consume). B) 1/(1 - marginal propensity to save). C) 1/(1 - marginal propensity to import). D) 1/(1 - marginal propensity to invest). Answer: A Topic: The Multiplier and the MPC Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

31) If there are no taxes or imports and MPC = 0.67, the multiplier is A) 1.5. B) 3. C) 6. D) 0.33. Answer: B Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 32) If there are no taxes or imports and MPC = 0.75, the multiplier equals A) 0.25. B) 1.33. C) 4.0. D) 6.0. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 33) If there are no taxes or imports and MPC = 0.5, the multiplier equals A) 0.5. B) 5.0. C) 6.0. D) 2.0. Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 34) Assume there are no taxes or imports. The government estimates that between 2008 and 2009 disposable income decreased by $300 billion and consumption expenditure decreased by $180 billion. Based on these data, the multiplier equals A) 0.4. B) 1.67. C) 0.6. D) 2.5. Answer: D Topic: The Multiplier Skill: Analytical Status: New AACSB: Analytical Skills

35) If the marginal propensity to consume is 0.8 and there no income taxes or imports, the multiplier for a change in autonomous expenditure equals A) 0.8. B) 1.0 C) 4.0. D) 5.0. Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 36) If the MPC is .9 and there are no income taxes or imports, the multiplier for a change in autonomous expenditure equals A) 0.1. B) 9.0. C) 10.0. D) 100.0. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 37) If the multiplier for a change in autonomous expenditure is 10 and there are no income taxes or imports, then the MPC is A) 0.9. B) 0.1. C) 1.0. D) 9.0. Answer: A Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 38) If the multiplier is 4 and there are no imports or income taxes, the marginal propensity to consume is A) 0.25. B) 0.50. C) 0.75. D) 1.00. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 74 Copyright © 2014 Pearson Education, Inc.

39) If the multiplier is 3.33 and there are no imports or income taxes, then the A) MPC is 0.7. B) MPS is 0.3. C) Both of the above answers are correct. D) None of the above answers are correct. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 40) If the slope of the AE curve is 0.60, the value of the multiplier is A) 2.5. B) 0.4. C) 1.67. D) 4.0. Answer: A Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 41) Suppose that last year the slope of the AE curve is 0.67 and this year the slope of the AE curve changes to 0.8. Which of the following best describes what happens to the multiplier? A) It rises from 3 to 5. B) It falls from 5 to 3. C) It rises from 1.25 to 1.49. D) It falls from 1.49 to 1.25. Answer: A Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 42) In general, the steeper the aggregate expenditure curve, the A) greater autonomous expenditure. B) lower the marginal propensity to consume. C) larger the multiplier. D) smaller the multiplier. Answer: C Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

43) In general, the flatter the aggregate expenditure curve, the A) greater the autonomous expenditure. B) larger the marginal propensity to consume. C) larger the multiplier. D) smaller the multiplier. Answer: D Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 44) The smaller the slope of the AE curve, ________. A) the greater is the value of the multiplier B) the smaller is slope of the saving function C) the steeper is the consumption function D) the smaller is the value of the multiplier Answer: D Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 45) The slope of the aggregate expenditure curve increases when the marginal propensity to consume ________ or the marginal propensity to import ________. A) increases; decreases B) decreases; increases C) decreases; decreases D) increases; increases Answer: A Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 46) A change in which of the following changes the slope of the aggregate expenditure curve? A) an increase in autonomous government expenditures B) an increase in the marginal propensity to consume C) a decrease in autonomous consumption expenditures D) All of the above answers are correct because they all change the slope of the aggregate expenditure curve. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

47) Given an MPC of 0.80, if there are no income taxes or imports and prices are constant, then when investment increases by $50 million, when prices are fixed equilibrium GDP would A) increase by $50 million. B) increase by $250 million. C) increase by $400 million. D) To answer the question more information on income is needed. Answer: B Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 48) In a simple economy in which prices are constant and with no income taxes or imports, the marginal propensity to save is 0.2. If exports increase $50, what impact will that have on aggregate expenditure? A) increase by $250 B) increase by $100 C) decrease by $250 D) decrease by $100 Answer: A Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 49) Between 2008 and 2009 the government reports that investment decreased by $ 530 billion. The government also estimates that the multiplier is 2.0. If the entire decrease in investment is autonomous, then real GDP A) decreases by $1,060 billion. B) increases by $265 billion. C) decreases by $265 billion. D) None of the above answers are correct. Answer: A Topic: The Multiplier Skill: Analytical Status: New AACSB: Analytical Skills

50) Suppose that the slope of the AE curve is 0.80. Then an increase of investment of $10 billion leads to an increase in equilibrium real GDP equal to A) $8.0 billion. B) $10.0 billion. C) $12.5 billion. D) $50.0 billion. Answer: D Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 51) The slope of the AE curve is 0.9. Investment decreases by $100 million and the price level is constant. Real GDP A) decreases by $10 million. B) increases by $90 million. C) decreases by $1 billion. D) increases by $1 billion. Answer: C Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 52) If the price level is constant and the slope of the AE curve is 0.75, a decrease in investment of $100 leads to a decrease in real GDP of A) $25. B) $100. C) $400. D) $800. Answer: C Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

53) An economy has no imports and no taxes. The marginal propensity to save is 0.2. The multiplier is ________ so a ________ increase in autonomous expenditure increases equilibrium expenditure by $60 billion. A) 1.25; $48 billion B) 5; $12 billion C) 10; $6 billion D) none of the above answers are correct. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 54) In a simple economy in which prices are constant and with no income taxes or imports, the slope of the AE curve is 0.8. In order to increase real GDP by $500 billion, then A) consumption expenditure needs to increase by $500 billion. B) saving needs to be reduced by $500 billion will lead to the increase of $500 billion. C) an increase in investment of $200 billion will lead to the increase of $500 billion. D) an increase in autonomous expenditure of $100 billion will lead to the increase of $500 billion. Answer: D Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 55) Suppose that the slope of the AE curve is 0.75. Then a $100 increase in autonomous spending means equilibrium expenditure will A) decrease by $400. B) increase by $400. C) decrease by $750. D) increase by $750. Answer: B Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

56) Suppose that the slope of the AE curve is 0.75. Then a $100 decrease in autonomous spending means equilibrium expenditure will A) decrease by $400. B) increase by $400. C) decrease by $750. D) increase by $750. Answer: A Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 57) Suppose that the slope of the AE curve is 0.67. Then a $100 decrease in autonomous spending means equilibrium expenditure will A) decrease by $200. B) increase by $200. C) decrease by $300. D) increase by $300. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 58) Suppose that the slope of the AE curve is 0.67. Then a $100 increase in autonomous spending means equilibrium expenditure will A) decrease by $200. B) increase by $200. C) decrease by $300. D) increase by $300. Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 59) Suppose that the slope of the AE curve is 0.80. If prices remain constant and government expenditure increases by $10 billion, what will be the change in real GDP? A) $8 billion B) $2 billion C) $10 billion D) $50 billion Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 80 Copyright © 2014 Pearson Education, Inc.

60) The government estimates that the fiscal policy multiplier is 2.0. If this estimate is accurate, then the slope of the AE curve is ________. A) 0.20 B) 0.80 C) 2.00 D) 0.50 Answer: D Topic: The Multiplier Skill: Analytical Status: New AACSB: Analytical Skills 61) The government estimates that the fiscal policy multiplier is 2.0. In this case an increase in government expenditure of $500 billion increases real GDP by ________ and results in an increase in induced expenditure of ________. A) $500 billion; $0 B) $500 billion; $500 billion C) $1,000 billion; $1,000 billion D) $1,000 billion; $500 billion Answer: D Topic: The Multiplier Skill: Analytical Status: New AACSB: Analytical Skills 62) An economy saves 20 percent of any increase in income and there are no income taxes or imports. Then, an increase in investment of $2 billion leads to a short run increase in real GDP of A) $2 billion. B) $10 billion. C) $0.4 billion. D) $1.6 billion. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

63) Equilibrium real GDP is $400 billion, the MPC = 0.9, and there are no income taxes or imports. Investment increases $40 billion. If the price level is constant, after the increase in investment, equilibrium real GDP will be A) $440 billion. B) $360 billion. C) $600 billion. D) $800 billion. Answer: D Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Real GDP Aggregate (trillions of 2005 expenditure (trillions dollars) of 2005 dollars) 0 0.3 1.0 1.2 2.0 2.1 3.0 3.0 4.0 3.9 5.0 4.8 64) The data in the above table indicate that autonomous expenditure is A) $0.3 trillion. B) $3.0 trillion. C) $4.8 trillion. D) None of the above answers is correct. Answer: A Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 65) In the above table, equilibrium expenditure is A) $0.3 trillion. B) $3.0 trillion. C) $4.8 trillion. D) None of the above answers are correct. Answer: B Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

66) The data in the above table indicate that the slope of the AE curve is A) 0.30. B) 0.50. C) 0.90. D) None of the above answers are correct. Answer: C Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 67) In the above table, suppose investment decreases by $0.1 trillion. The multiplier equals A) 5.0. B) 9.0. C) 10.0. D) None of the above answers are correct. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Real GDP (dollars) 3,000 4,000 5,000 6,000 7,000 8,000

Consumption expenditure (dollars) 2,500 3,250 4,000 4,750 5,500 6,250

Investment (dollars) 500 500 500 500 500 500

Government expenditure (dollars) 500 500 500 500 500 500

68) In the above table, there are no taxes (so that that real GDP equals disposable income) and no imports or exports. If real GDP decreases from $6,000 to $5,000, the marginal propensity to consume is A) -750. B) -0.75. C) 0.75. D) 0.80. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

69) In the above table, there are no taxes and no imports or exports. The equilibrium level of expenditure for this economy is A) any level because investment always equals government expenditures. B) no level because consumption expenditure is always less than real GDP. C) $3,000. D) $5,000. Answer: D Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 70) In the above table, there are no taxes and no imports or exports. The total level of expenditure in the economy when real GDP is $7,000 is A) $7,000. B) $6,500. C) $13,500. D) 0.75. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 71) In the above table, there are no taxes and no imports or exports. The change in unplanned inventories when real GDP is $7,000 is A) $6,500. B) $500. C) -$500. D) $1,500. Answer: B Topic: Convergence to Equilibrium Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 72) In the above table, there are no taxes and no imports or exports. If current real GDP is equal to $7,000, then firms will A) not change production because $7,000 is the equilibrium level of real GDP. B) increase production to rebuild inventories to their target level. C) decrease production to restore inventories to their target level. D) None of the above answers is correct. Answer: C Topic: Convergence to Equilibrium Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 84 Copyright © 2014 Pearson Education, Inc.

73) In the above table, there are no taxes and no imports or exports. The value of the multiplier for this economy is A) 0.75. B) 1.33. C) 4.0. D) 0.25. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 74) In the above table, there are no taxes and no imports or exports. Suppose that investment increases from $500 to $750 at each level of real GDP. After the increase, what is the level of planned expenditure when real GDP equals $5,000? A) $5,000 B) $5,250 C) $1,000 D) $250 Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 75) In the above table, there are no taxes and no imports or exports. Investment increases from $500 to $750. After the increase in investment, the new equilibrium level of output is A) $5,000. B) $7,000. C) $6,000. D) $5,750. Answer: C Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

76) Suppose the price level is fixed. If investment increases by $1 trillion and the aggregate expenditure curve is shown in the figure above, in response equilibrium expenditure increases by ________. A) $1 trillion. B) $3 trillion. C) less than $1 trillion. D) None of the above answers are correct. Answer: B Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

77) In the above figure, an increase in autonomous expenditure is depicted by the movement from point E to A) point F. B) point G. C) point H. D) point I. Answer: A Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 78) In the above figure, the increase in autonomous expenditure moves the economy from point E to A) point F. B) point G. C) point H. D) point I. Answer: B Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

79) In the above figure, the multiplier is equal to A) zero. B) one. C) two. D) three. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

80) In the above figure, autonomous expenditure along AE1 equals A) $3 trillion. B) $6 trillion. C) $12 trillion. D) an amount not given in the above answers. Answer: A Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

81) In the above figure, autonomous expenditure along AE2 equals A) $3 trillion. B) $6 trillion. C) $12 trillion. D) an amount not given in the above answers. Answer: B Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 82) If AE0 is the aggregate planned expenditure curve, then equilibrium real GDP in the figure above is A) $3 trillion. B) $6 trillion. C) $12 trillion. D) None of the above answers is correct. Answer: B Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 83) In the above figure, equilibrium expenditure along AE2 is A) $3 trillion. B) $6 trillion. C) $12 trillion. D) an amount not given in the above answers. Answer: C Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 84) In the above figure, the shift from AE0 to AE1 might have been caused by A) an increase in government expenditures. B) an increase in the real interest rate. C) an increase in the price level. D) All of the above answers are correct. Answer: A Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

85) The value of the multiplier in the economy illustrated in the figure above is A) 2.0. B) 2.5. C) 4.0. D) 10.0. Answer: A Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 86) In the above figure, AE0 is the aggregate planned expenditure curve and then investment increases by an additional $3 trillion. As a result, the new equilibrium GDP will be A) $3 trillion. B) $6 trillion. C) $12 trillion. D) None of the above answers is correct. Answer: C Topic: Changes in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 87) The presence of income taxes and imports make the slope of the aggregate expenditure curve A) the same as it would be without income taxes and exports. B) steeper than it would be without income taxes and exports. C) flatter than it would be without income taxes and exports. D) probably different than it would be without income taxes and exports but income taxes make it steeper while imports make it flatter. Answer: C Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

88) In the figure above, the multiplier equals A) 0.5. B) 2.5. C) 10.0. D) some amount that cannot be calculated without additional information. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 89) In the figure above, if income taxes increase, A) the AE curve becomes steeper. B) the AE curve becomes flatter. C) there is a movement leftward along the unchanged AE curve. D) there is a movement rightward along the unchanged AE curve. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

90) Imports A) increase the size of the multiplier because imports make disposable income less than real GDP. B) decrease the size of the multiplier because spending on imports does not increase real GDP in the domestic nation. C) increase the size of the multiplier because imports are paid for by exports. D) decrease the size of the multiplier because imports lead to an increase in taxes and government purchases. Answer: B Topic: The Multiplier and Imports Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 91) The relationship between net exports and GDP makes the slope of the aggregate expenditure curve A) flatter than it would be otherwise. B) steeper than it would be otherwise. C) neither flatter nor steeper than it would be otherwise. D) steeper at low levels of GDP and flatter at high levels of GDP. Answer: A Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 92) If the marginal propensity to import increases, then the A) multiplier will decrease in value. B) multiplier will increase in value. C) multiplier will not change in value. D) effect on the multiplier will depend on what happens to exports. Answer: A Topic: The Multiplier and Imports Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

93) The presence of imports ________ the size of the U.S. multiplier because with an increase of U.S. real GDP, ________. A) increases; U.S. consumers buy goods from other countries B) increases; U.S. firms can sell goods to other countries C) decreases; U.S. consumers buy goods from other countries D) decreases; U.S. firms can sell goods to other countries Answer: C Topic: The Multiplier and Imports Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 94) Changes in which of the following will affect the size of the multiplier? I. marginal propensity to import II. marginal propensity to consume III. marginal income tax rate A) I only B) II only C) I and II only D) I, II, and III Answer: D Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 95) The presence of income taxes and imports make the multiplier A) fall in value but remain positive. B) rise in value. C) not change in value. D) become negative. Answer: A Topic: The Multiplier, Imports, and Income Taxes Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

96) In 2013 the government increased Social Security income taxes by 2 percentage points and increased the income tax rate on Americans making more than $400,000 by 4.6 percentage points. These tax hikes A) decreased the size of the multiplier. B) increased the size of the multiplier. C) had no effect on the size of the multiplier. D) None of the above answers are correct because the effect on the size of the multiplier is ambiguous. Answer: A Topic: The Multiplier and Income Taxes Skill: Analytical Status: New AACSB: Reflective Thinking 97) You observe that unplanned inventories are increasing. You predict that there will be ________. A) a business cycle B) an expansion C) a trough D) a recession Answer: D Topic: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 98) Business cycle turning points are A) unaffected by, and unrelated to the multiplier. B) easy to predict. C) brought about by changes in autonomous expenditures that are then subject to the multiplier effect. D) None of the above is correct. Answer: C Topic: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

99) Which of the following does NOT occur as the economy moves from an expansion to a recession? A) An initial decrease in autonomous spending is the trigger that creates the business cycle turning point. B) The change in planned spending exceeds the change in real GDP. C) The multiplier process reinforces any decrease in spending and pushes the economy into recession. D) Incomes fall during recessions as firms cut production in response to unplanned increases in inventories. Answer: B Topic: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 100) Which of the following is INCORRECT? A) Expansions usually begin with an increase in autonomous spending. B) Firms experience unplanned decreases in inventories as expansions begin. C) Firms increase production in response to unplanned decreases in inventories. D) The multiplier dampens the increase in income that occurs during expansions and brings the economy to a new equilibrium GDP. Answer: D Topic: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 101) A decrease in autonomous expenditure shifts the AE curve A) downward and leaves its slope unchanged. B) downward and makes it steeper. C) downward and makes it flatter. D) upward and makes it steeper. Answer: A Topic: Study Guide Question, Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

102) If investment increases by $150 and, in response, equilibrium expenditure rises by $600, A) the multiplier is 0.25. B) the multiplier is 4.0. C) the MPC is 4. D) the slope of the AE curve is 3.0. Answer: B Topic: Study Guide Question, The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 4 The Multiplier and the Price Level 1) The aggregate demand curve slopes downward because of A) the multiplier. B) the MPC. C) wealth and substitution effects. D) import and taxation effects. Answer: C Topic: Aggregate Demand Curve and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 2) If the price level rises, the purchasing power of wealth A) increases. B) does not change. C) decreases. D) increases at first but in the long run decreases. Answer: C Topic: Aggregate Demand Curve and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) The intertemporal substitution effect of a change in the price level results from a A) change in the price of current goods relative to future goods. B) change in the purchasing power of wealth. C) change in the price of foreign goods relative to domestic goods. D) Both answers B and C are correct. Answer: A Topic: Aggregate Demand Curve and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) Intertemporal substitution means changes in purchases A) through time. B) between imports and exports. C) across different stores. D) across different goods and services. Answer: A Topic: Aggregate Demand Curve and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 5) The larger the multiplier, the ________ the AE curve and the ________ the AD curve from an increase in investment. A) steeper; smaller the shift in B) steeper; larger the shift in C) flatter; larger the movement along D) flatter; smaller the movement along Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 6) If investment decreases, the AE curve shifts A) upward and the AD curve shifts rightward. B) downward and the AD curve shifts leftward. C) upward and there is a movement along the AD curve. D) downward and there is a movement along the AD curve. Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 7) Which of the following shifts the aggregate demand curve rightward? A) an increase in the price level B) an increase in the income tax rate C) an increase in government expenditure D) a decrease in investment Answer: C Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) An increase in investment spending results in a ________ the aggregate expenditure curve and ________ the aggregate demand curve. A) movement along; a shift in B) shift in; a movement along C) shift in; has no effect on D) shift in; a shift in Answer: D Topic: AE, AD, and Change in Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) Which of the following shifts the aggregate expenditure curve AND shifts the aggregate demand curve? I. a decrease in investment II. a change in the price level III. an increase in exports A) I and II B) I and III C) II and III D) III only Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 10) Because the short-run aggregate expenditure model assumes that the price level is ________, its predicted effect of changes in autonomous expenditure on equilibrium output is ________ than the prediction of the AD/SAS model. A) fixed; greater B) fixed; less C) flexible; greater D) flexible; less Answer: A Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

11) A fall in the price level A) shifts the aggregate expenditure curve upward and increases the quantity of real GDP demanded. B) shifts the aggregate demand curve rightward and increases equilibrium GDP. C) decreases aggregate planned expenditures and shifts the aggregate demand curve leftward. D) shifts both the aggregate expenditures curve and aggregate demand curve upward. Answer: A Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 12) An increase in the price level results in a A) downward shift in the AE curve and a movement up along the AD curve. B) downward shift in both the AE and AD curves. C) downward shift in the AD curve and a movement down along the AE curve. D) leftward movement along both the AE and AD curves. Answer: A Topic: AE, AD, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 13) A shift in the aggregate expenditure curve as a result of an increase in the price level results in a A) leftward shift in the aggregate demand curve. B) movement down along the aggregate demand curve. C) rightward shift in the aggregate demand curve. D) movement up along the aggregate demand curve. Answer: D Topic: AE, AD, and the Price Level Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 14) Any change in the price level will result in a A) shift in the AE curve and a movement along the AD curve. B) movement along the AE curve and a shift of the AD curve. C) shift in the AE and AD curves in the same direction. D) shift in the AE and AD curves in opposite directions. Answer: A Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

15) 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 we move along the AD curve. D) downward and we move along the AD curve. Answer: D Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 16) An increase in ________ shifts the AE curve ________ and an increase in ________ shifts the aggregate demand curve ________. A) autonomous expenditure; upward; the price level; leftward B) the price level; downward; autonomous expenditure; rightward C) the price level; upward; autonomous expenditure; leftward D) autonomous expenditure; upward; the price level; rightward Answer: B Topic: AE, AD, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 17) The multiplier measures the A) horizontal shift in the aggregate demand curve from an increase in autonomous spending. B) vertical shift in the aggregate demand curve from an increase in autonomous spending. C) horizontal difference between two points on the same aggregate demand curve. D) vertical difference between two points on the same aggregate demand curve. Answer: A Topic: The Multiplier and the Change in Aggregate Demand Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 18) An increase in the price level decreases planned expenditure because A) real wealth decreases, thus decreasing expenditure. B) current prices rise relative to future prices, increasing expenditure. C) domestic prices rise relative to foreign prices, increasing net exports. D) the real interest rate rises, increasing consumption expenditure. Answer: A Topic: Aggregate Expenditure and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

19) An increase in the price level decreases planned expenditures because A) real wealth increases, decreasing expenditure. B) current prices rise relative to future prices, decreasing expenditure. C) domestic prices rise relative to foreign prices, increasing net exports. D) the real interest rate rises, increasing expenditure. Answer: B Topic: Aggregate Expenditure and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 20) When autonomous expenditure changes, the horizontal distance by which the aggregate demand curve shifts A) depends on the size of the multiplier. B) depends on the size of the wealth effect. C) is increased by the existence of automatic stabilizers. D) is determined by the inverse of the multiplier. Answer: A Topic: Aggregate Demand Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) In general, an increase in autonomous expenditure that is NOT created by a change in the price level results in a A) rightward shift of the AD curve. B) movement upward along the AD curve. C) movement downward along the AD curve. D) leftward shift of the AD curve. Answer: A Topic: Change in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

22) Suppose that in a particular economy, the multiplier is equal to 5. In terms of aggregate demand and aggregate supply, this value for the multiplier means that after an increase in investment A) at each level of real GDP, the aggregate demand curve shifts upward by an amount equal to 5 times the change in investment. B) at each level of real GDP, the aggregate supply curve shifts upward by an amount equal to 5 times the change in investment. C) at each price level, the aggregate supply curve shifts rightward by an amount equal to 5 times the change in investment. D) at each price level, the aggregate demand curve shifts rightward by an amount equal to 5 times the change in investment. Answer: D Topic: The Multiplier and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 23) In an economy, the multiplier is 3. If government expenditure increases by $1 million, then in the short run, the price level ________ and real GDP ________ $3 million. A) falls; decreases by less than B) rises; equals C) rises; increases by less than D) rises; decreases by less than Answer: C Topic: The Multiplier and the Price Level Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 24) The government increases its expenditures. The steeper the SAS curve, the ________ will be the increase in the price level and the ________ will be the increase in real GDP. A) larger; larger B) larger; smaller C) smaller; larger D) smaller; smaller Answer: B Topic: The Multiplier and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

25) With a steep short-run aggregate supply curve, A) an increase in government expenditure will not have an impact on the price level. B) fiscal policy will be an effective tool to reduce unemployment without raising prices too much. C) an increase in taxes that does not change potential GDP will not decrease real GDP by much. D) there is a large change in real GDP whenever the price level rises. Answer: C Topic: Contractionary Fiscal Policy Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 26) Taking into account the upward-sloping short-run aggregate supply curve, the short-run effect of an increase in government expenditure on real GDP is that A) real GDP increases by more in the short run than in the long run. B) real GDP increases by the same amount in the short run as in the long run. C) real GDP increases by less in the short run than in the long run. D) real GDP does not change in the short run because the price level increases. Answer: A Topic: The Multiplier and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 27) Because of changes in the ________, the long-run effect of a $10 increase in investment on real GDP equals ________. A) interest rate; zero B) interest rate; $10 C) money wage rate and price level; zero D) money wage rate and price level; $10 Answer: C Topic: The Multiplier and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 28) The size of the multiplier A) is unaffected by the amount of time that elapses. B) increases in the long run. C) decreases in the long run. D) is constant in the long run. Answer: C Topic: Long-Run Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 103 Copyright © 2014 Pearson Education, Inc.

29) The multiplier effect is smallest A) in the long run. B) in the short run. C) when the price level is fixed. D) when the economy is in a recession. Answer: A Topic: Long-Run Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 30) The short-run multiplier is equal to 3, real GDP equals potential GDP of $8,000, and the price level is equal to 100. Suppose that government expenditure decreases by $200. The longrun effect of the decrease in government expenditure changes real GDP by A) a decrease of 600. B) an increase of 600. C) nothing; that is, in the long run real GDP equals $8,000. D) a decrease of $200 because the long-run multiplier is 1. Answer: C Topic: Long-Run Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 31) After an increase in autonomous spending, in the long run, changes in the price level A) will make the AE curve steeper. B) will make the AE curve flatter. C) will reduce the effect of the multiplier. D) will not affect the multiplier. Answer: C Topic: Long-Run Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 32) In the long run, the multiplier A) is greater than 1 because of the position and slope of the SAS curve. B) is twice the short-run multiplier. C) is 0. D) depends on the slope of the AD curve. Answer: C Topic: Long-Run Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

33) When the economy is at full employment and investment increases, in the long run the price level will ________ and, if potential GDP does not change, in the long run real GDP will ________. A) increase; increase B) decrease; not change C) decrease; decrease D) increase; not change Answer: D Topic: Long-Run Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 34) A fall in the price level shifts the AE curve ________ and ________ equilibrium expenditure. A) upward; increases B) upward; decreases C) downward; increases D) downward; decreases Answer: A Topic: Study Guide Question, Aggregate Demand and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 35) If the multiplier is 4.0 and investment decreases by $2.5 billion, the AD curve A) shifts rightward by $10 billion. B) shifts rightward by less than $10 billion. C) shifts leftward by $10 billion. D) shifts leftward by more than $30 billion. Answer: C Topic: Study Guide Question, The Multiplier and Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 36) The multiplier is 2.5 and the SAS curve is upward sloping. Investment increases by $20 billion. In the short run, equilibrium real GDP will A) increase by $50 billion. B) increase by less than $50 billion. C) decrease by $50 billion. D) decrease by less than $50 billion. Answer: B Topic: Study Guide Question, Short-Run Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 105 Copyright © 2014 Pearson Education, Inc.

37) The multiplier is 5.0 and autonomous expenditure increases by $30 billion. If potential real GDP is unaffected, in the long run, equilibrium real GDP will A) increase by $50 billion. B) increase by more than $50 billion. C) increase by less than $50 billion. D) not change. Answer: D Topic: Study Guide Question, Long-Run Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 5 Mathematical Note: The Algebra of the Keynesian Model 1) Suppose the consumption function is given by the equation C = 100 + 0.8YD, where YD is disposable income. What is the marginal propensity to consume? A) 0.2 B) 0.8 C) 2.0 D) 100 Answer: B Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 2) Suppose the consumption function is given by the equation C = 100 + 0.8YD, where YD is disposable income. What is the marginal propensity to save? A) 0.2 B) 0.8 C) 2.0 D) 100 Answer: A Topic: Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

6 News Based Questions 1) In 2007, investment in France increased by 7 billion euros. Assume the price level was constant, the multiplier was 5 and the economy was at full employment. As a result, equilibrium expenditure A) increased by 35 billion euros. B) increased by 1.4 billion euros C) decreased by 35 billion euros. D) decreased by .71 billion euros. Answer: A Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 2) In 2007, investment in France increased by 7 billion euros, consumption increased by 4 billion euros and government spending increased by 1.5 billion euros. Assume the price level was constant and the economy was at full employment. As a result, suppose that equilibrium expenditure increased by 21 billion euros. In this example, ________ is the induced expenditure and ________ is autonomous expenditure. A) consumption; government spending B) investment; consumption C) investment; government spending D) government spending; equilibrium expenditure Answer: B Topic: Autonomous Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) "Few if any economists anticipated the extent of the inventory adjustment... Production cutbacks have been much greater than expected. Those cuts have weakened the industrial sector considerably." As a result of these changes, the U.S. government lowered its estimate of fourthquarter growth in real GDP. www.businessweek.com 3/12/2007 The article suggests that ________. A) planned expenditures exceeded real GDP in 2006. B) real GDP exceeded planned expenditures in 2006. C) the AE curve shifted upward in 2007. D) the AD curve shifted rightward in 2007. Answer: B Topic: Real GDP with a Fixed Price Level Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 107 Copyright © 2014 Pearson Education, Inc.

4) The software and related services sector has a multiplier effect on the Indian economy with every one-rupee input spent by the" information technology sector" producing an increase in real GDP by two rupees. www.ft.com, 2/28/2008 According to the story, if ________ in the software and related services sector increases by $15 billion, real GDP will increase by ________. A) investment; $30 billion. B) consumption; $30 billion. C) consumption; $2 billion. D) investment; $2 billion. Answer: A Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 5) Mauritius, an island off the coast of Africa, competes with other countries producing goods with low-skilled labor. In 2006, it was reported that its "... factories have been exposed to ... competition from China, India and other Asian mass producers." As a result, "the main export industry has seen a 30 per cent reduction in volume ..." www.ft.com, 3/13/2006 The story describes A) a decrease in autonomous expenditure. B) a decrease in induced expenditure. C) an unplanned decrease in inventories. D) an increase in equilibrium expenditure. Answer: A Topic: Autonomous Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

6) Mauritius, an island off the coast of Africa, competes with other countries producing goods with low-skilled labor. In 2006, it was reported that ..."its clothing factories have been exposed to frontal competition from China, India and other Asian mass producers." As a result, "the main export industry has seen a 30 per cent reduction in volume ..." www.ft.com, 3/13/2006 Suppose real GDP is $14 billion, exports total $2 billion and the multiplier is 4. If exports decline by $600,000,000, real GDP in Mauritius will A) increase by $2.4 billion B) decrease by $2.4 billion. C) decrease by $8 billion. D) increase by $4 billion. Answer: B Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 7) In an article regarding Bangladesh's economy, the author suggests that the government ..."[g]ive double tax breaks on investment dollars. Give a tax break to R&D [research and development]. Give a tax break on donations to educational institutions." www.groundreport.com, March 24, 2008 The increase in investment is considered ________ and will generate a larger increase in ________. A) equilibrium spending; autonomous expenditure B) autonomous expenditure; induced expenditure C) induced expenditure; autonomous expenditure D) autonomous expenditure; multiplier spending. Answer: B Topic: Autonomous Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) In an article regarding Bangladesh's economy, the author suggests that the government ..."[g]ive double tax breaks on investment dollars. Give a tax break to R&D [research and development]. Give a tax break on donations to educational institutions." www.groundreport.com, March 24, 2008 Suppose the multiplier in Bangladesh is 2. If the government enacts the proposed policies and ________, aggregate expenditure ________ in the short run. A) induced expenditure increases by $5 billion; increases by $10 billion. B) autonomous expenditure decreases by $10; decreases by $5 billion. C) equilibrium expenditure increases by $8 billion; increases by $16 billion. D) autonomous expenditure increases by $10 billion; increases by $20 billion. Answer: D Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 9) In an article regarding Bangladesh's economy, the author suggests that the government ..."[g]ive double tax breaks on investment dollars. Give a tax break to R&D [research and development]. Give a tax break on donations to educational institutions." www.groundreport.com, March 24, 2008 Suppose the multiplier in Bangladesh is 2. As a result of enacting the proposed policies, which of the following describe possible outcomes in the short run? I. an $20 billion increase in investment will increase aggregate expenditure by $40 billion. II. the AE curve will shift upward. III. there will be an unplanned increase in inventories. A) I,II and III. B) I and II only. C) I and III only. D) II and III only. Answer: B Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

10) In the third quarter of 2008, investment in the U.S. totaled $1.4 trillion and in 2007, investment was $1.3 trillion. The change in investment A) is a change in autonomous expenditure. B) is a change in equilibrium expenditure. C) is a change in induced expenditure. D) will increase the multiplier. Answer: A Topic: Autonomous Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 11) An estimate of the MPC in the U.S. is 0.90. Paul Krugman, the 2008 Nobel Prize winner in economics, stated, "... you'd be hard pressed to argue for an overall multiplier as high as 2." www.nytimes.com, 11/10/2008 What factors could explain the difference between the MPC and Krugman's estimate of the multiplier? A) exports and investment. B) investment and imports. C) imports and taxes. D) taxes and investment. Answer: C Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 12) In the third quarter of 2008, investment in the U.S. totalled $1.4 trillion and in 2007, investment was $1.3 trillion. In addition, third quarter real GDP was $11 trillion. Suppose the MPC in the U.S. is 0.80. Ignoring the effects of imports and taxes, the multiplier is ________ and the change in investment will decrease equilibrium expenditure by ________. A) 2; $1 trillion. B) 5; $1 trillion. C) 2; $200 million. D) 5; $500 million. Answer: D Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

13) In an article regarding Bangladesh's economy, the author suggests that the government ..."[g]ive double tax breaks on investment dollars. Give tax break to R&D [research and development]. Give tax break on donations to educational institutions." www.groundreport.com, March 24, 2008 As a result of enacting the policies, the AE curve will shift ________ and the AD curve will shift ________. A) upward; leftward B) upward; rightward C) downward; rightward D) downward; leftward Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 14) Mauritius, an island off the coast of Africa, competes with other countries producing goods with low-skilled labor. In 2006, it was reported that its "... factories have been exposed to ... competition from China, India and other Asian mass producers." As a result, "the main export industry has seen a 30 per cent reduction in volume ..." www.ft.com, 3/13/2006 The decrease in exports represents a change in ________ expenditure and will cause ________. A) induced; a downward shift in the AE curve and a leftward shift in the AD curve B) autonomous; a downward shift in the AE curve and a leftward shift in the AD curve C) induced; an upward shift in the AE curve and a leftward shift in the AD curve D) autonomous; a downward shift in the AE curve and a rightward shift in the AD curve Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

15) Mauritius, an island off the coast of Africa, competes with other countries producing goods with low-skilled labor. In 2006, it was reported that its "... factories have been exposed to ... competition from China, India and other Asian mass producers." As a result, "the main export industry has seen a 30 per cent reduction in volume ..." www.ft.com, 3/13/2006 The decrease in exports will cause ________ and the price level will ________. A) a downward shift in the AE curve; decrease as the AD curve shifts leftward in the short run B) an upward shift in the AE curve; increase as the AD curve shifts rightward in the long run C) a leftward shift in the AD curve; fall in the short run and rise in the long run D) a leftward shift in the AD curve; rise in the long run as goods become more scarce Answer: A Topic: AE, AD, and the Price Level Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 16) In 2007, investment in France increased by 7 billion euros. Which of following occurs? I. an upward shift in the AE curve. II. a leftward shift in the AD curve. III. an increase in the price level and real GDP in the short run. IV. an increase in the price level and no change in real GDP in the long run. A) I, II, III and IV. B) I and III only. C) I, III and IV only. D) III and iv only. Answer: C Topic: AE, AD, and the Price Level Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

17) "The global financial crisis has had a considerable impact on China's export growth, which will continue to show weakness with recession in the U.S. and Europe," said a report by JP Morgan & Co. www.money.cnn.com, 11/11/2008 If Chinese exports continue to decline, the AE curve will shift ________, the price level will ________ in the short run and real GDP will ________ in the short run. A) upward; decrease; decrease B) downward; decrease; decrease C) upward; decrease; not change D) downward; decrease; not change Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 18) "The global financial crisis has had a considerable impact on China's export growth, which will continue to show weakness with recession in the U.S. and Europe," said a report by JP Morgan & Co. www.money.cnn.com, 11/11/2008 If Chinese exports continue to decline, the AE curve will shift ________, the price level will ________ in the long run and real GDP will ________ in the long run. A) downward; decrease; not change B) downward; decrease; decrease C) decrease; not change; not change D) upward; decrease; not change Answer: A Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

7 Essay Questions 1) List the four components of aggregate expenditure. Explain the two-way link with real GDP. Answer: The four components of aggregate expenditure are consumption expenditure, investment, government expenditure on goods and services, and net exports. These four components sum to real GDP. The two-way link between these four parts and real GDP exists through consumption expenditure and imports, both of which are influenced by the level of real GDP. Specifically, an increase in real GDP increases these components of aggregate expenditure and an increase in aggregate expenditure increases real GDP. Topic: Expenditure Plans Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 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: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) Please explain the relationship between consumption, disposable income and saving. Answer: In general, the greater the level of disposable income the greater the level of consumption. Therefore, as disposable income rises consumption rises. Any amount of disposable income not spent, or consumed, is saved. Disposable income is split between consumption and saving. Consumption, however, is not solely determined by disposable income. In fact at low levels of disposable income consumption can be greater than disposable income. This is true in the extreme when disposable income is zero and consumption is greater than zero. At times when consumption is greater than disposable income saving is negative. We are dissaving. On the other hand, if disposable income is high enough, consumption can be less than disposable income. In this case we have positive saving. Lastly, as disposable income rises, consumption rises but by less. Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

4) What is the difference between movements along the consumption function and shifts in the consumption function? What factor or factors lead to movements along the consumption function and what factor or factors lead to shifts in the consumption function? Answer: The consumption function describes the relationship between disposable income and consumption expenditure: If disposable income increases, consumption increases and if disposable income decreases consumption decreases. Because the consumption function is illustrated using disposable income along the horizontal axis, changes in disposable income lead to movements along the consumption function. Changes in other factors that affect consumption expenditure, such as the real interest rate, wealth, and expected future income, shift the consumption function. Specifically, if the real interest rate falls, if wealth increases, or if future income is expected to increase, the consumption function shifts upward so that at any level of disposable income, consumption is greater than it otherwise would have been. Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 5) 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, the buying power of money, and expected future disposable income. When the real interest rate falls, the buying power of money increases, or expected future disposable income increases, consumption increases. Alternatively, when the real interest rate rises, the buying power of money decreases, or expected future income decreases, consumption expenditure decreases. Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 6) 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: Autonomous Consumption Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

7) What is the marginal propensity to consume? Why it is an important concept? Answer: The marginal propensity to consume, MPC, is the fraction of a change in disposable income that is consumed, or where △ means "change in." The MPC tells what fraction of an increase in disposable income is spent on consumption. The MPC is an important concept because it affects the multiplier: The larger the MPC, everything else the same, the larger the multiplier. Topic: Marginal Propensity to Consume Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 8) 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: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) 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: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 10) 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: Import Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

11) 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: Import Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 12) 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 expenditures. Topic: Induced Versus Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 13) 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 expenditures. Consumption expenditure also has an autonomous component. Topic: Induced Versus Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 14) List the components of aggregate expenditure and describe how each of them change as real GDP increases. Answer: The components of aggregate expenditure are consumption expenditure, investment, government expenditure 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: Induced Versus Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 118 Copyright © 2014 Pearson Education, Inc.

15) "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 Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 16) "Aggregate planned expenditure is the sum of planned consumption expenditure, investment, government expenditure 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: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 17) Explain the relationships between real GDP, aggregate planned expenditure, induced expenditure, and unplanned investment. Answer: All buyers in the economy make expenditure plans. Aggregate planned expenditure equals the sum of these buying plans. Aggregate planned expenditure is divided into four components: consumption expenditure, investment, government expenditure on goods and services, and net exports. Investment, government expenditure, and exports are autonomous expenditures because they do not vary with the level of real GDP. Consumption expenditure and imports, however, are affected by the level of real GDP and so are induced expenditures. If aggregate planned expenditure differs from real GDP, not all planned expenditure can be carried out. In this situation, firms' inventories change in an unplanned manner. When aggregate planned expenditure is less that real GDP, inventories increase beyond what was planned and when aggregate planned expenditure is greater than real GDP, inventories decrease beyond what was planned. Because changes in inventories are included in investment, when there are unplanned changes in inventories there is unplanned investment. Topic: Aggregate Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

18) At the equilibrium level of aggregate expenditure, what does aggregate planned expenditure equal? What happens at other levels of real GDP to bring about an equilibrium? Answer: At the equilibrium level of aggregate expenditure, aggregate planned expenditure is equal to real GDP. At levels of real GDP where aggregate planned 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 planned 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: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 19) "If aggregate planned expenditure exceeds real GDP, then 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: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 20) 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: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) If real GDP exceeds aggregate planned expenditure, what happens to 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: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

22) 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: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 23) 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 so there is an unplanned increase in inventories, firms decrease their production. As a result, GDP decreases. Conversely, if inventories are below their target levels, that is, less than planned so there is an unplanned decrease in inventories, firms increase their production. In this case, GDP increases. Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 24) 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: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 25) Does aggregate planned expenditure always equal real GDP? Answer: No, aggregate planned expenditure does not always equal real GDP. Actual aggregate expenditure always equals real GDP, but aggregate planned expenditure equals real GDP only when the economy is at an expenditure equilibrium. Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

26) 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: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 27) How does the economy adjust so that aggregate planned expenditure equals real GDP? Answer: Equilibrium occurs when real GDP equals the aggregate planned expenditure so that unplanned inventory change is zero. The unplanned changes to inventory are the key signal that induces firms to change their production and drive the economy to its equilibrium. For example, if aggregate planned expenditure is greater than real GDP, firms find their inventory levels falling. This change is an unplanned reduction so firms respond by increasing production and, as a result, real GDP and disposable income increase. The increase in real GDP moves the economy closer to equilibrium but the increase in disposable income leads to an increase in induced aggregate expenditures. However the increase in induced aggregate expenditures is less than the increase in real GDP, so the difference between aggregate planned expenditure and real GDP shrinks. As long as there is unplanned decreases in inventories, firms continue to increase their production so that real GDP continues to increase. Ultimately equilibrium is reached when unplanned inventory changes are zero and so aggregate planned expenditures equal real GDP. Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 28) 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 build up, 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: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

29) Explain the basic idea of the expenditure multiplier and the role consumers play in determining its magnitude. Answer: The basic idea of the multiplier is that any increase in expenditure will increase real GDP by a larger (a multiple) amount. The magnitude of the 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, generates an increase in income and this increase, in turn, induces 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: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 30) Explain why the multiplier is greater than 1. Answer: The 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 increase. 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 multiplier greater than 1. Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 31) 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: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

32) What is the relationship between the MPC and the slope of the AE curve? Answer: If there are no imports or income taxes, then the slope of the AE curve equals the MPC. If there are imports and income taxes, then the slope of the AE curve is less than the MPC. In either case, an increase in the MPC increases the slope of the AE curve. Topic: The Slope of the Aggregate Expenditure Curve and the Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 33) What is the relationship between the slope of the aggregate expenditure curve and the multiplier? Answer: The multiplier equals . This result does not change regardless of the existence or absence of imports or income taxes. Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 34) What is the mathematical formula for the multiplier? Why is there a multiplier? Answer: In general, the multiplier equals . If, however, there are no income taxes or imports, the multiplier equals

, or, equivalently,

. There is a

multiplier because a change in autonomous expenditure creates an additional change in induced expenditure. As a result, the equilibrium total change in aggregate expenditure exceeds the initial autonomous change. The multiplier is the amount by which the initial change in autonomous expenditure is multiplied to determine the change in equilibrium expenditure. Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 35) 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 induces further increases in aggregate expenditure because the initial increase in expenditure increases income, which, in turn, causes further increases in expenditure and income. Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

36) Suppose the MPC = 0.90 and there are no taxes or imports. What dos the multiplier equal? If the initial equilibrium aggregate expenditure is $12 trillion, what will be the effect on aggregate expenditure of a $100 billion increase in investment? Answer: The multiplier equals 1/(1 - MPC), so the multiplier equals 1/(1 - 0.9) = 1/(0.1) = 10. With a multiplier of 10, a $100 billion increase in investment results in a (10) × ($100 billion) = $1 trillion increase in aggregate expenditure, so the new equilibrium aggregate expenditure is $13 trillion. Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 37) How do imports and income taxes affect the multiplier? Why do they have this effect? Answer: Income taxes and imports shrink the multiplier. They have this effect because they mean that increases in GDP translate into smaller increases of spending on domestic goods and services. Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 38) "If the income tax rate is high enough, the multiplier can be negative." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The higher the income tax rate, the smaller the multiplier, but the multiplier always remains positive. Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 39) Discuss how the marginal propensity to consume, imports, and income tax rates influence the multiplier. Answer: The simple 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 multiplier. Both the taxes and imports decrease the size of the multiplier because both taxes and imports "divert" changes in GDP from consumption expenditure on domestic goods and services. The larger the income tax rate and the larger the marginal propensity to import, the smaller the multiplier. The larger the income 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: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 125 Copyright © 2014 Pearson Education, Inc.

40) List and explain factors that determine the size of the multiplier in the aggregate expenditure model when prices are constant. Answer: The size of the multiplier depends on three factors: the marginal propensity to consume, the marginal propensity to import, and the income tax rate. The larger the marginal propensity to import and the larger the tax rate, the smaller the multiplier. These two factors 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: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 41) How does the concept of the multiplier help explain business cycle turning points? Answer: Business cycle turning points are the point in the business cycle during which the economy either goes from expansion to recession, or recession to expansion. If the economy is at a peak, an expansion is turning into a recession. At this point, aggregate planned expenditures decrease because of a decrease in an autonomous component of expenditure. Real GDP is now greater than aggregate planned expenditure. Inventories rise and firms respond to rising inventories by cutting production, so that real GDP decreases. The multiplier process works and consumption falls by a multiple of the decrease in real GDP. The economy moves into recession. Just the reverse occurs at a trough. At a trough the economy moves from a recession to an expansion. Expansions start as an increase in an autonomous component of aggregate expenditure. This increase boosts aggregate planned expenditures so that it exceeds real GDP. Inventories unexpectedly fall. Firms respond by raising their production, so that real GDP and disposable income increase. Induced expenditure rises by more because of the multiplier effect and so the expansion has begun. Topic: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 42) 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: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 126 Copyright © 2014 Pearson Education, Inc.

43) "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: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 44) How does an increase in the price level affect the aggregate expenditure curve and the aggregate demand curve? Answer: An increase in the price level shifts the aggregate expenditure curve downward and leads to a movement upward along the aggregate demand curve. Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 45) An increase in the price level shifts the aggregate 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 expenditure curve rather than a movement along it? Answer: The increase in the price level shifts the aggregate expenditure curve because the aggregate 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 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 expenditure curve shifts downward. Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 46) What is the relationship between the aggregate expenditure curve and the aggregate demand curve? Explain the relationship. Answer: The aggregate demand curve is derived using the aggregate expenditure curve. The aggregate 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: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 127 Copyright © 2014 Pearson Education, Inc.

8 Numeric and Graphing Questions Consumption Disposable expenditure income (trillions (trillions of 2005 of 2005 dollars) dollars) 0.0 0.8 1.0 1.6 2.0 2.4 3.0 3.2 4.0 4.0 1) 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: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 2) 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: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 3) When Audrey's disposable income is $40,000, her consumption expenditure is $39,000. When her disposable income is $50,000, Audrey's consumption expenditure is $47,000. 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: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Real GDP C I G (billions of (billions of (billions of (billions of 2005 dollars) 2005 dollars) 2005 dollars) 2005 dollars) 100 150 150 150 200 200 150 150 300 250 150 150 400 300 150 150 500 350 150 150 600 400 150 150 700 450 150 150 800 500 150 150 900 550 150 150 4) 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: Aggregate Real GDP expenditure (trillions of 2005 (trillions of 2005 dollars) dollars) 100 450 200 500 300 550 400 600 500 650 600 700 700 750 800 800 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: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

5) The above figure shows the AE curve and 45° line for an economy. a) If real GDP equals $8 trillion, how do firms' inventories compare to their planned inventories? b) If real GDP equals $16 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 $8 trillion, aggregate expenditure exceeds GDP and so firms' inventories are less than planned. b) If real GDP equals $16 trillion, aggregate expenditure is less than GDP and so firms' inventories are more than planned. c) The equilibrium level of expenditure is $12 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: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

6) The slope of the AE curve is .80. What is the 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: 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 5 × ($0.5 trillion) = $2.5 trillion. b) The change in equilibrium aggregate expenditure equals the multiplier times the change in autonomous expenditure, which is -$0.2 trillion, that is, government expenditure decreases by $0.2 trillion. 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 5 × ($1.1 trillion) = $5.5 trillion. Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 7) Suppose a country has no income taxes or imports. If the MPC is 0.75, what does the multiplier equal? Answer: The multiplier equals , so in this case it equals = = 4.0. Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 8) 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 multiplier equals , so for the case in the question, the multiplier equals =

= 5.0. The change in real GDP equals the multiplier times the change in

investment, or 5.0 × $200 billion = $1,000 billion. Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

9) 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 is =

= 1.3. If the MPC is 0.50, the multiplier equals

= 2.0. And if the MPC is 0.90, the multiplier equals

= 10.0. So,

the larger the MPC, the larger the multiplier. Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 9 True or False 1) Components of aggregate expenditure include saving, consumption expenditure, investment and government expenditure. Answer: FALSE Topic: Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 2) In the very short term, planned investment, planned government expenditure, planned exports, planned consumption, and planned imports are all fixed and do not change when GDP changes. Answer: FALSE Topic: Fixed Prices and Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) The positive relationship between consumption expenditure and disposable income is shown by a movement along the consumption function. Answer: TRUE Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) A change in the real interest rate creates a movement along the consumption function. Answer: FALSE Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 5) A movement along the consumption function is the result of changes in disposable income. Answer: TRUE Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 6) If wealth increases, the consumption function shifts upward. Answer: TRUE Topic: Shifts in the Consumption Function, Wealth Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 7) As disposable income increases, saving increases. Answer: TRUE Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 8) The marginal propensity to consume must increase as disposable income increases. Answer: FALSE Topic: Marginal Propensity to Consume Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) The autonomous components of aggregate expenditures are consumption, savings, and investment. Answer: FALSE Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

10) Components of induced aggregate expenditure include government expenditure, investment and consumption expenditure. Answer: FALSE Topic: Induced Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 11) When aggregate planned expenditure is greater than real GDP, inventories decrease. Answer: TRUE Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 12) Actual aggregate expenditure does not always equal real GDP. Answer: FALSE Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 13) If the price level is constant, a change in investment has a multiplied impact on real GDP. Answer: TRUE Topic: The Multiplier Effect Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 14) In the short run, the multiplier typically is less than 1. Answer: FALSE Topic: The Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 15) If the change in autonomous investment equals $1 trillion and the change in real GDP equals $4 trillion, the multiplier equals 1/4. Answer: FALSE Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

16) If the multiplier is 3, a $750,000 increase in autonomous expenditure increases equilibrium expenditure by $2.25 million. Answer: TRUE Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 17) If there are no income taxes or imports, the multiplier equals 1/(1 - marginal propensity to consume). Answer: TRUE Topic: The Multiplier and the MPC Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 18) Income taxes reduce the size of the multiplier. Answer: TRUE Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 19) Imports and income taxes make the multiplier larger than it would otherwise be. Answer: FALSE Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 20) In the short run, an upward shift in the aggregate expenditure curve leads to a leftward shift in the short-run aggregate supply curve. Answer: FALSE Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) A fall in the price level shifts the aggregate expenditure curve upward and increases the quantity of real GDP demanded. Answer: TRUE Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

22) The short-run impact changes in autonomous spending have on real GDP and the price level depends on aggregate supply. Answer: TRUE Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

10 Extended Problems 1) In the country of Midland, autonomous consumption expenditure is $60 million, and the marginal propensity to consume is 0.6. Investment is $110 million, government expenditure is $70 million, and there are no income taxes. Investment and government expenditure are constant—they do not vary with income. The nation does not trade with the rest of the world. a) Draw the aggregate expenditure curve. b) What is the autonomous aggregate expenditure? c) What is the size of the multiplier in Midland's economy? d) What is aggregate planned expenditure and what is happening to inventories when real GDP is $800 million? e) What is the economy's equilibrium aggregate expenditure? Answer:

a) See the figure above. Because the nation does not trade with the rest of the world, net exports are zero. When net exports are zero, aggregate expenditure, or AE, is given by Consumption equals $60 million plus 0.6 of income, so the consumption function is where $60 million is autonomous consumption, 0.60 is the marginal propensity to consume, and Y is real GDP which equals real income. Using the formula in the equation for aggregate expenditure gives so the formula for aggregate expenditure is b) Autonomous expenditure is expenditure that does not vary with real GDP; it is the amount of aggregate expenditure when real GDP equals zero. In Midland, if so autonomous expenditure is $240 million, shown by point A in the figure above. c) The multiplier is the amount by which a change in autonomous expenditure is multiplied to determine the change in equilibrium expenditure and real GDP. The multiplier equals So in Midland, the multiplier is

d) When real GDP is $800 million, aggregate planned expenditure, AE, equals which is $720 million. This level of aggregate planned expenditure is point B in the figure above. Because this level of aggregate planned expenditures is less than real GDP, point C in the figure, inventories increase. e) Equilibrium expenditure is the level of aggregate expenditure that occurs when aggregate planned expenditure, AE, equals real GDP. Midland's equilibrium expenditure is at point E in the figure, when real GDP and aggregate expenditure equal $600 million. Equilibrium expenditure also can be calculated by solving the equation for Y. Start by subtracting 0.6Y from both sides to give Then divide both sides by 0.4 to obtain so that Y, which is real GDP, equals $600 million. Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 2) In the economy of St. Maynard Island, autonomous consumption expenditure is $185 million, and the marginal propensity to consume is 0.75. Investment is $150 million, government expenditure is $100 million, and net taxes are $80 million. Investment, government expenditure, and taxes are constant—they do not vary with income. The island does not trade with the rest of the world. a) Draw the aggregate expenditure curve. b) What is the island's autonomous aggregate expenditure? c) What is the size of the multiplier in St. Maynard Island's economy? d) What is the island's aggregate planned expenditure and what is happening to inventories when real GDP is $1,100 million? e) What is the economy's equilibrium aggregate expenditure? Answer:

a) See the figure above. Because the island does not trade with the rest of the world, net exports are zero. When net exports are zero, aggregate expenditure, or AE, is given by Consumption equals $185 million plus 0.75 of disposable income, so the consumption function is where $185 million is autonomous consumption, 0.75 is the marginal propensity to consume, and is disposable income, real income minus net taxes. (Real income also equals real GDP.) Because net taxes are constant, the consumption function is Using the formula in the equation for aggregate expenditure gives so aggregate expenditure is given by b) Autonomous expenditure is expenditure that does not vary with real GDP; it is the level of aggregate expenditure if real GDP were equal to zero. In the economy of St. Maynard Island, if ( 0, so autonomous expenditure is $375 million, which is point A in the figure above. c) The multiplier is the amount by which a change in autonomous expenditure is multiplied to determine the change in equilibrium expenditure and real GDP. The multiplier equals The slope of the AE curve is 0.75, so in the economy of St. Maynard Island, the multiplier is d) When real GDP is $1,100 million, aggregate planned expenditure, AE, equals which is $1,200 million. This level of aggregate planned expenditure is point B in the figure above. Because this level of aggregate planned expenditures exceeds real GDP, point C in the figure, inventories decrease. e) Equilibrium expenditure is the level of aggregate expenditure that occurs when aggregate planned expenditure, AE, equals real GDP. In the economy of St. Maynard Island equilibrium is at point E in the figure, when real GDP and aggregate expenditure equal $1,500 million. Equilibrium expenditure also can be calculated by solving the equation for Y. Start by subtracting 0.75Y from both sides to give Then divide both sides by 0.25 to obtain so that Y, which is real GDP, equals $1,500 million. Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

3) In the economy of Keynesian Island, autonomous consumption expenditure is $50 million, and the marginal propensity to consume is 0.8. Investment is $160 million, government expenditure is $190 million, and net taxes are $250 million. Investment, government purchases, and taxes are constant—they do not vary with income. The island does not trade with the rest of the world. a) Draw the aggregate expenditure curve. b) What is equilibrium real GDP for Keynesian Island? c) What is the size of the multiplier in Keynesian Island's economy? d) If the government increases its purchases by $200 million, what will be the change in the economy's equilibrium real GDP? Answer:

a) See the figure above. The aggregate expenditure line is AE0. Because the island does not trade with the rest of the world, net exports are zero. When net exports are zero, aggregate expenditure, is given by Consumption equals $50 million plus 0.8 of disposable income, so the consumption function is where $50 million is autonomous consumption, 0.8 is the marginal propensity to consume, and is disposable income, real income minus net taxes. (Real income also equals real GDP.) Because net taxes are constant, the consumption function is Using the formula in the equation for aggregate expenditure gives so aggregate expenditure is given by b) Equilibrium expenditure is the level of aggregate expenditure that occurs when aggregate planned expenditure, AE, equals real GDP. In the economy of Keynesian Island equilibrium is at point E in the figure, when real GDP and aggregate expenditure equal $1,000 million. Equilibrium expenditure also can be calculated by solving the equation for Y. Start by subtracting 0.8Y from both sides to give Then divide both sides by 0.2 to obtain so that Y, which is real GDP, equals $1,000 million.

c) The multiplier is the amount by which a change in autonomous expenditure is multiplied to determine the change in equilibrium expenditure and real GDP. The multiplier equals The slope of the AE curve is 0.80, so in the economy of Keynesian Island, the multiplier is d) If the government increases its expenditure by $200 million, the aggregate expenditure curve shifts up by the amount of additional purchases to the aggregate expenditure line AE1. (The new formula for aggregate expenditure is The economy's equilibrium real GDP increases by the amount of the additional expenditure multiplied by the multiplier. So the increase in real GDP is which equals $1,000 million. So the new equilibrium level of real GDP is $2,000 million, point C in the figure above. Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 12 Inflation, Jobs, and the Business Cycle 1 Inflation Cycles 1) 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. Answer: D Topic: Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2) 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. Answer: B Topic: Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 3) Demand-pull inflation starts with A) an increase in aggregate demand. B) a decrease in aggregate demand. C) an increase in short-run aggregate supply. D) a decrease in short-run aggregate supply. Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4) Demand-pull inflation is an inflation that results from an initial ________. A) increase in aggregate demand B) decrease in aggregate demand C) increase in wage rates D) increase in natural resource prices Answer: A Topic: Demand-Pull Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 5) Demand-pull inflation starts with a shift of the A) SAS curve rightward. B) AD curve rightward. C) SAS curve leftward. D) AD curve leftward. Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 6) Demand-pull inflation starts as the A) LAS curve shifts leftward. B) LAS curve shifts rightward. C) AD curve shifts rightward. D) AD curve shifts leftward. Answer: C Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

7) Which of the above figures best shows the start of a demand-pull inflation? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

8) Which of the above figures best shows the start of a demand-pull inflation? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 9) Demand-pull inflation can start when A) money wage rates rise but the price level does not change. B) money wage rates rise faster than prices. C) the short-run aggregate supply curve shifts rightward. D) the aggregate demand curve shifts rightward. Answer: D Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

10) 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 Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 11) 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 wage rates D) an increase in exports Answer: D Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 12) Which of the following could lead to demand-pull inflation? A) an increase in the money wage rate B) an increase in the quantity of money C) a decrease in exports D) an increase in oil prices Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 13) Which of the following could start a demand-pull inflation? A) an increase in government expenditure B) an increase in imports C) a decrease in the quantity of money D) an increase in the money prices of raw materials Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

14) 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 Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 15) Which of the following can start a demand-pull inflation? A) An improvement in technology B) A decrease in productivity C) An increase in imports D) None of the above can start a demand-pull inflation. Answer: D Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 16) Demand-pull inflation could start with A) an increase in government expenditure followed by an increase in the money wage rate. B) an increase in the quantity of money followed by a decrease in the money wage rate. C) a rise in prices of raw materials followed by an increase in the quantity of money. D) a decrease in exports followed by a decrease in the quantity of money. Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 17) Which of the following is NOT a potential start of a demand-pull inflation? A) an increase in the money wage rate B) an increase in the quantity of money C) an increase in government expenditure D) an increase in exports Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

18) Which of the following is NOT a potential start of a demand-pull inflation? A) an increase in the quantity of money B) an increase in government expenditure C) an increase in taxes D) an increase in exports Answer: C Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 19) Which of the following is a change that would NOT start a demand-pull inflation? A) an increase in exports B) an increase in labor productivity C) an increase in government expenditure on goods and services D) an increase in the quantity of money Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 20) Which of the following could NOT start a demand-pull inflation? A) increases in government expenditure B) increases in net exports C) increases in oil prices D) increases in the quantity of money Answer: C Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 21) 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. Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

22) 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. Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 23) If demand pull inflation occurs when the economy is already at potential GDP, then following the initial increase in aggregate demand, the A) SAS curve shifts rightward. B) LAS curve shifts rightward. C) SAS curve shifts leftward. D) LAS curve shifts leftward. Answer: C Topic: Wage Response Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 24) If an economy at potential GDP experiences a demand shock that shifts the aggregate demand curve rightward, there will be A) an eventual leftward shift in the short-run aggregate supply curve. B) unemployment below the natural rate. C) upward pressure on money wage rates. D) All of the above answers are correct. Answer: D Topic: Wage Response Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

25) In the above figure, suppose that the economy is at point A when the quantity of money increases. In the short run, the economy will move to point ________. A) A, that is, the price level and level of real GDP will not change. B) B C) C D) D Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 26) In the above figure, suppose that the economy is at point A when foreign countries begin an expansion and buy more U.S.-made goods. In the short run, this change creates a movement to point ________ and an eventual increase in ________. A) B; money wage rates B) D; the natural unemployment rate C) B; the natural unemployment rate D) D; money wage rates Answer: A Topic: Wage Response Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

27) An initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in a 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) None of the above answers are correct. Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 28) Suppose that a shock causes the aggregate demand curve to shift rightward. If the Fed does nothing, A) the economy will experience a temporary reduction in employment but will eventually return to full employment. B) output initially will exceed potential GDP, but the economy will return to potential GDP with a higher price level. C) the short-run aggregate supply curve will not shift leftward and there will be continued inflation. D) eventually the short-run aggregate supply curve will shift leftward and there will be continued inflation. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 29) For an economy at full employment, an increase in the quantity of money will lead to which of the following sequences of shifts in aggregate demand and supply curves? A) decreased aggregate demand, increased short-run aggregate supply, constant long-run aggregate supply B) decreased aggregate demand, decreased short-run aggregate supply, decreased long-run aggregate supply C) increased aggregate demand, increased short-run aggregate supply, increased long-run aggregate supply D) increased aggregate demand, decreased short-run aggregate supply, constant long-run aggregate supply Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

30) A one-time rise in the price level can turn into a demand-pull inflation when ________. A) the money wage rate continues to increase B) the quantity of money persistently decreases C) taxes consistently increase D) the quantity of money persistently increases Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 31) A demand-pull inflation consists of ________ shifts in the AD curve and ________ shifts in the SAS curve. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 32) In a persisting demand-pull inflation A) short-run aggregate supply decreases and aggregate demand increases. B) aggregate demand and short-run aggregate supply both decrease. C) aggregate demand increases and long-run aggregate supply decreases. D) None of the above answers are correct. Answer: A Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 33) Demand-pull inflation results from continually increasing the quantity of money, which leads to a continually A) decreasing long-run aggregate supply. B) increasing aggregate supply. C) decreasing aggregate demand. D) increasing aggregate demand. Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

34) Demand-pull inflation persists because of A) continuing increases in government expenditures. B) continuing increases in the quantity of money. C) continuing increases in real wage rates. D) continuing increases in aggregate supply. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 35) A demand-pull inflation requires persistent increases in A) tax rates. B) real wages. C) the quantity of money. D) government expenditures. Answer: C Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 36) If the Fed responds to an initial increase in aggregate demand by increasing the quantity of money, A) there will be no inflationary gap. B) real GDP will begin to decrease more rapidly than if the quantity of money had remained constant. C) money wages will fall to reduce the unemployment. D) there is the risk of continued inflation. Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 37) In a demand-pull inflation brought about by increases in the quantity of money, real GDP might increase at times because A) tax rates decline. B) real wages fall. C) money wages fall. D) real wages rise. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 12 Copyright © 2014 Pearson Education, Inc.

38) If the Fed responds to an increase in aggregate demand by increasing the quantity of money, A) nothing happens because aggregate demand had already increased. B) output will begin to decrease more rapidly than otherwise. C) money wage rates will fall to reduce the unemployment. D) there will be continued inflation. Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 39) If the economy is at potential GDP and the Fed increases the quantity of money, then A) potential GDP rises. B) real GDP rises temporarily above potential GDP. C) real GDP rises permanently above potential GDP. D) potential GDP and real GDP both decrease. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 40) During a demand-pull inflation, if the Fed tries to maintain a level of real GDP above potential GDP, A) there will be a one-time shift in the AD and the SAS curves. B) the AD curve will shift rightward continuously and SAS curves will shift leftward continuously. C) the AD curve will shift rightward continuously and the SAS curve will not shift. D) the SAS curve will shift leftward continuously and the AD curve will not shift. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 41) 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. Answer: C Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

42) As the money wage rate rises, A) the long-run aggregate supply curve shifts rightward. B) the short-run aggregate supply curve shifts rightward. C) both the long-run aggregate supply curve and the short-run aggregate supply curve shift leftward. D) the short-run aggregate supply curve shifts leftward. Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 43) When the AD and SAS curves intersect at a level of real GDP which exceeds potential GDP and there is no government policy undertaken, which of the following will occur? A) The AD curve shifts rightward because the Fed decreases the money supply. B) The SAS curve shifts leftward because the money wage rate rises. C) The AS curve shifts leftward because the money wage rate falls. D) The AD curve shifts leftward because the money wage rate rises. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 44) To prevent demand-pull inflation A) firms must refuse to increase wages. B) the Fed must not let the quantity of money persistently rise. C) the natural unemployment rate must increase. D) real GDP must increase. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 45) To stop a demand-pull inflation using monetary policy, you would recommend that the Fed A) increase the quantity of money. B) not increase the quantity of money. C) increase tax rates. D) purchase government bonds in the open market. Answer: B Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

46) 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. Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

47) The figure above shows the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves for the U.S. economy. The economy is currently at point A. A demandpull rise in the price level will initially move the economy to point ________ and to point ________. A) E when aggregate demand increases; D when the wage rate rises B) B when aggregate demand decreases; C when the wage rate rises C) E; A when aggregate demand changes D) C when the wage rate rises; D when aggregate demand increases Answer: A Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

48) In the above figure, the movement from point A to B to C to D to E represents A) demand-pull inflation resulting solely from wage responses to excess labor demand. B) demand-pull inflation resulting from persistent increases in the quantity of money. C) cost-push inflation resulting solely from wage responses to excess labor demand. D) cost-push inflation resulting from persistent increases in the quantity of money. Answer: B Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 49) In the above figure, suppose the economy is at point A initially. For real GDP to increase to and consistently remain above $13 trillion, I. the price level must increase to above 90. II. there must be continued increases in the quantity of money. A) only I B) only II C) Both I and II are correct. D) Neither I nor II is correct. Answer: D Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

50) In the above figure, if the economy moves from point A to point E, A) money wage rates have increased. B) there may have been demand-pull inflation. C) there has been economic growth. D) Both answers A and B are correct. Answer: D Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

51) In the above figure, which path represents a demand-pull inflation? A) point A to C to D to F to G B) point A to B to D to E to G C) point A to C to D to E to G D) point A to B to D to F to G Answer: A Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

52) In the above figure, the economy initially is at point A and then an increase in the quantity of money moves the economy to point D. At point D, the real wage rate has A) risen by the same percentage as the price level. B) remained constant. C) risen. D) fallen. Answer: D Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 53) In the above figure, the economy initially is at point A and then an increase in the quantity of money moves the economy to point D. The money wage rate will A) rise because a labor shortage now exists. B) fall because a labor shortage now exists. C) rise because a labor surplus now exists. D) fall because a labor surplus now exists. Answer: A Topic: Wage Response Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

54) In the above figure, the economy initially is at point A and then an increase in the quantity of money moves the economy to point D. If the quantity of money remains constant, the economy will adjust with A) short-run aggregate supply shifting leftward to SAS1. B) short-run aggregate supply shifting leftward to SAS2. C) aggregate demand shifting back to AD0. D) aggregate demand shifting to AD2. Answer: A Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 55) A demand-pull inflation occurred in the United States during most of the later part of the A) 1960s. B) 2000s. C) 1980s. D) 1990s. Answer: A Topic: Demand-Pull Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 56) As far as demand-pull inflation goes, the United States A) has never experienced this type of inflation. B) experienced this type of inflation during the 1990s. C) experienced this type of inflation during the 1960s. D) experienced this type of inflation during the 1950s. Answer: C Topic: Demand-Pull Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

57) In the above, which figure shows the start of a cost-push inflation? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 58) The main sources of cost-push inflation are increases in A) money wage rates and the cost of raw materials. B) real wage rates and the cost of raw materials. C) money wage rates and aggregate demand. D) aggregate demand and real wage rates. Answer: A Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

59) Assuming that GDP currently equals potential GDP, a cost-push inflation could result from which of the following? A) a decrease in tax rates B) an increase in the labor force C) a large crop failure that boosts the prices of raw food materials D) an increase in the nation's capital stock Answer: C Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 60) 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) a decrease in government expenditure on goods and services. Answer: B Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 61) Cost-push inflation can start with A) lower taxes. B) an increase in government expenditure. C) higher money wage rates. D) an increase in transfer payments. Answer: C Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 62) 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 the quantity of money. Answer: B Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

63) Cost-push inflation might initially result from A) an increase in the quantity of money. B) the use of new technology. C) an increase in government expenditure. D) an increase in the cost of resources. Answer: D Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 64) In April 2008 the price of oil was approximately $130 per barrel; in April 2013, it was approximately $90 per barrel. This change in the price of oil could have started A) a cost-push inflation. B) a demand-pull inflation. C) both a cost-push and a demand-pull inflation. D) None of the above are correct because the fall in the price of oil does not start an inflation. Answer: D Topic: Cost-Push Inflation Skill: Conceptual Status: New AACSB: Reflective Thinking 65) Cost-push inflation is an inflation that results from an initial ________. A) increase in money wage rates or money prices of raw materials B) decrease in taxes C) increase in investment D) increase in taxes Answer: A Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 66) The initial factors that can create a cost-push inflation do NOT include A) increases in money wage rates. B) increases in the money prices of raw materials. C) increases in the quantity of money. D) None of the above answers is correct because all of the above could be the initial cause of a cost-push inflation. Answer: C Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

67) At the start of a cost-push inflation, A) productivity rises. B) real GDP increases faster than the quantity of money. C) the short-run aggregate supply curve shifts rightward. D) prices and unemployment are rising. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 68) Cost-push inflation starts with a A) falling GDP and falling unemployment rate. B) raising GDP and rising unemployment rate. C) falling GDP and rising unemployment rate. D) raising GDP and falling unemployment rate. Answer: C Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 69) Cost-push inflation starts with A) an increase in aggregate demand. B) a decrease in aggregate demand. C) an increase in short-run aggregate supply. D) a decrease in short-run aggregate supply. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 70) A leftward shift in the aggregate supply curve A) is the result of the Fed increasing the quantity of money. B) is the result of a rise in the price of a key resource. C) is the result of consumer expenditures exceeding available output. D) increases both the price level and real GDP. Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

71) When a cost-push inflation starts A) the price level falls and the money wages rises. B) real GDP rises faster than the quantity of money. C) the short-run aggregate supply curve shifts rightward. D) the price level rises and real GDP decreases. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 72) At the start of a cost-push inflation, A) only real GDP changes while the price level remains constant. B) the price level and real GDP both increase. C) the price level rises and real GDP decreases. D) the price level rises and real GDP does not change. Answer: C Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 73) 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) both I and II C) both II and III D) III only Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

74) An increase in the money wage rate shifts the SAS curve ________ and an increase in the money prices of raw materials shifts the SAS curve ________. A) rightward; rightward B) leftward; leftward C) rightward; leftward D) leftward; rightward Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Analytical Skills 75) A higher price for oil shifts the A) SAS curve leftward. B) LAS curve leftward. C) SAS curve rightward. D) AD curve rightward. Answer: A Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Analytical Skills 76) By itself, an increase in the price of oil shifts the A) short-run aggregate supply curve leftward and does not shift the aggregate demand curve. B) short-run aggregate supply curve rightward and does not shift the aggregate demand curve. C) aggregate demand curve leftward and does not shift the short-run aggregate supply curve. D) aggregate demand curve rightward and does not shift the short-run aggregate supply curve. Answer: A Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 77) By itself, a fall in the price of oil shifts the A) short-run aggregate supply curve leftward and does not shift the aggregate demand curve. B) short-run aggregate supply curve rightward and does not shift the aggregate demand curve. C) aggregate demand curve leftward and does not shift the short-run aggregate supply curve. D) aggregate demand curve rightward and does not shift the short-run aggregate supply curve. Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

78) The SAS 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. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 79) If the prices of crucial raw materials increase, A) the short-run aggregate supply curve shifts leftward. B) stagflation could occur. C) a cost-push inflation could occur depending on the behavior of the Federal Reserve. D) All of the above answers are correct. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 80) An increase in the price of a resource such as oil I. shifts the aggregate demand curve leftward. II. shifts the long-run aggregate supply curve rightward. III. shifts the short-run aggregate supply curve leftward. IV. increases the price level and decreases real GDP in the short run. A) Only I is correct. B) Both I and II are correct. C) Only III is correct. D) Both III and IV are correct. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

81) 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 Answer: C Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 82) 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) lower; increase D) lower; decrease Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 83) In the short run, if there is an increase in the money wage rate, then A) short-run aggregate supply increases and the price level rises. B) short-run aggregate supply decreases and the price level rises. C) aggregate demand decreases and the price level falls. D) aggregate demand increases and the price level rises. Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 84) 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 cause inflation. C) be inflationary as long as there is no policy response. D) cause a wage-price spiral. Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

85) Stagflation occurs when the price level ________ and real GDP ________. A) falls; increases B) falls; decreases C) rises; decreases D) rises; increases Answer: C Topic: Stagflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 86) Stagflation is the result of A) an increase in aggregate demand. B) a decrease in short-run aggregate supply. C) a decrease in aggregate demand. D) an increase in short-run aggregate supply. Answer: B Topic: Stagflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 87) Stagflation is the combination of a ________ and ________. A) falling inflation rate; an increasing real GDP B) falling price level; an increasing real GDP C) rising price level; a decreasing real GDP D) rising inflation rate; a decreasing real GDP Answer: C Topic: Stagflation Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 88) Stagflation occurs when the A) price level and real GDP are increasing at the same time. B) price level and real GDP are decreasing at the same time. C) price level is increasing and real GDP is decreasing. D) price level is decreasing and real GDP is increasing. Answer: C Topic: Stagflation Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

89) The term "stagflation" refers to the situation when A) the aggregate supply curve shifts leftward, prices increase and real GDP decreases. B) real GDP and the price level both rise because of an increase in aggregate demand. C) prices become stagnant and do not increase or decrease. D) the short-run aggregate supply curve and the aggregate demand curve shift in opposite directions. Answer: A Topic: Stagflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 90) Stagflation is associated with A) cost-push inflation. B) demand-pull inflation. C) both types of inflation. D) neither cost-push inflation or demand-pull inflation because it is a different concept altogether. Answer: A Topic: Stagflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 91) When the price level is rising and simultaneously real GDP is decreasing, A) the natural unemployment rate increases. B) stagflation occurs. C) there is an expansionary gap. D) the Fed has increased the discount rate. Answer: B Topic: Stagflation Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 92) Stagflation results from A) a leftward shift in the short-run aggregate supply curve. B) a rightward shift in the aggregate demand curve. C) a rightward shift in the short-run aggregate supply curve. D) an increase in government expenditures financed by an increase in the quantity of money. Answer: A Topic: Stagflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

93) Stagflation is characterized by A) an increase in both output and the price level. B) a decrease in output and the price level. C) an increase in the unemployment rate and an increase in the price level. D) an economy which is growing at a rate equal to its historical average growth rate. Answer: C Topic: Stagflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 94) A one-time increase in the price of oil followed by a one-time increase in aggregate demand produce A) continuing cost-push inflation. B) continuing demand-pull inflation. C) a one-time decrease in the price level. D) a one-time increase in the price level. Answer: D Topic: Aggregate Demand Response Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 95) A cost-push inflation spiral results if the Fed's response to stagflation is to keep A) decreasing aggregate demand. B) decreasing aggregate supply. C) increasing aggregate demand. D) increasing aggregate supply. Answer: C Topic: A Cost-Push Inflation Process Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 96) During a cost-push inflation spiral, the money wage rate ________ and the quantity of money ________. A) increases; increases B) increases; does not change C) does not change; increases D) does not change; does not change Answer: A Topic: A Cost-Push Inflation Process Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

97) For a cost-push inflation to occur, oil price increases must be accompanied by A) decreased investment spending. B) lower personal tax rates. C) increases in the quantity of money. D) increases in government expenditures. Answer: C Topic: A Cost-Push Inflation Process Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 98) Oil prices increase sharply, raising the price level and decreasing real GDP. The Fed has an incentive to A) increase the quantity of money in order to reduce unemployment. B) decrease the quantity of money in order to reduce unemployment. C) increase the quantity of money in order to reduce the price level. D) increase the quantity of money in order to reduce the price level and unemployment. Answer: A Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 99) Suppose oil prices rise and short-run aggregate supply decreases. If the Fed responds by increasing the quantity of money, then in the short run A) real GDP increases and the price level falls. B) real GDP increases and the price level rises still higher. C) the Fed is more concerned about fighting inflation than unemployment. D) None of the above answers is correct. Answer: B Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 100) Suppose oil prices rise. The Fed can ________ the quantity of money to ________ the unemployment rate back to its natural rate. A) increase; raise B) increase; lower C) decrease; raise D) decrease; lower Answer: B Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 31 Copyright © 2014 Pearson Education, Inc.

101) One example of cost-push inflation is an increase in A) the money prices of raw materials followed by no government policy. B) the money prices of raw materials followed by increases in the quantity of money. C) the money prices of raw materials followed by decreases in the quantity of money. D) government expenditure followed by increases in the quantity of money. Answer: B Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 102) In a cost-push inflation, A) increases in AD lead to increases in SAS. B) decreases in AD lead to increases in SAS. C) increases in SAS lead to decreases in AD. D) decreases in SAS lead to increases in AD. Answer: D Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 103) If the Fed responds to repeated decreases in the short-run aggregate supply with repeated increases in the quantity of money, the economy will be faced with A) a one-time increase in prices. B) continuous inflation. C) alternating periods of inflation and deflation. D) steady decreases in real GDP. Answer: B Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 104) When there is a cost-push inflation, A) workers demand higher money wages because of the inflation. B) the short-run aggregate supply curve shifts rightward. C) the aggregate demand curve shifts leftward because of the cost hikes. D) None of the above answers is correct. Answer: A Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

105) To prevent cost-push inflation A) there must not be an excess demand for money. B) interest rates must not rise. C) there must not be an increase in government purchases. D) the Fed must not let the quantity of money rise persistently. Answer: D Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

106) In the above figure, which path represents a cost-push inflation? A) point A to C to D to F to G B) point A to B to D to E to G C) point A to C to D to E to G D) point A to B to D to F to G Answer: B Topic: A Cost-Push Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

107) The figure above shows the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves for the U.S. economy. The economy is currently at point A. A cost-push rise in the price level will initially move the economy to point ________ and to point ________. A) E when aggregate demand increases; D when the money prices of raw materials rise B) C when the money prices of raw materials rise; D when aggregate demand increases C) F; A when the money prices of raw materials change D) B when aggregate demand decreases; C when the money prices of raw materials rise Answer: B Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

108) In the above figure, the economy is at point A. An increase in oil prices that sets off a costpush inflation will initially move the economy from point A to point A) A, that is, the economy does not change. B) B. C) C. D) D. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 109) In the above figure, the economy is at point A. An increase in money wage rates that sets off a cost-push inflation will initially move the economy from point A to point A) A, that is, the economy does not change. B) B. C) C. D) D. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

110) In the above figure, the economy is at point A. An increase in oil prices occurs after which the Fed responds by increasing the quantity of money. The economy moves from point A to A) D to point C. B) B to point C. C) C to point D. D) C to point B. Answer: A Topic: A Cost-Push Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 111) During which decade did the United States suffer from the worst cost-push inflation? A) 1960s B) 1970s C) 1980s D) 1990s Answer: B Topic: Cost-Push Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 112) As far as cost-push inflation goes, the United States A) has never experienced this type of inflation. B) has experienced only this type of inflation. C) experienced this type of inflation in the 1970s. D) experienced this type of inflation during the 1990s. Answer: C Topic: Cost-Push Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 113) If people correctly anticipate an increase in aggregate demand, a result is A) an increase in the real value of outstanding government debt. B) workers demanding higher money wages to keep the real wage unchanged. C) a lower rate of inflation in the current time period. D) there are no predictable results associated with an anticipated increase in aggregate demand. Answer: B Topic: Anticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

114) The anticipated inflation rate is 5 percent. In order for purchasing power to remain constant, the money wage rate must rise by A) 2 percent. B) 5 percent. C) 7 percent. D) 12 percent. Answer: B Topic: Anticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 115) When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand, A) there will be no unemployment. B) workers will overestimate the real wage rate. C) unemployment will be at the natural rate. D) workers will underestimate the real wage rate. Answer: C Topic: Anticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 116) The economy is at potential GDP when people correctly anticipate an increase in government expenditure on goods and services. If the money wage rate adjusts immediately, then A) real GDP and the price level will increase in the short run, but the real wage rate will fall. B) real GDP remains at potential GDP. C) real GDP, the price level, and the real wage rate all increase in the short run. D) real GDP remains at potential GDP, there is no change in the price level, and the real wage rate rises in the short run. Answer: B Topic: Anticipated Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

117) If the economy is initially at potential GDP and people correctly anticipate an increase in inflation so that their money wage rate adjusts immediately, then A) only real GDP increases with no change in the price level. B) only the price level rises with no change in real GDP. C) both the price level and real GDP increase. D) neither the price level nor real GDP increase. Answer: B Topic: Anticipated Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 118) If people correctly expect an increase in aggregate demand, their money wage rate ________ immediately, the SAS curve shifts ________. A) rises; rightward B) rises; leftward C) falls; rightward D) fall; leftward Answer: B Topic: Anticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 119) Suppose aggregate demand increases by more than expected. Which of the following describes what will occur? A) Real GDP will be greater than potential GDP. B) The price level will increase. C) Unemployment will fall. D) All of the above answers are correct. Answer: D Topic: Unanticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 120) Suppose aggregate demand increases by less than expected. Which of the following describes what will occur? A) Real GDP will be less than potential GDP. B) The price level will fall. C) Real GDP will be more than potential GDP. D) Both answers A and B are correct. Answer: A Topic: Unanticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 38 Copyright © 2014 Pearson Education, Inc.

121) In the above figure, if people correctly anticipate the increases in aggregate demand and the resulting inflation, the path will be from A) point A to C to D to F to G. B) point A to B to D to E to G. C) point A to D to G. D) point A to B to D to F to G. Answer: C Topic: Anticipated Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

122) In the above figure, the economy is initially at point A. If workers and firms correctly anticipate the increase in aggregate demand and the resulting inflation rate, the economy will move to point A) A, that is, the price level and level of real GDP will not change. B) B. C) C. D) D. Answer: C Topic: Anticipated Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

123) An economy is at potential GDP and the price level is 100 in the figure above. If aggregate demand unexpectedly increases so that the aggregate demand curve shifts to AD1, the inflation rate is ________. A) 0 percent a year B) 10 percent a year C) 20 percent a year D) More than 20 percent a year Answer: B Topic: Unanticipated Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 124) An economy is in long-run equilibrium and the price level is 100 in the figure above. Aggregate demand increases and the aggregate demand curve shifts to AD1. If the increase in aggregate demand is expected, then the inflation rate is ________. A) 0 percent a year B) 10 percent a year C) 20 percent a year D) More than 20 percent a year Answer: C Topic: Anticipated Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

125) Suppose that the economy is at full employment and aggregate demand increases by more than it is anticipated to increase. Other things remaining the same, ________. A) long-run aggregate supply decreases B) real GDP remains at potential GDP C) real GDP increases above potential GDP D) real GDP decreases below potential GDP Answer: C Topic: Unanticipated Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 126) A rational expectation is A) a forecast devoid of all emotions. B) a forecast which perfectly foretells the future. C) the best possible forecast based upon all relevant information. D) the forecast that automatically carries over from past forecasts. Answer: C Topic: Rational Expectation Theories Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 127) A rational expectation of inflation is A) how economists make perfect forecasts of inflation. B) how unexpected inflation affects the economy. C) why unexpected inflation redistributes income. D) a forecast of inflation that uses all relevant information. Answer: D Topic: Rational Expectation Theories Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 128) A rational expectation is A) a correct forecast but it might not be the best available forecast. B) an incorrect forecast. C) not necessarily correct but is the best available forecast. D) necessarily correct because it is the best available forecast. Answer: C Topic: Rational Expectation Theories Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

129) If Samantha predicts future inflation based on rational expectations, then A) her forecast of inflation will always be correct. B) she uses all relevant information to forecast inflation. C) she looks only to the past to help her predict future inflation. D) she never under estimates inflation. Answer: B Topic: Rational Expectation Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 130) The Cleveland Federal Reserve Bank's estimate of expected inflation in 2013 is 1.5 percent. In 2013, if aggregate demand grows faster than expected, the actual inflation rate will A) exceed 1.5 percent. B) equal 1.5 percent because the actual inflation rate must equal the expected inflation rate. C) be less than 1.5 percent. D) None of the above answers are correct because there is no relationship between the actual inflation rate and aggregate demand. Answer: A Topic: Rational Expectation Theories Skill: Conceptual Status: New AACSB: Reflective Thinking 131) Which of the following would shift the aggregate demand curve leftward year after year? A) a one-time tax cut B) a one-time increase in government expenditures on goods and services C) inflation D) negative growth in the quantity of money Answer: D Topic: Study Guide Question, A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 132) Which of the following results in the aggregate demand curve shifting rightward year after year? A) a one-time tax cut B) a one-time increase in government expenditures on goods and services C) inflation D) growth in the quantity of money Answer: D Topic: Study Guide Question, A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 43 Copyright © 2014 Pearson Education, Inc.

133) Demand-pull inflation occurs when A) aggregate demand increases persistently. B) aggregate supply and aggregate demand decrease persistently. C) the government increases its expenditures. D) oil prices increase substantially. Answer: A Topic: Study Guide Question, A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 134) In a demand-pull inflation, the AD curve shifts ________ and the SAS curve shifts ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: B Topic: Study Guide Question, A Demand-Pull Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 135) A rise in the price level because of an increase in the money wage rate A) definitely triggers a cost-push inflation. B) definitely triggers a demand-pull inflation. C) might trigger a cost-push inflation. D) might trigger a demand-pull inflation. Answer: C Topic: Study Guide Question, Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 136) A rise in the price level because of an increase in the price of oil A) definitely triggers a cost-push inflation. B) definitely triggers a demand-pull inflation. C) might trigger a cost-push inflation. D) might trigger a demand-pull inflation. Answer: C Topic: Study Guide Question, Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

137) Cost-push inflation might start with A) a rise in money wage rates. B) an increase in government expenditures. C) an increase in the quantity of money. D) a fall in the prices of raw materials. Answer: A Topic: Study Guide Question, Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 138) Which of the following statements about a cost-push inflation is correct? A) Cost-push inflation starts when an increase in aggregate demand "pushes" costs higher. B) Cost-push inflation might start with a rise in the price of raw materials, but it requires increases in the quantity of money to persist. C) To persist, cost-push inflation needs a continual series of cost hikes with no change in aggregate demand. D) The United States has never experienced a cost-push inflation. Answer: B Topic: Study Guide Question, Cost-Push Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2 Inflation and Unemployment: The Phillips Curve 1) Phillips curves show the relationship between the A) nominal interest rate and the real interest rate. B) expected rate of inflation and the nominal interest rate. C) real interest rate and the unemployment rate. D) unemployment rate and the inflation rate. Answer: D Topic: Inflation and Unemployment: The Phillips Curve Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 2) Phillips curves describe the relationship between A) aggregate expenditures and aggregate demand. B) the quantity of money and interest rates. C) unemployment and inflation. D) aggregate demand and the price level. Answer: C Topic: Inflation and Unemployment: The Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 45 Copyright © 2014 Pearson Education, Inc.

3) A Phillips curve measures the relationship between A) the unemployment rate and inflation. B) the level of money wage rates and GDP. C) unemployment and GDP. D) inflation and GDP. Answer: A Topic: Inflation and Unemployment: The Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 4) A Phillips curve shows the relationship between the A) price level and real GDP. B) unemployment rate and real GDP. C) inflation rate and the unemployment rate. D) inflation rate and real GDP. Answer: C Topic: Inflation and Unemployment: The Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 5) For a given level of anticipated inflation and natural unemployment rate, the short-run Phillips curve shows the relationship between A) potential GDP and real GDP. B) real GDP growth and the unemployment rate. C) inflation and money growth. D) inflation and the unemployment rate. Answer: D Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 6) In 2012 the Cleveland Federal Reserve estimated that the expected inflation rate was 1.5 percent, the actual inflation rate was 2.1 percent, and the unemployment rate was 8.1 percent. A point on the short-run Phillips curve is the A) difference between the actual and expected inflation rates (0.6 percent) and the unemployment rate of 8.1 percent. B) inflation rate of 2.1 percent and the expected inflation rate of 1.5 percent. C) expected inflation rate of 1.5 percent and the unemployment rate of 8.1 percent. D) inflation rate of 2.1 percent and the unemployment rate of 8.1 percent. Answer: D Topic: The Short-Run Phillips Curve Skill: Recognition Status: New AACSB: Reflective Thinking 46 Copyright © 2014 Pearson Education, Inc.

7) The short-run Phillips curve gives much the same information as A) the AD curve. B) the SAS curve. C) the LAS curve. D) none of the above Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 8) A movement along the SAS curve that brings a lower price level and a decrease in real GDP is equivalent to a A) movement along a short-run Phillips curve that brings a decrease in the inflation rate and an increase in the unemployment rate. B) movement along a short-run Phillips curve that brings an increase in the inflation rate and an increase in the unemployment rate. C) shift in the short-run Phillips curve that brings a decrease in the inflation rate and an increase in the unemployment rate. D) shift in the short-run Phillips curve that brings an increase in the inflation rate and an increase in the unemployment rate. Answer: A Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 9) The short-run Phillips curve A) slopes downward. B) slopes upward. C) is horizontal. D) is vertical. Answer: A Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

10) Moving along a short-run Phillips curve, A) the price level is constant. B) unemployment is constant. C) the expected inflation rate is constant. D) the inflation rate is constant. Answer: C Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 11) Which of the following is held constant when moving along a short-run Phillip's curve? A) the inflation rate B) the unemployment rate C) the expected inflation rate D) the growth rate of the quantity of money Answer: C Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 12) The short-run Phillips curve shows the tradeoff between ________, holding the expected inflation rate and the natural unemployment rate constant. A) the price level and real GDP B) inflation and unemployment C) the price level and unemployment D) inflation and employment Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 13) The short-run Phillips curve shows a A) positive relationship between the quantity of money and interest rates. B) positive relationship between the price level and real GDP. C) negative relationship between interest rates and the price level. D) negative relationship between the unemployment rate and the inflation rate. Answer: D Topic: The Short-Run Phillips Curve Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

14) In the short run, an unexpected increase in the inflation rate leads to A) a higher unemployment rate. B) a decrease in aggregate demand. C) a lower unemployment rate. D) workers thinking the money wage rate has fallen. Answer: C Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 15) Moving along the short-run Phillips curve indicates A) that higher inflation leads to a higher unemployment rate. B) that higher unemployment leads to a higher inflation rate. C) a tradeoff between inflation and unemployment so that higher inflation is related to lower unemployment. D) that the natural unemployment rate falls when the inflation rate rises. Answer: C Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 16) Movements upward along the short-run Phillips curve result from A) expected increases in the inflation rate. B) unexpected increases in the inflation rate. C) expected decreases in the inflation rate. D) unexpected decreases in the inflation rate. Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 17) If the unemployment rate initially equals its natural rate, then if the inflation rate rises above its expected rate, the unemployment rate ________. A) equals the natural rate B) remains constant C) falls below its natural rate D) rises above its natural rate Answer: C Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

18) Along a short-run Phillips curve, suppose the expected inflation rate is 6 percent. If the inflation rate turns out to be 8 percent instead, A) there is a movement upward along the short-run Phillips curve. B) there is a movement downward along the short-run Phillips curve. C) there is a downward shift of the short-run Phillips curve. D) None of the above answers are correct. Answer: A Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 19) Suppose the expected inflation rate is 8 percent and the unemployment rate is 3 percent. If the inflation rate rises to 10 percent and the expected inflation rate does not change, A) the short-run Phillips curve will shift upward. B) the short-run Phillips curve will shift downward. C) there will be a movement along the short-run Phillips curve. D) the natural unemployment rate will rise. Answer: C Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 20) Suppose that last year the economy of Suffera was experiencing an expected inflation rate of 8 percent and unemployment rate of 12 percent. An unexpected increase in the inflation rate would A) increase the unemployment rate. B) increase the inflation rate and decrease the unemployment rate. C) increase the inflation rate but have no effect on the unemployment rate. D) None of the above answers is correct. Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

21) Which of the following leads to a rightward shift in the short-run Phillips curve? I. a reduction in the expected inflation rate II. an increase in the natural unemployment rate A) I only B) II only C) I and II D) neither I nor II Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 22) An increase in the expected inflation rate shifts the A) short-run Phillips curve downward. B) short-run Phillips curve upward. C) long-run Phillips curve upward. D) long-run Phillips curve downward. Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 23) An increase in the expected inflation rate leads to ________ the short-run Phillips curve. A) a movement upward along B) a movement downward along C) an upward shift of D) a downward shift of Answer: C Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 24) Which of the following leads to a downward shift in the short-run Phillips curve? A) People expected inflation to be 5 percent last year and now expect inflation to be 3 percent this year. B) People expect the unemployment rate to increase. C) The long-run Phillips curve shifts rightward. D) Unexpected inflation increases. Answer: A Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 51 Copyright © 2014 Pearson Education, Inc.

25) Suppose the expected inflation rate is 12 percent and the unemployment rate is 5 percent. If the expected inflation rate increases to 13 percent, A) the short-run Phillips curve will shift upward. B) the short-run Phillips curve will shift downward. C) there will be a movement along the short-run Phillips curve. D) the natural unemployment rate will rise. Answer: A Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 26) The Cleveland Federal Reserve Bank's estimate of expected inflation has fallen from 3.5 percent in 2000 to 1.5 percent in 2013. This fall means that A) the short-run Phillips curve shifted upward. B) the short-run Phillips curve shifted downward. C) there was a movement along the short-run Phillips curve. D) the natural unemployment rate increased. Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: New AACSB: Reflective Thinking 27) The government estimates that the natural unemployment rate has increased from 4.8 percent in 2006 to 5.2 percent in late 2012. If these estimates are accurate, the short-run Phillips curve has ________. A) shifted rightward B) shifted leftward C) not shifted D) None of the above answers are correct because the effect on the short-run Phillips curve is ambiguous. Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: New AACSB: Reflective Thinking

28) In the above figure, suppose the economy is at point A. An unexpected increase in the inflation rate to 6 percent will result in a movement to point A) A, that is, there is no movement. B) B. C) C. D) D. Answer: B Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 29) In the above figure, suppose the economy is at point A. An expected increase in the inflation rate to 6 percent will result in a movement to point A) A, that is, there is no movement. B) B. C) C. D) D. Answer: C Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

30) The long-run Phillips curve shows the relationship between the inflation rate and the unemployment rate when the A) real interest rate equals the nominal interest rate. B) real interest rate is zero. C) actual inflation rate equals the expected inflation rate. D) inflation rate is zero. Answer: C Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 31) The long-run Phillips curve is A) vertical at potential GDP. B) the horizontal sum of the short-run Phillips curves. C) vertical at the natural unemployment rate. D) the vertical sum of the short-run Phillips curves. Answer: C Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 32) The long-run Phillips curve is ________. A) horizontal at the expected inflation rate B) vertical at the natural unemployment rate C) horizontal at the actual inflation rate D) vertical at the actual inflation rate Answer: B Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 33) Along the long-run Phillips curve, A) actual inflation is greater than expected inflation. B) actual inflation is equal to expected inflation. C) actual inflation is less than expected inflation. D) None of the above answers is correct. Answer: B Topic: The Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

34) The long-run Phillips curve shows that in the long run, policymakers can A) lower unemployment if they are willing to accept more inflation forever. B) lower inflation if they are willing to accept higher unemployment forever. C) choose the unemployment rate but not the inflation rate. D) lower inflation without increasing unemployment. Answer: D Topic: The Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 35) The position of the long-run Phillips curve is determined by A) the quantity of money. B) the natural unemployment rate. C) the inflation rate. D) the expected inflation rate. Answer: B Topic: The Long-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 36) The Cleveland Federal Reserve Bank's estimate of expected inflation has fallen from 3.5 percent in 2000 to 1.5 percent in 2013. This fall means that A) the long-run Phillips curve shifted leftward. B) the long-run Phillips curve shifted rightward. C) the long-run Phillips curve shifted downward. D) None of the above answers are correct because a change in the expected inflation rate does not shift the long-run Phillips curve. Answer: D Topic: The Long-Run Phillips Curve Skill: Conceptual Status: New AACSB: Reflective Thinking 37) Which of the following statements about the long-run Phillips curve is correct? A) The long-run Phillips curve is horizontal. B) The long-run Phillips curve shifts leftward if the natural unemployment rate decreases. C) The long-run Phillips curve shifts rightward and upward if the expected inflation rate increases. D) None of the above statements is correct. Answer: B Topic: The Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 55 Copyright © 2014 Pearson Education, Inc.

38) In the above figure, which of the following curves represents the long-run Phillips curve? A) 1 B) 2 C) 3 D) 4 Answer: A Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Analytical Skills

39) Which of the diagrams in the above figure best illustrates a short-run Phillips curve? A) Figure A B) Figure B C) both Figure A and Figure B D) neither Figure A nor Figure B Answer: B Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 40) In Figure B above, which of the following are being held constant while moving along the curve in the figure? A) the expected inflation rate B) the natural unemployment rate C) the AD curve D) Both answers A and B are correct. Answer: D Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 41) Which of the diagrams in the above figure best illustrates a long-run Phillips curve? A) Figure A B) Figure B C) both Figure A and Figure B D) neither Figure A nor Figure B Answer: A Topic: The Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

42) The short-run Phillips curve intersects the long-run Phillips curve at the A) natural interest rate. B) nominal interest rate. C) natural inflation rate. D) expected inflation rate. Answer: D Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 43) The Cleveland Federal Reserve Bank estimates the expected inflation rate is 1.5 percent in 2013. This estimate means that A) the long-run and short-run Phillips curve cross at an inflation rate of 1.5 percent. B) the long-run Phillips curve is vertical at 1.5 percent. C) the short-run Phillips curve is vertical at 1.5 percent. D) the short-run Phillips curve shifts upward by 1.5 percentage points per year. Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: New AACSB: Reflective Thinking 44) The short-run Phillips curve and the long-run Phillips curve intersect at the ________ and ________. A) expected inflation rate; the expected unemployment rate B) expected inflation rate; the natural unemployment rate C) natural inflation rate; the expected employment rate D) expected inflation rate; the expected employment rate Answer: B Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 45) An increase in the expected inflation rate shifts A) both the short-run and the long-run Phillips curves upward. B) the short-run but not the long-run Phillips curve upward. C) the long-run but not the short-run Phillips curve upward. D) neither the short-run nor the long-run Phillips curve. Answer: B Topic: The Short-Run and Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

46) A decrease in the expected inflation rate shifts the short-run Phillips curve A) downward and shifts the long-run Phillips curve leftward. B) upward and shifts long-run Phillips curve rightward. C) downward and creates a movement downward along the long-run Phillips curve. D) upward and creates a movement upward along the long-run Phillips curve. Answer: C Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 47) An increase in the natural unemployment rate shifts A) both the short-run and the long-run Phillips curves rightward. B) the short-run but not the long-run Phillips curve rightward. C) the long-run but not the short-run Phillips curve rightward. D) neither the short-run nor the long-run Phillips curve. Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 48) A change in the natural unemployment rate ________. A) shifts only the short-run Phillips curve B) causes a movement along the short-run Phillips curve C) shifts only the long-run Phillips curve D) shifts both the short-run and long-run Phillips curves Answer: D Topic: The Short-Run and Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 49) If the natural unemployment rate increases, then the short-run Phillips curve shifts ________ and the long-run Phillips curve shifts ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

50) The government estimates that the natural unemployment rate has increased from 4.8 percent in 2006 to 5.2 percent in late 2012. If these estimates are accurate, the short-run Phillips curve has shifted ________ and the long-run Phillips curve has shifted ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: New AACSB: Reflective Thinking Inflation rate Unemployment rate (percent per year) (percent) 8 3 6 4 4 5 2 6 51) An economy's natural unemployment rate is 4 percent. The table above gives some points on the economy's short-run Phillips curve. When the unemployment rate is 4 percent ________. A) actual inflation is greater than expected inflation B) actual inflation is less than expected inflation C) and the inflation rate is 6 percent a year, the short-run and long-run Phillips curves intersect D) and the expected inflation rate is 8 percent a year, the short-run Phillips curve shifts downward Answer: C Topic: The Short-Run Phillips Curve and the Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 52) An economy's natural unemployment rate is 4 percent. The table above gives some points on the economy's short-run Phillips curve. If the expected inflation rate becomes 8 percent per year, then the ________. A) short-run Phillips curve shifts upward B) long-run Phillips curve shifts rightward C) long-run Phillips curve shifts leftward D) short-run Phillips curve shifts downward Answer: A Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

53) In the above figure, suppose that the economy currently is at point A. If the inflation rate falls and this fall is unanticipated by the public, the economy moves to a point such as point A) B. B) C. C) D. D) E. Answer: D Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 54) In the above figure, suppose that the economy currently is at point A. If the inflation rate rises and this rise is NOT expected by the public, the economy moves to a point such as point A) B. B) C. C) D. D) E. Answer: A Topic: The Short-Run Phillips Curve Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

55) In the above figure, what might have shifted the short-run Phillips curve from SRPC1 to SRPC2 while leaving the long-run Phillips curve unchanged at LRPC? A) The natural unemployment rate increased. B) The natural unemployment rate decreased. C) The expected inflation rate increased. D) The expected inflation rate decreased. Answer: C Topic: The Short-Run Phillips Curve Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 56) In the above figure, suppose that the economy currently is at point A. If the inflation rate rises and this rise is anticipated by the public, the economy moves to a point such as point A) B. B) C. C) D. D) E. Answer: B Topic: The Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 57) In the above figure, suppose that the economy is at point C. If the inflation rate is lower than expected, A) the LRPC will shift rightward. B) the SRPC will shift downward. C) the SRPC will shift upward. D) Neither the LRPC nor the SRPC will shift. Answer: D Topic: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

58) In the above figure, the economy is at point A. The inflation rate unexpectedly falls by two percentage points. As a result, the economy moves to point A) A, that is, there is no movement. B) B. C) C. D) D. Answer: D Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 59) In the above figure, the economy is at point A. The inflation rate falls by two percentage points and people correctly expected the fall. As a result, the economy moves to point A) A, that is, there is no movement. B) B. C) C. D) D. Answer: C Topic: The Long-Run Phillips Curve Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

60) The figure above shows an economy's Phillips curves. Currently, the inflation rate is 6 percent a year. The natural unemployment rate is ________ percent and the expected inflation rate is ________ percent a year. A) 6; 6 B) 6; 10 C) 4; 6 D) 6; 4 Answer: D Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 61) The figure above shows an economy's Phillips curves. Currently, the inflation rate is 6 percent a year. If inflation expectations remain unchanged, the current unemployment rate is ________. A) less than the natural rate B) greater than the natural rate C) equal to the natural rate D) 6 percent Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

62) Consider the U.S. data for inflation and the unemployment rate for the last five decades. Which of the following statements describes the relationship between the two variables? A) The natural unemployment rate did not change but the expected inflation rate did change over these years. B) Several different short-run Phillips curves representing different natural unemployment rates and different expected inflation rates existed. C) There is a positive relationship. D) None of the above answers is correct. Answer: B Topic: The U.S. Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 63) During the 1970s when both the unemployment rate and inflation rate rose, it is reasonable to conclude that A) both the short-run and long-run Phillips curves shifted rightward. B) both the short-run and long-run Phillips curves shifted leftward. C) only the short-run Phillips curve shifted. D) only the long-run Phillips curve shifted. Answer: A Topic: The U.S. Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 64) The short-run Phillips curve shows the relationship between A) the price level and real GDP in the short run. B) the price level and unemployment in the short run. C) inflation and unemployment when expected inflation equals the actual inflation. D) inflation and unemployment when expected inflation does not change. Answer: D Topic: Study Guide Question, The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 65) The short-run Phillips curve shows the ________ relationship between ________. A) negative; unemployment and real GDP B) positive; unemployment and real GDP C) negative; inflation and unemployment D) positive; real GDP and inflation Answer: C Topic: Study Guide Question, The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 65 Copyright © 2014 Pearson Education, Inc.

66) The long-run Phillips curve shows the relationship between A) the price level and real GDP in the long run. B) the price level and unemployment in the long run. C) inflation and unemployment when expected inflation equals the actual inflation. D) inflation and unemployment when expected inflation does not change. Answer: C Topic: Study Guide Question, The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 67) A decrease in the natural unemployment rate shifts the long-run Phillips curve ________ and ________ the short-run Phillips curve. A) rightward; does not shift B) leftward; shifts rightward C) rightward; shifts rightward D) leftward; shifts leftward Answer: D Topic: Study Guide Question, Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 68) A rise in the expected inflation rate leads to ________ in the long-run Phillips curve and ________ in the short-run Phillips curve. A) an upward shift; no shift B) a leftward shift; an upward shift C) no shift; no shift D) no shift; an upward shift Answer: D Topic: Study Guide Question, Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 69) A decrease in the expected inflation rate leads to ________ in the long-run Phillips curve and ________ in the short-run Phillips curve. A) an upward shift; no shift B) a leftward shift; an upward shift C) no shift; no shift D) no shift; a downward shift Answer: D Topic: Study Guide Question, Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 66 Copyright © 2014 Pearson Education, Inc.

3 The Business Cycle 1) Business cycle events that arise solely from aggregate demand shifts are emphasized by the A) Keynesian and real business cycle theories. B) monetarist and real business cycle theories. C) Keynesian and monetarist cycle theories. D) none of the major theories Answer: C Topic: Aggregate Demand Theories of the Business Cycle Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2) Which of the following are business cycle theories that regard fluctuations in aggregate demand as the factor creating business cycles? I. Keynesian cycle theory II. real business cycle theory III. monetarist cycle theory A) I only B) I and II C) I and III D) I, II and III Answer: C Topic: Aggregate Demand Theories of the Business Cycle Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 3) Which of the following is NOT an aggregate demand, mainstream theory of the business cycle? A) Keynesian cycle theory B) monetarist cycle theory C) new Keynesian cycle theory D) real business cycle theory Answer: D Topic: Aggregate Demand Theories of the Business Cycle Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4) In 2008, when a recession started, the growth of government expenditures on goods and services doubled from its growth in 2007. According to the aggregate demand theories of the business cycle A) government expenditure was at least a partial cause of the recession. B) government expenditure was not a cause of the recession. C) government expenditure was definitely the cause of the recession D) None of the above answers are correct because aggregate demand theories of the business cycle focus only on investment and consumption expenditure. Answer: B Topic: Aggregate Demand Theories of the Business Cycle Skill: Conceptual Status: New AACSB: Reflective Thinking 5) In the Keynesian business cycle theory, business cycles begin with changes in A) inflation expectations. B) consumer sentiment. C) business confidence. D) the public's expectations about Fed policies. Answer: C Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 6) The ________ states that the main source of economic fluctuations is volatile business confidence. A) real business cycle theory B) new classical cycle theory C) Keynesian cycle theory D) monetarist cycle theory Answer: C Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 7) Fluctuations in business confidence is the factor leading to business cycles in the ________. A) Keynesian cycle theory B) new Keynesian cycle theory C) new classical cycle theory D) monetarist cycle theory Answer: A Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 68 Copyright © 2014 Pearson Education, Inc.

8) The factor leading to business cycles in the Keynesian model is ________. A) changes in business confidence B) a speed up in money growth C) unanticipated changes in aggregate demand D) unanticipated changes in aggregate supply Answer: A Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 9) The Keynesian explanation of the business cycle is based on A) the inability of government policy-makers to predict the future course of the economy. B) shifts in monetary policy undertaken by the Federal Reserve. C) fluctuations in business confidence. D) unstable inflationary expectations. Answer: C Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 10) The factor that leads to business cycles within Keynesian cycle theory is A) the growth rate in labor productivity. B) the growth rate in the quantity of money. C) adverse shocks to international trade. D) fluctuations in business confidence. Answer: D Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 11) Keynes used the term "animal spirits" to represent A) changes in people's consumption expenditures. B) the ease of forecasting. C) fluctuations in business confidence. D) investment based on hard facts about the future. Answer: C Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

12) Which theory emphasizes frequent changes in investment because of "animal spirits" as the main source of economic fluctuations? A) real business cycle theory B) new classical cycle theory C) Keynesian cycle theory D) monetarist cycle theory Answer: C Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 13) One model of the business cycle claims that volatile business confidence is the primary factor in starting a business cycle. This model is the A) real business cycle model. B) Keynesian cycle theory. C) aggregate supply model. D) new classical theory. Answer: B Topic: Keynesian Theory Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 14) Which theory assumes that business cycles occur because of changes in business confidence? A) monetarist cycle theory B) real business cycle theory C) new classical cycle theory D) Keynesian cycle theory Answer: D Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

15) Which of the following describes the Keynesian approach to the business cycle? I. Unanticipated shocks to aggregate supply drive expansions and recessions. II. The Keynesian theory is a real business cycle model of the economy. III. A decrease in business confidence can trigger a recession. A) I only B) III only C) I and II D) II and III Answer: B Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 16) Suppose that managers forecasted a large decline in expected sales and profits and so their confidence plummets. According to the ________, this forecast might start a business cycle. A) Keynesian cycle theory B) circular flow theory C) monetarist cycle theory D) new classical cycle theory Answer: A Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 17) Keynesians believe that A) money wage rate adjustments will quickly eliminate unemployment. B) aggregate demand changes tend to induce aggregate supply changes, offsetting any effect from changes in government expenditures. C) the economy will normally operate at full employment. D) a change in business confidence can affect the amount of investment in the economy. Answer: D Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

18) The Keynesian explanation of the business cycle rests on several concepts, including A) rigid money wage rates. B) unstable monetary policy by the Fed. C) shocks to the rate of technological change. D) the desire of politicians to be re-elected. Answer: A Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 19) Based on the Keynesian theory of the business cycle, if the economy is at its fullemployment equilibrium and aggregate demand increases then A) the price level and real GDP both increase. B) the price level rises but real GDP remains unchanged. C) the price level and GDP both decrease. D) real GDP decreases and the price level remains unchanged. Answer: A Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 20) For monetarists the main cause of economic fluctuations is changes in A) investment. B) consumption expenditure. C) the growth rate of the quantity of money. D) the levels of household debt. Answer: C Topic: Monetarist Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 21) The monetarist theory of the business cycle regards ________ as the factor that leads to business cycles. A) unexpected increases in aggregate demand B) changes in the growth rate of the quantity of money C) volatility in the interest rate D) volatility in the demand for money Answer: B Topic: Monetarist Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

22) What, according to the monetarist theory of the business cycle, leads to changes in real GDP? A) a change in profit expectations B) a change in the growth rate in tax revenue C) a change in the growth rate of the quantity of money D) an unanticipated change in aggregate demand Answer: C Topic: Monetarist Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 23) In monetarist business cycle theory, the factor leading to a business cycle is changes in A) consumer spending. B) investment spending. C) the growth rate of the quantity of money. D) net exports. Answer: C Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 24) In monetarist business cycle theory, decreasing the growth rate of the quantity of money ________ and increasing the growth rate of the quantity of money ________. A) increases real GDP; decreases the inflation rate B) decreases real GDP; decreases the inflation rate C) causes the economy to enter a recession; causes the economy to enter an expansion D) causes the economy to enter an expansion; causes the economy to enter a recession Answer: C Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 25) In monetarist business cycle theory, increases in money growth temporarily ________ real GDP and ________ the price level. A) increase; rise B) increase; lower C) decrease; rise D) decrease; lower Answer: A Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 73 Copyright © 2014 Pearson Education, Inc.

26) Using the monetarist model, place the following events in the order in which they occur in a business cycle. I. Money wages fall and the SAS curve shifts rightward. II. The Federal Reserve decreases the growth rate of the quantity of money. III. The AD curve shifts leftward. A) II, III, I B) III, II, I C) I, III, II D) The events are not part of a monetarist model of the business cycle. Answer: A Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 27) Suppose the growth rate of the quantity of money increased from 5 percent per year to 8 percent per year. According to the ________, this event would trigger a business cycle expansion. A) Keynesian cycle model B) real business cycle model C) aggregate supply cycle model D) monetarist cycle model Answer: D Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 28) Which of the following is TRUE regarding the monetarist theory of the business cycle? I. Monetarists assume that the quantity of money increases at a constant rate. II. Fluctuations in interest rates cause business cycles. III. Changes in the growth rate of the quantity of money affect aggregate demand. A) I only B) III only C) I and II D) II and III Answer: B Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

29) Which of the following pieces of evidence is most consistent with the monetarist theory? A) Labor supply decisions do not seem to depend on real interest rates. B) Changes in real GDP and the quantity of money move closely together. C) Money wage rates take some time to adjust to price changes. D) Productivity and GDP move closely together. Answer: B Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

30) In the above figure, suppose the economy has moved from point A to point C. According to the monetarist theory of the business cycle, what could have caused this movement? A) an increase in the money wage rate B) an increase in the growth rate of the quantity of money C) a decrease in the growth rate of the quantity of money D) an increase in uncertainty Answer: C Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

31) In the above figure, suppose the economy has moved from point D to point B. According to the monetarist theory of the business cycle, what could have caused this movement? A) a decrease in the money wage rate B) an increase in uncertainty about future sales and profits C) an increase in the growth rate of the quantity of money D) an increase in the money wage rate Answer: C Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

32) Using the above figure, a recession in the monetarist model would start with a A) rightward shift in the AD curve. B) leftward shift in the AD curve. C) leftward shift in the SAS curve. D) leftward shift in the LAS curve. Answer: B Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

33) In the above figure, the economy is initially at point A. Which point best represents the shortrun response to a decrease in the growth rate of the quantity of money, according to the monetarists? A) A, that is, there is no change. B) B C) C D) D Answer: D Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

34) In the above figure, suppose the economy starts at point A. The short-run response to a decrease in the growth rate of the quantity of money in monetarist business cycle theory moves the economy to point A) B. B) C. C) D. D) E. Answer: C Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 35) In the above figure, suppose the economy starts at point A. The short-run response to an increase in the growth rate of the quantity of money in monetarist business cycle theory moves the economy to point A) B. B) C. C) D. D) E. Answer: A Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

36) In the above figure, suppose the economy starts at point A. The short-run response to an increase in the growth rate of the quantity of money in the monetarist business cycle theory is for the price level to ________ and real GDP to ________. A) fall to 90; remain at $13 trillion B) rise to 120; increase to $15 trillion C) rise to 130; remain at $13 trillion D) remain at 110; remain at $13 trillion Answer: B Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 37) The new classical cycle theory predicts that an unexpected increase in aggregate demand ________ create a business cycle and an expected increase in aggregate demand ________ create a business cycle. A) will; will B) will; will not C) will not; will D) will not; will not Answer: B Topic: Rational Expectation Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 38) The ________ cycle theory states that only unexpected fluctuations in aggregate demand are the main source of business cycles. A) new Keynesian B) new classical C) Keynesian D) monetarist Answer: B Topic: New Classical Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

39) The business cycle impulse in the new classical theory of the business cycle is A) unexpected changes in aggregate demand. B) expected changes in aggregate demand. C) fluctuations in money growth with rigid wages. D) fluctuations in investment coupled with rigid wages. Answer: A Topic: New Classical Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 40) The new classical theory argues that the primary factor leading to business cycles are A) expected changes in aggregate demand. B) expected changes in aggregate supply. C) unexpected changes in aggregate demand. D) unexpected changes in aggregate supply. Answer: C Topic: New Classical Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 41) Which theory distinguishes between expected and unexpected fluctuations in aggregate demand and asserts that only unexpected changes can affect real GDP? A) new classical cycle theory B) Keynesian cycle theory C) monetarist cycle theory D) real business cycle theory Answer: A Topic: New Classical Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 42) According to the new classical model, changes in aggregate demand change real GDP A) all of the time. B) only when the short-run aggregate supply curve is vertical. C) only when the changes in aggregate demand are expected. D) only when the changes in aggregate demand are unexpected. Answer: D Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

43) Suppose that forecasters have incorrectly estimated aggregate demand. According to the ________, this mistake could trigger a business cycle. A) Keynesian cycle model B) the monetarist cycle model C) the new classical cycle model D) the real business cycle model Answer: C Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 44) A larger than expected increase in aggregate demand will lead to ________ in the ________ of the business cycle. A) a recession; new Keynesian cycle theory B) a recession; Keynesian cycle theory C) an expansion; new classical cycle theory D) an expansion; real business cycle theory Answer: C Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 45) Which of the following correctly describes the new classical cycle theory of the business cycle? A) An unexpected change in the quantity of money can trigger a business cycle. B) An expected tax rate change can trigger a business cycle. C) An expected change in the level of exports can trigger a business cycle. D) Rational expectations keep the money wage from changing quickly. Answer: A Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 46) One assumption of the new classical model is that A) money wage rates are rigid. B) prices are "sticky" upward. C) people make rational expectations about aggregate demand. D) markets are not purely competitive. Answer: C Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 81 Copyright © 2014 Pearson Education, Inc.

47) Both new Keynesian and new classical cycle theories claim that ________. A) animal spirits can trigger a business cycle B) shifts in the SAS curve are the main impulse for a business cycle C) unexpected changes in aggregate demand trigger a business cycle D) expected changes in the quantity of money can trigger a business cycle Answer: C Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 48) Both the new classical and new Keynesian business cycle theories agree that A) expected changes in aggregate demand lead to the business cycle. B) unexpected changes in aggregate demand cannot result in a business cycle. C) the money wage rate is influenced by rational expectations of the price level. D) the long-term nature of wage contracts allow expected changes in the price level to cause business cycles. Answer: C Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 49) A key difference between the new classical and the new Keynesian views of the business cycle is the role played by A) unexpected changes in aggregate demand. B) government expenditure on goods and services. C) expected changes in aggregate demand. D) the growth rate of the quantity of money. Answer: C Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

50) The key difference between the new classical theory of the business cycle and the new Keynesian theory of the business cycle is that the new classical theory believes that ________ while the new Keynesian theory believes that ________. A) expected changes in aggregate demand will change real GDP; expected changes in aggregate demand will not change real GDP B) only unexpected changes in aggregate demand will change real GDP; only expected changes in aggregate demand will change real GDP C) only unexpected changes in aggregate demand will change real GDP; both expected and unexpected changes in aggregate demand will change real GDP D) the short-run aggregate supply curve is horizontal; the short-run aggregate supply curve is vertical Answer: C Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 51) The factor leading to business cycles in the ________ cycle theory is unexpected fluctuations in aggregate demand while in the ________ cycle theory both unexpected and expected fluctuations in aggregate demand are factors that lead to business cycles. A) new classical; monetarist B) new classical; new Keynesian C) new Keynesian; Keynesian D) monetarist; new Keynesian Answer: B Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 52) According to the new classical theory, ________ policy changes have no effect on real GDP and according to the new Keynesian theory, ________ policy changes have an effect on real GDP. A) expected; expected B) unexpected; expected C) fiscal; monetary D) fiscal; fiscal Answer: A Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

53) An unexpected decrease in aggregate demand will trigger a recession in the ________ theory of the business cycle. A) new Keynesian cycle B) new classical cycle C) Keynesian cycle D) Both answers A and B are correct. Answer: D Topic: New Classical and New Keynesian Theories Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 54) The new Keynesian cycle theory of the business cycle regards ________ as the main source of economic fluctuations. A) unexpected fluctuations in aggregate demand B) expected and unexpected fluctuations in aggregate demand C) expected fluctuations in aggregate supply D) changes in business confidence Answer: B Topic: New Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 55) New Keynesian economists believe that ________ is influenced by ________. A) yesterday's money wage rate; today's rational expectations of the money wage B) today's money wage rate; yesterday's rational expectations of the price level C) yesterday's rational expectations of the price level; today's money wage rate D) today's money wage rate; today's rational expectations of the price level Answer: B Topic: New Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 56) Which business cycle theory emphasizes that, because of long-term wage agreements, both expected and unexpected fluctuations in aggregate demand can change real GDP? A) the new classical cycle theory B) the new Keynesian cycle theory C) monetarist cycle theory D) Keynesian cycle theory Answer: B Topic: New Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 84 Copyright © 2014 Pearson Education, Inc.

57) The ________ theory of the business cycle asserts that expected and unexpected changes in aggregate demand lead to fluctuations in real GDP. A) real business cycle B) new classical cycle C) new Keynesian cycle D) None of the above answers are correct. Answer: C Topic: New Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 58) According to the new Keynesian cycle theory of the business cycle, which of the following can trigger a business cycle expansion? I. an unexpected increase in the quantity of money II. an expected increase in the quantity of money III. an expected increase in government expenditure A) I only B) II and III C) I, II and III D) None of the three will trigger an expansion. Answer: C Topic: New Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 59) In the new Keynesian business cycle theory, ________ can effect real GDP. A) only expected changes in aggregate demand B) expected and unexpected changes in aggregate demand C) only unexpected changes in aggregate demand D) only unexpected changes in the money wage rate Answer: B Topic: New Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

60) Suppose that the Federal Reserve is expected to expand the quantity of money by 5 percent but ends up expanding it by only 2 percent. If the new Keynesian theory is correct, which of the following describes the effect on the economy? A) The economy experience a boom because the quantity of money is still growing. B) Inflation will be higher than expected. C) Workers' decisions about when to work will be affected. D) A recession will ensue. Answer: D Topic: New Keynesian Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 61) Suppose the data show that an unexpected change in tax rates caused a recent recession. These data support which model of the business cycle? A) new classical cycle theory B) new Keynesian cycle theory C) real business cycle theory D) Both answers A and B are correct. Answer: D Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 62) Which of the following are TRUE? I. New Keynesian economists believe that money wage rates are influenced by rational expectations of the price level. II. New classical economists believe that money wage rates are influenced by rational expectations of the price level. III. New classical economists believe expected changes in aggregate demand trigger business cycles. A) I and II B) I and III C) II and III D) I, II and III Answer: A Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

63) Real business cycle theory says that the factor leading to the business cycle is changes in A) animal spirits. B) the growth rate of the quantity of money. C) only aggregate demand. D) productivity. Answer: D Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 64) The real business cycle theory asserts that changes in ________ lead to changes in ________. A) the quantity of money; real GDP B) technology; productivity C) animal spirits; real GDP D) consumption expenditure; real GDP Answer: B Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 65) The factor leading to business cycles according to the real business cycle theory is changes in A) the growth rate of the quantity of money. B) technological change caused by changes in productivity. C) productivity caused by changes in technology. D) investment caused by changes in business confidence. Answer: C Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 66) Real business cycle (RBC) theory predicts that the main source of economic fluctuations is A) sticky money wage rates. B) rational expectations based on complete information. C) changes in the growth rate of productivity. D) None of the above answers is correct. Answer: C Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

67) Real business cycle theory explains the business cycle as the result of A) excess growth of the quantity of money. B) unstable investment demand. C) shocks to consumer spending habits. D) fluctuations in productivity. Answer: D Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 68) The factor that leads to business cycle events within real business cycle theory is A) changes in growth rate in productivity. B) changes in the growth rate in the quantity of money. C) adverse shocks to international trade. D) changes in expected future sales and profits of firms. Answer: A Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 69) In real business cycle theory, the factor leading to a business cycle is A) changes in investment. B) changes in the quantity of money. C) unexpected changes in aggregate demand. D) fluctuations in the pace of technological change. Answer: D Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 70) The factor leading to business cycles in the real business cycle theory is changes in the growth rate of A) the quantity of money. B) productivity. C) labor supply. D) the money wage rate. Answer: B Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

71) According to the real business cycle (RBC) theory, recessions are the result of A) a fall in growth rate of productivity. B) an increase in growth rate of the quantity of money. C) an increase in investment. D) a decrease in growth rate of the quantity of money. Answer: A Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 72) The theory that regards random fluctuations in productivity as the main source of economic fluctuations is the ________ of the business cycle. A) real business cycle theory B) productivity theory C) dynamic general equilibrium theory D) Keynesian cycle theory Answer: A Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 73) Which theory views fluctuations in productivity as the main source of business cycle fluctuations? A) real business cycle theory B) Keynesian cycle theory C) monetarist cycle theory D) new classical cycle theory Answer: A Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 74) When the recession started in 2008, the government estimates that labor productivity for the year was -2.8 percent. This result is most in line with which theory of business cycle fluctuations? A) real business cycle theory B) Keynesian cycle theory C) monetarist cycle theory D) new classical cycle theory Answer: A Topic: RBC Impulse Skill: Conceptual Status: New AACSB: Reflective Thinking 89 Copyright © 2014 Pearson Education, Inc.

75) According to the real business cycle theory, technological change A) occurs at a constant rate. B) happens only occasionally. C) happens at an uneven pace. D) is increasing in recent years at an increasing rate. Answer: C Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 76) According to the real business cycle theory, technological change A) always increases productivity. B) never increases productivity. C) can initially decrease productivity. D) is caused by changes in productivity. Answer: C Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 77) The real business cycle (RBC) theory assets that the impact on real GDP of technological change is A) always positive. B) usually positive but occasionally negative. C) always negative. D) nonexistent. Answer: B Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 78) According to the ________ theory, technological change can be so rapid that some existing capital becomes obsolete and ________. A) real business cycle; aggregate demand increases B) new classical; productivity falls C) new classical; aggregate demand increases D) real business cycle; productivity falls Answer: D Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 90 Copyright © 2014 Pearson Education, Inc.

79) Evidence indicates that a recession occurs at about the same time as a decrease in investment. According to the real business cycle theory, the decrease in investment is attributable to A) a fall in animal spirits. B) a decrease in productivity. C) a decrease in the growth rate of the quantity of money. D) intertemporal substitution in working decisions. Answer: B Topic: RBC Impulse Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 80) Which of the following pieces of evidence is most consistent with the real business cycle theory? A) Labor supply decisions do not seem to depend on real interest rates. B) Real GDP and the quantity of money move closely together. C) Money wage rates take some time to adjust to price changes. D) Productivity and GDP move closely together. Answer: D Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 81) Looking at U.S. economic history between 1964 and 2009, we see that growth in real GDP A) was not correlated with fluctuations in productivity growth. B) falls following an increase in productivity growth. C) rises following an increase in productivity growth. D) rises following a decrease in productivity growth. Answer: C Topic: RBC Impulse Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 82) The key ripple effect in real business cycle theory is the ________ decision and it depends on the ________. A) when-to-invest; real interest rate B) when-to-work; real interest rate C) what-to-save; nominal interest rate D) where-to-work; real wage rate Answer: B Topic: Real Business Cycle Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 91 Copyright © 2014 Pearson Education, Inc.

83) According to the real business cycle theory, the immediate effects from a change in productivity include which of the following? I. Investment demand changes. II. Demand for labor changes. III. Government expenditures change. A) I B) I and II C) I and III D) II and III Answer: B Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 84) "Intertemporal substitution" in labor supply describes changes in labor supply in response to changes in A) personal tax rates. B) investment spending. C) the real interest rate. D) consumer demand for goods. Answer: C Topic: RBC Mechanism Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 85) Which theory maintains that the money wage rate always adjusts freely? A) Keynesian cycle theory B) monetarist cycle theory C) both the new classical cycle theory and the new Keynesian cycle theory D) real business cycle theory Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

86) In real business cycle theory, a decrease in productivity leads to all of the following events EXCEPT ________. A) a decrease in the demand for labor B) a decrease in investment demand C) a rise in the real wage rate D) a fall in the real interest rate Answer: C Topic: RBC Mechanism Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 87) In a real business cycle model, labor supply A) increases if the nominal interest rate rises. B) is independent of the real interest rate. C) decreases if the real interest rate rises. D) decreases if the real interest rate falls. Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 88) In the real business cycle framework, a technology shock that increases investment demand and the demand for loanable funds leads to a ________ quantity of saving and a ________ real interest rate. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: A Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

89) Suppose that a severe shock that decreases the demand for loanable funds hits the United States. Which of the following can we expect to occur according to the real business cycle model? A) The real interest rate will fall. B) People will work fewer hours. C) The real wage rate will fall. D) All of the above are true. Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 90) According to the real business cycle theory, an increase in the price of a resource, such as oil, that decreases the demand for loanable funds will ________ employment and ________ real GDP. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 91) According to real business proponents, in an increase in productivity ________ the demand for loanable funds, ________ the demand for labor, and ________ the supply of labor. The real interest rate will ________. A) increases; increases; there is no change in; fall B) increases; increases; there is no change in; rise C) decreases; decreases; decreases; fall D) increases; increases; increases; rise Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

92) According to the real business cycle (RBC) theory, during a recession the demand for labor ________ and the supply of labor ________. A) increases; decreases B) decreases; does not change C) does not change; decreases D) decreases; decreases Answer: D Topic: Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 93) According to real business cycle theory, a fall in the real interest rate ________ current labor supply and ________ current employment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 94) Real business cycle economists claim that the intertemporal substitution effect A) plays a small role in the labor market. B) depends on the real interest rate. C) plays a large role in the economy only during expansions. D) has unpredictable effects on the economy. Answer: B Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 95) According to real business cycle theory, workers' decisions to work now versus later depend on A) the real wage rate today but not the real wage rate in the future. B) the money wage rate. C) the real interest rate. D) labor productivity. Answer: C Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 95 Copyright © 2014 Pearson Education, Inc.

96) Suppose that in response to a decrease in real interest rates, a person decides to reduce his labor supply today and increase it in the future. This behavior is most consistent with the A) new classical theory of the business cycle. B) Keynesian theory of the business cycle. C) new Keynesian theory of the business cycle. D) real business cycle theory. Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 97) If the real interest rate is 4 percent and workers expect real wages to be 2 percent year higher next year, according to real business cycle theory, workers will work A) more this year and less next year. B) less this year and less next year. C) more this year and more next year. D) less this year and more next year. Answer: A Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 98) If the real interest rate is 2 percent and workers expect real wages to be 4 percent higher next year, according to real business cycle theory, workers will work A) more this year and less next year. B) less this year and less next year. C) more this year and more next year. D) less this year and more next year. Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 99) In the real business cycle model, the quantity of money A) can change the real wage rate. B) can increase the real interest rate. C) has no effect on real GDP. D) can decrease the effect from technology shocks. Answer: C Topic: Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 96 Copyright © 2014 Pearson Education, Inc.

100) According to real business cycle (RBC) theory, a change in the quantity of money leads to A) a change in the price level and in real GDP. B) a change in the price level but no change in real GDP. C) a change in investment and real GDP. D) a change in the real wage rate and the money wage rate. Answer: B Topic: Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 101) According to which theory of the business cycle do changes in the quantity of money never play a role in helping to explain fluctuations in real variables? A) Keynesian B) monetarist C) new Keynesian D) real business cycle Answer: D Topic: Real Business Cycle Theory Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 102) In real business cycle models, in order to increase real GDP after a negative technology shock, the government can I. increase the quantity of money. II. decrease the quantity of money. A) only I B) only II C) both I and II D) neither I nor II Answer: D Topic: Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 103) Critics of the real business cycle model argue that A) investment spending is strongly related to the real interest rate. B) labor supply is only weakly related to the real interest rate. C) investment spending is only weakly related to the real interest rate. D) labor supply is very strongly related to the real interest rate. Answer: B Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 97 Copyright © 2014 Pearson Education, Inc.

104) Which of the following is NOT one of the criticisms of real business cycle theory? A) The money wage rate is sticky in the short run. B) Inter-temporal substitution is too weak. C) Productivity fluctuations are the result of the business cycle, not the cause of business cycles. D) The theory is built on weak microeconomic foundations. Answer: D Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 105) Critics of the real business cycle theory claim that A) both real and nominal variables change during the business cycle. B) the intertemporal substitution effect is too weak to account for changes in labor supply. C) changes in technology cannot cause economic growth. D) Both answers B and C are correct. Answer: B Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 106) Suppose that an economist finds that in most recessions, which are times when employment is low, that real interest rates are extremely high. This finding would pose the biggest problem for the A) new classical theory of the business cycle. B) real business cycle theory. C) new Keynesian theory of the business cycle. D) Keynesian theory of the business cycle. Answer: B Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 107) A criticism of the real business cycle (RBC) theory is that A) the money wage rate is flexible. B) potential GDP does not vary with changes in the quantity of money. C) productivity fluctuations might be caused by the business cycle. D) All of the above answers are correct. Answer: C Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

108) Which of the following is a criticism of real business cycle theory? A) Real business cycle theory fails to explain the phenomenon of economic growth. B) Real business cycle theory assumes that money wage rates are sticky. C) Real business cycle theory believes that productivity changes are caused by technology changes when in fact they are caused by changes in aggregate demand. D) None of the above are criticisms of real business cycle theory. Answer: C Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 109) Which of the following theories is criticized for assuming the money wage rate is not sticky? A) monetarist cycle theory B) real business cycle theory C) Keynesian cycle theory D) new Keynesian cycle theory Answer: B Topic: Criticisms of Real Business Cycle Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 110) Which of the following is the factor the creates business cycles in the real business cycle theory? A) an unexpected change in aggregate demand B) a change by the Fed in the growth rate of the quantity of money C) a change in expectations about future sales and profits D) a change in the growth rate of productivity Answer: D Topic: Study Guide Question, Real Business Cycle Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 111) By itself, an increase in aggregate demand increases GDP by the least amount in the ________. A) Keynesian theory B) monetarist theory C) new Keynesian theory D) real business cycle theory Answer: D Topic: Study Guide Question, Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 99 Copyright © 2014 Pearson Education, Inc.

112) Which of the following is the factor that leads to business cycles in the Keynesian business cycle theory? A) an unexpected change in aggregate demand B) a change by the Fed in the growth rate of the quantity of money C) a change in business confidence D) a change in the growth rate of productivity Answer: C Topic: Study Guide Question, Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 113) Which of the following is the factor that leads to business cycles in the monetarist business cycle theory? A) an unexpected change in aggregate demand B) a change by the Fed in the growth rate of the quantity of money C) a change in business confidence D) a change in the growth rate of productivity Answer: B Topic: Study Guide Question, Monetarist Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 114) Which of the following is the factor that leads to business cycles in the new classical business cycle theory? A) an unexpected change in aggregate demand B) a change by the Fed in the growth rate of the quantity of money C) a change in business confidence D) a change in the growth rate of productivity Answer: A Topic: Study Guide Question, New Classical Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4 News Based Questions 1) The data below show data for Germany including real GDP (in billions of euros) and the price level.

2002 2003 2004 2005 2006 2007

Real GDP 2088 2083 2105 2121 2182 2237

Price Level 102.6 103.6 106 108.2 109.7 109.5

In which of the following year(s) did Germany experience inflation? A) 2003, 2004, 2005 and 2006 B) 2006 and 2007 C) 2007 D) 2002, 2005 and 2006 only Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2) "UK Inflation Surges to 16-year High" According to the story, "High inflation in July will also lead to ... "further rises next January ..." Economists also noted that inflation may get worse because the current data did not yet include "announced rises in gas and electricity prices." www.ft.com, 8/12/2008 The story reflects the concept of A) cost-push inflation. B) the short-run Phillips curve. C) demand-pull inflation. D) the long-run Phillips curve. Answer: A Topic: Cost-Push Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

3) "Inflation Gives Saudis Food for Thought" "My boss sent me back to return the milk – it's too expensive," said the Pakistani driver for a middle-class Saudi family at the checkout counter of the Al-Othaim supermarket. ... Saudi Arabia is enjoying an unprecedented economic boom ...as sectors [have] increased activity to meet the big internal demand." www.ft.com, 1/18/2008 The type of inflation described in the story A) begins with stagflation. B) starts with an increase in aggregate demand. C) is the result of money wage rate spiral. D) starts with a decrease in aggregate demand. Answer: B Topic: Demand-Pull Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Communication 4) "Inflation Gives Saudis Food for Thought" "My boss sent me back to return the milk – it's too expensive," said the Pakistani driver for a middle-class Saudi family at the checkout counter of the Al-Othaim supermarket. ... Saudi Arabia is enjoying an unprecedented economic boom ...as sectors [have] increased activity to meet the big internal demand." www.ft.com, 1/18/2008 The story describes A) cost-push inflation. B) demand-pull inflation. C) a rightward shift in the short-run Phillips curve. D) stagflation. Answer: B Topic: Demand-Pull Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Communication

5) "Shoe Industry under Pressure Amid Rising Costs " Rising costs have forced about 15 per cent of shoe manufacturers in a major south China industrial centre to shut down or relocate in the past year... [the firms have] identified rising wages as a key factor behind the closures and relocations from Dongguan...The problems in the footwear industry reflect broader issues affecting manufacturers across China's Pearl River Delta..." www.ft.com, 2/26/2008 As the same pressures affect other industries across China, we expect to see A) demand-pull inflation. B) a combination of cost-push and demand-pull inflation. C) cost-push inflation. D) a downward movement along the short-run Phillips curve. Answer: C Topic: Cost-Push Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 6) "Shoe Industry under Pressure Amid Rising Costs" Rising costs have forced about 15 per cent of shoe manufacturers in a major south China industrial centre to shut down or relocate in the past year... [the firms have] identified rising wages as a key factor behind the closures and relocations from Dongguan...The problems in the footwear industry reflect broader issues affecting manufacturers across China's Pearl River Delta..." www.ft.com, 2/26/2008 Using an AS/AD framework to describe the events in the story, there would be a A) leftward shift in the AD curve. B) leftward shift in the SAS curve. C) rightward shift in the AD curve. D) rightward shift in the SAS curve. Answer: B Topic: Cost-Push Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

7) "All for One, but None for All" In an article regarding how Great Britain and France are addressing the economic crisis in 2008, Britain's prime minister "is eager to encourage consumer spending" while France's president "wants to boost investment in both the private and public sectors." Both leaders are concerned because "hardly a day goes by without some manufacturing company announcing painful restructuring, plant closures or temporary lay-offs." www.ft.com, 11/24/2008 If the governments can increase consumption or investment while holding the expected inflation constant, there would be A) a rightward shift of the long-run Phillips curve. B) a movement down along the short-run Phillips curve C) a movement up along the short-run Phillips curve. D) a leftward shift of the AD curve. Answer: C Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 8) "All for One, but None for All" In an article regarding how Great Britain and France are addressing the economic crisis in 2008, Britain's prime minister "is eager to encourage consumer spending" while France's president "wants to boost investment in both the private and public sectors." Both leaders are concerned because "hardly a day goes by without some manufacturing company announcing painful restructuring, plant closures or temporary lay-offs." www.ft.com, 11/24/2008 If consumption and investment are increased by the governments' policies, we would expect ________ and a ________ the short-run Phillips curve. A) increase in aggregate demand; rightward shift of B) increase in aggregate demand; movement up along C) movement up along the AD curve; rightward shift of D) movement down along the AD curve; movement down along Answer: B Topic: Inflation and Unemployment: The Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

9) In a speech to Asia Pacific Economic Cooperation summit in Peru in November 2008, President Hu of China commented on his country's $586 billion fiscal stimulus plan by saying, "Instead of relying mainly on investment and export we will adopt a coordinated approach that combines consumption, investment and export to boost the economy. And instead of relying heavily on higher consumption of material resources we will achieve development by making scientific and technological progress." If his country's plan works and the expected inflation rate does not change, there will be a A) movement up along the short-run Phillips curve. B) movement down along the short-run Phillips curve. C) rightward shift of the long-run Phillips curve. D) leftward shift of the long-run Phillips curve. Answer: A Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 10) In late 2008, Great Britain's inflation rate fell from 5.2 percent to 4.5 percent while unemployment was increased from 5.4 percent to 6 percent. These changes would be shown as a A) leftward shift of the long-run Phillips curve. B) movement up along the short-run Phillips curve. C) movement down the short-run Phillips curve. D) rightward shift of the long-run Phillips curve. Answer: C Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 11) As world economies recover from the financial crisis in 2008 and 2009, the U.S. economy returns to full employment and expected inflation equals actual inflation, A) there will be a movement back to the long-run Phillips curve. B) the long-run Phillips curve will shift leftward. C) there will be a movement upward along the short-run Phillips curve. D) there will be a movement downward along the short-run Phillips curve. Answer: A Topic: Inflation and Unemployment: The Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

12) A story from www.ft.com (1/31/2005) describing Ireland's transformation to a prosperous economy noted that "Ireland's story is unique: a small, English-speaking, non-industrialized country on the edge of Europe was able to secure structural funds from the EU, cut taxes, deregulate faster than its neighbours and attract lots of foreign companies in the process." If the natural rate of unemployment in Ireland decreased as a result of these policies, then ________ would shift ________. A) the long-run and short-run Phillips curves; rightward B) the long-run and short-run Phillips curves; leftward C) only the long-run Phillips curve; leftward D) only the short-run Phillips curve; rightward Answer: B Topic: The Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 13) Over the last several years, the money supply in Indonesia as increased by 9 percent in 2003 to 14 percent in 2005 and 23 percent in 2007. At the same time, real GDP has grown steadily at over 4 percent annually. These changes would be shown as I. rightward shifts of the AD curve II. a movement down along the short-run Phillips curve III. rightward shifts of the LAS curve A) I and III. B) I, II and III. C) II only. D) I only. Answer: A Topic: The Business Cycle Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

14) In a story from www.Forbes.com (5/30/2003), it was reported that the Chief Technology Officer of the U.S. plans for the country to spend $58.1 billion on technology that year. He was planning to buy technology from Cisco Systems, Oracle and Sun Microsystems in addition to other software makers. This story reports on technological change which is the stressed in the ________ of business cycles. A) real business cycle theory B) new Keynesian cycle theory C) new classical cycle theory D) monetarist cycle theory Answer: A Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 5 Essay Questions 1) 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: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2) 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 the short-run aggregate supply decreases and the SAS 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: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

3) 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: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 4) What was the U.S. experience with demand pull inflation during the 1960s and early 1970s? Answer: The United States experienced demand pull inflation notably during the late 1960s. Government spending increased enormously during the decade because of spending on the Vietnam War and on social programs related to the Great Society of Lyndon Johnson. These increases in spending were matched by increases in the quantity of money. The AD curve shifted rightward, driving prices higher. The decade had begun with inflation of 2 percent per year. By the end of the decade the rate was 5 percent and would reach 10 percent by 1975. Topic: Demand-Pull Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 5) 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: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 6) 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 the short-run aggregate supply, that is, a leftward shift of the SAS curve. The decrease in short-run 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 the short-run aggregate supply. The dilemma for the Fed is that the decreases in shortrun 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 costpush inflation might well occur. Topic: Cost-Push Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 108 Copyright © 2014 Pearson Education, Inc.

7) What is the Phillips curve? Discuss both the short-run and long-run Phillips curve. Answer: In general, a Phillips curve shows a relationship between the inflation rate and the unemployment rate. There is a short-run Phillips curve and a long-run Phillips curve. Moving along a short-run Phillips curve, expected inflation and the natural unemployment rate are constant. The short-run Phillips curve shows the relationship between the inflation rate and unemployment rate: a higher inflation rate results in a lower unemployment rate. The long-run Phillips curve shows the relationship between the inflation rate and unemployment rate when the inflation rate equals the expected inflation rate. Moving along the long-run Phillips curve there is no tradeoff between the inflation rate and the unemployment rate: a higher inflation rate has no effect on unemployment rate, which remains equal to the natural unemployment rate. Topic: Inflation and Unemployment: The Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Communication 8) "The short-run Phillips curve shows the relationship 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 relationship between the unemployment rate and the inflation rate. Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 9) Define and describe 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: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 10) "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: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

11) What does the short-run Phillips curve indicate about the relationship 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: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 12) "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: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 13) If the short-run Phillips curve shifts rightward, what happens to the relationship between inflation and unemployment? If the short-run Phillips curve shifts leftward, what happens to the relationship 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: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

14) "As the economy moves upward along its short-run 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 short-run aggregate supply curve, the price level rises so that there is inflation. And as the economy moves upward along its short-run aggregate supply curve, real GDP increases so that the unemployment rate decreases. So, moving upward along the short-run 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: Short-Run Phillips Curve & Short-Run Aggregate Supply Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 15) Discuss the relationship between the short-run aggregate supply curve and the short-run Phillips curve. Answer: The short-run Phillips curve and the short-run 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: Short-Run Phillips Curve & Short-Run Aggregate Supply Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 16) Explain how the expected inflation rate affects the short-run Phillips curve. Be sure to mention the role played by the money wage rate. Answer: When the expected inflation rate falls, the short-run Phillips curve shifts downward and when the expected inflation rate rises, the short-run Phillips curve shifts upward. To see why the expected inflation rate affects the short-run Phillips curve, the key is that the expected inflation rate affects the money wage rate. Suppose the expected inflation rate increases. As a result, labor contracts will now specify higher money wage rates in the present and in the future. In turn, the higher the money wage rates, the more the aggregate supply decreases. And, the more the aggregate supply decreases, the lower the level of employment and the higher the level of unemployment. Therefore for a given price level and inflation rate, an increase in the expected inflation rate increases the unemployment rate, which means that the short-run Phillips curve shifts higher. Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

17) "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: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 18) "The long-run Phillips curve is vertical at the expected inflation rate." 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: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 19) 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: The Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 20) 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: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

21) 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: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 22) 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: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 23) 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, both Phillips curves shift rightward; if the natural unemployment rate decreases, both Phillips curves shift leftward. Topic: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

24) 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: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 25) What is the factor that leads to business cycles in the Keynesian cycle theory? Answer: The impulse in the Keynesian theory is changes in firms' expectations about future sales and profits, which changes investment. Keynes referred to these expectations as "animal spirits." Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 26) What is the factor that leads to business cycles in the monetarist cycle theory? Answer: The factor leading to business cycles in the monetarist theory is changes in the growth rate of the quantity of money. Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 27) Compare and contrast the Keynesian and Monetarist business cycle theories. Answer: Both theories are centered about changes in aggregate demand as the central cause of the business cycle. Keynesian's use the concept of 'animal spirits' and the inability to forecast the future as the factor that leads to changes in investment. Monetarists assert that changes in the growth rate of the quantity of money is the factor that leads to business cycles. As for the adjustment following the initial shock of a change in the level of investment, both theories envision a multiplier effect. This effect causes a greater change in aggregate demand (and hence real GDP) than would occur strictly as a result of the initial change in real GDP. Both theories also believe that sticky wages limit the ability of the money wage rate to adjust to changes in aggregate demand. Topic: Keynesian and Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

28) What is the factor that leads to business cycles in the new classical cycle theory? Answer: The factor leading to business cycles in the new classical theory is unexpected changes in aggregate demand. Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 29) What is the factor that leads to business cycles in the new Keynesian cycle theory? Answer: The major factor in the new Keynesian cycle theory is unexpected changes in aggregate demand, but expected changes in aggregate demand also play a role in creating business cycles. Topic: New Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 30) What is the impulse in the real business cycle theory of the business cycle? Answer: The impulse in the real business cycle theory is technological changes that affect the growth rate of productivity. Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 31) What is the impulse that leads to business cycle in the real business cycle, RBC, theory? Answer: The real business cycle theory focuses on changes in the growth rate of productivity as the main source of economic fluctuations. Furthermore, the RBC theory views these changes as random and mainly as a result of changes in the rate of technological change. It asserts that most of the time technological change is steady, allowing for productivity to grow at a moderate pace. Occasionally productivity growth speeds up or slows down. If it speeds up, an expansion can be triggered while if it slows down a recession can result. Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

32) What is the intertemporal substitution effect and what role does it play in the real business cycle model? Answer: The intertemporal substitution effect is the idea that people choose when they will work by comparing the real wage rate they receive this year to the real wage rate next year, taking into account the real interest rate. Basically, employees compare how much they would have earned if they worked this year (and received the real wage rate) and then saved this amount (and thereby increased the amount by the real interest rate) to the real interest rate they would earn by working next year. This effect plays a key role in the real business cycle theory because it means that the supply of labor changes when the real interest rate changes. For instance, as the economy heads into a recession with investment demand decreasing, the decrease in investment demand lowers the real interest rate, so the intertemporal substitution effect decreases the supply of labor and hence employment. As a result, potential GDP decreases. Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 33) What are criticisms of the real business cycle theory? Answer: Four criticisms of the real business cycle theory are frequently made. First is the criticism that money wage rates are sticky, whereas the real business cycle theory assumes they are flexible. Second is the assertion that intertemporal substitution is too weak to account for large fluctuations in employment. Third is the criticism that technology shocks are implausible as an impulse that causes a business cycle. Fourth is the comment is that productivity shocks, as measured, are correlated with factors that change aggregate demand and so are the result of the business cycle not a cause of the business cycle. Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 34) How do defenders of the real business cycle theory, (RBC theory) respond to critics of the theory? Answer: The defenders of the real business cycle theory state that the theory works because it accurately describes the real-life experiences of both growth and the cyclical nature of growth. The theory is also consistent with much microeconomic evidence about labor supply, labor demand and investment demand decisions. They believe that although the quantity of money is correlated with real GDP, real GDP changes cause the changes in the quantity of money. Lastly, RBC theory proponents assert that the theory is important because it points out that business cycles might be a normal state of affairs, which suggests that government attempts to dampen them are futile. Topic: Defenses of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

6 Numeric and Graphing Questions

1) Suppose the natural unemployment rate is 4 percent and the expected inflation rate is 6 percent. In the above figure, 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: The Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 117 Copyright © 2014 Pearson Education, Inc.

2) In the above figure, what factor might have lead to 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: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

3) In the figure above, 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: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 119 Copyright © 2014 Pearson Education, Inc.

7 True or False 1) Inflation describes the event of increasing output and rising prices. Answer: FALSE Topic: Inflation and the Price Level Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2) A one-time increase in aggregate demand creates inflation. Answer: FALSE Topic: Inflation and the Price Level Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 3) Increases in the quantity of money can create demand-pull inflation. Answer: TRUE Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 4) For a persistent demand-pull inflation to occur, government expenditure must persistently increase. Answer: FALSE Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 5) The early 1990s were the last period of substantial demand-pull inflation in the U.S. Answer: FALSE Topic: Demand-Pull Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 6) Increases in government expenditure can create cost-push inflation. Answer: FALSE Topic: Cost-Push Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

7) Increases in the prices of raw materials can create cost-push inflation. Answer: TRUE Topic: Cost-Push Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 8) For a persistent cost-push inflation to occur, the Fed must persistently increase the quantity of money. Answer: TRUE Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 9) Stagflation occurs when the SAS curve shifts leftward. Answer: TRUE Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 10) The Phillips curve describes the relationship between real GDP and inflation. Answer: FALSE Topic: Inflation and Unemployment: The Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 11) The short-run Phillips curve is vertical at the natural unemployment rate. Answer: FALSE Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 12) An increase in the expected inflation rate leads to a movement upward along the short-run Phillips curve. Answer: FALSE Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

13) The long-run Phillips curve slopes downward. Answer: FALSE Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 14) The long-run Phillips curve is vertical at the natural unemployment rate. Answer: TRUE Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 15) The short-run Phillips curve intersects the long-run Phillips curve at the actual inflation rate. Answer: FALSE Topic: The Short-Run Phillips Curve and the Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 16) The short-run Phillips curve intersects the long-run Phillips curve at the expected inflation rate. Answer: TRUE Topic: The Short-Run Phillips Curve and the Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 17) An increase in the natural unemployment rate shifts both the long-run Philips curve and the short-run Phillips curve rightward. Answer: TRUE Topic: The Short-Run Phillips Curve and the Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 18) Monetarists believe in changes in animal spirits are the factor that leads to business cycles. Answer: FALSE Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

19) The monetarist theory of the business cycle views fluctuations in the growth rate of the quantity of money as the main source of economic fluctuations. Answer: TRUE Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 20) The new classical cycle theory views anticipated fluctuations in aggregate demand as the main source of business cycle economic fluctuations. Answer: FALSE Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 21) The new Keynesian cycle theory views only anticipated changes in aggregate demand as the source of business cycle economic fluctuations. Answer: FALSE Topic: New Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 22) The real business cycle theory views fluctuations in the quantity of money as the main source of business cycles. Answer: FALSE Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 23) The real business cycle theory views fluctuations in productivity as the main source of business cycles. Answer: TRUE Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 24) The intertemporal substitution effect is the factor that creates business cycles in the Keynesian theory of the business cycle. Answer: FALSE Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 123 Copyright © 2014 Pearson Education, Inc.

25) According to the real business cycle theory, a decrease in the real interest rate today increases current labor supply. Answer: FALSE Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

8 Extended Problems

1) The figure above shows the initial aggregate demand curve, AD0, the initial short-run aggregate supply curve, SAS0, and the long-run aggregate supply curve, LAS. The points in the figure show possible combinations of real GDP and the price level at which the economy of Atlantia is in macroeconomic equilibrium. The economy is initially at point A. Then, the government increases its expenditure on goods and services. Draw the new aggregate demand and short-run aggregate supply curves in the figure to show the effects of this event on Atlantia's real GDP and price level. a) What happens to Atlantia's potential GDP? b) In the short run, what happens to aggregate supply and aggregate demand? c) What are the new short-run equilibrium real GDP and price level? d) In the long run, what happens to the short-run aggregate supply and aggregate demand? e) What are the new long-run equilibrium real GDP and price level? Answer: a) Atlantia's potential GDP is not affected. Potential GDP depends on the economy's factors of production and available technology, not on aggregate spending.

b) See the figure above. The increase in government expenditure increases aggregate demand. The aggregate demand curve shifts from AD0 to AD1. Because there is no change in potential GDP and no change in the money wage rate, short run aggregate supply is not affected. The short-run aggregate supply curve remains at SAS0. c) In the short run the economy is at point B, where real GDP is $400 million and the price level is 105. d) Because at point B real GDP is above potential GDP, unemployment is less than the natural rate so the tight conditions in the labor market means that the money wage rate begins to rise. As it does, short-run aggregate supply decreases. The short-run aggregate supply curve shifts from SAS0 to SAS1. Because nothing further affects aggregate demand, the aggregate demand curve remains at AD1. e) In the long run the economy is at point D, where real GDP is $300 million and the price level is 115. Topic: Demand-Pull Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

2) The figure above shows the initial aggregate demand curve, AD0, the initial short-run aggregate supply curve, SAS0, and the long-run aggregate supply curve, LAS. The points in the figure show possible combinations of real GDP and the price level at which the economy of Atlantia is in macroeconomic equilibrium. The economy is initially at point A. Atlantia's Central Bank then increases the quantity of money year after year. Draw the necessary curves in the figure to show the effects of this on Atlantia's real GDP and price level. a) What happens to Atlantia's potential GDP? b) In the short run, what happens to aggregate supply and aggregate demand? c) What are the new short-run equilibrium real GDP and price level? d) In the long run, what happens to aggregate supply and aggregate demand? e) In the long run, what process is unfolding? Answer: a) Atlantia's potential GDP is not affected. Potential GDP depends on the economy's factors of production and available technology, not on monetary factors.

b) See the figure above. The increase in the quantity of money lowers the interest rate and increases aggregate demand. The aggregate demand curve shifts rightward from AD0 to AD1. Because there is no change in potential GDP and no change in the money wage rate, the shortrun aggregate supply is not affected. The short-run aggregate supply curve remains at SAS0. c) In the short run the economy is at point B, where real GDP is $400 million and the price level is 105.

d) Because at point B real GDP exceeds potential GDP, unemployment is less than the natural rate so the tight conditions in the labor market means that the money wage rate begins to rise. As it does, short-run aggregate supply decreases. The short-run aggregate supply curve shifts from SAS0 to SAS1, bringing the economy to point D. But the Central Bank increases the quantity of money again, and aggregate demand continues to increase. The aggregate demand curve shifts rightward to AD2. The economy moves to point G, so that the price level rises still more to 120 and real GDP again exceeds potential GDP at $400 million. The money wage rate rises once again, further decreasing short-run aggregate supply. The short-run aggregate supply curve shifts from SAS1 to SAS2, bringing the economy to point F. As the quantity of money continues to grow, aggregate demand continues to increase and short-run aggregate supply continues to decrease. e) In the long run, the price level rises continuously as the economy moves from point A to point B to point D to point G to point F and so on. An ongoing demand-pull inflation process is the result. Topic: Demand-Pull Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

3) The figure above shows the initial aggregate demand curve, AD0, the initial short-run aggregate supply curve, SAS0, and the long-run aggregate supply curve, LAS. The points in the figure show possible combinations of real GDP and the price level at which the economy of Atlantia is in macroeconomic equilibrium. The economy is initially at point A. Then, Atlantia's oil producers form a price-fixing organization and increase the price of oil. Suppose that potential GDP does not change and that Atlantia's Central Bank takes no action. Draw the new aggregate demand and short-run aggregate supply curves in the figure to show the effects of this event on Atlantia's real GDP and price level. a) What happens to aggregate supply and aggregate demand? b) What are the new equilibrium real GDP and price level? c) Will the rise in the price of oil lead to inflation in Atlantia? Why or why not? Answer:

a) See the figure above. The increase in the price of oil raises the cost of production and decreases short-run aggregate supply. The short-run aggregate supply curve shifts leftward from SAS0 to SAS1. Aggregate demand is not affected, so the aggregate demand curve remains at AD0. b) In the short run the economy moves to point C, where real GDP is $200 million and the price level is 110. c) The rise in the price of oil results in a one-time rise in the price level, but not ongoing inflation. A one-time rise in the price level can only be converted into inflation if it is accompanied by growth in the quantity of money. Topic: Cost-Push Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

4) The figure above shows the initial aggregate demand curve, AD0, the initial short-run aggregate supply curve, SAS0, and the long-run aggregate supply curve, LAS. The points in the figure show possible combinations of real GDP and the price level at which the economy of Atlantia is in macroeconomic equilibrium. The economy is initially at point A. Then, Atlantia's oil producers form a price-fixing organization and increase the price of oil. Suppose that potential GDP does not change and that Atlantia's Central Bank responds by increasing the quantity of money. Draw necessary curves in the figure to show the effects of this on Atlantia's real GDP and price level. a) In the short run, what happens to aggregate supply and aggregate demand? b) What are the new short-run equilibrium real GDP and price level? c) In the long run, if Atlantia's continue to hike the price of oil and the Central Bank continues to increase the quantity of money, what happens to aggregate supply and aggregate demand? d) If Atlantia's oil producers continue to hike the price of oil and Atlantia's Central Bank responds by increasing the quantity of money, what process unfolds? Answer:

a) See the figure above. The increased price of oil raises the cost of production and decreases short-run aggregate supply. The short-run aggregate supply curve shifts from SAS0 to SAS1. As the Central Bank increases the quantity of money, the interest rate falls, and aggregate demand increases. The aggregate demand curve rightward shifts from AD0 to AD1. b) In the short run, the economy moves to point D, where real GDP is $300 million and the price level is 115. c) As the oil producers respond to the higher price level by raising the price of oil, short-run aggregate supply decreases again and the short-run aggregate supply curve shifts leftward again, from SAS1 to SAS2. As the Central Bank increases the quantity of money again, aggregate demand increases once more and the aggregate demand curve shifts rightward from AD1 to AD2. The economy moves to point F, where the price level is even higher. This invites another oil price hike that will call forth yet a further increase in the quantity of money. So short-run aggregate supply continues to decrease and aggregate demand continues to increase. 130 Copyright © 2014 Pearson Education, Inc.

d) If Atlantia's oil producers continue to hike the price of oil and Atlantia's central bank continues to increase the quantity of money, a cost-push inflation process unfolds. The price level rises continuously as the economy moves from point A to point C to point D to point H to point F and so on. Topic: Cost-Push Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 13 Fiscal Policy 1 The Federal Budget 1) Prior to the Great Depression, the purpose of the federal budget was to ________. A) stabilize the economy B) finance the activities of the government C) maintain low interest rates D) decrease unemployment Answer: B Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) The use of the U.S. federal budget to help stabilize the economy grew in reaction to the ________ and is known as ________. A) stagflation of the 1970s; fiscal policy B) Great Depression of the 1930s; fiscal policy C) stagflation of the 1970s; government policy D) Great Depression of the 1930s; monetary policy Answer: B Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3) Fiscal policy includes A) only decisions related to government expenditure on goods and services. B) only decisions related to government expenditure on goods and services and the value of transfer payments. C) only decisions related to the value of transfer payments and tax revenue. D) decisions related to government expenditure on goods and services, the value of transfer payments, and tax revenue. Answer: D Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) Fiscal policy involves A) the use of interest rates to influence the level of GDP. B) the use of tax and spending policies by the government. C) decreasing the role of the Federal Reserve in the everyday life of the economy. D) the use of tax and money policies by government to influence the level of interest rates. Answer: B Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 5) Fiscal policy A) is enacted by the Federal Reserve. B) involves changing interest rates. C) involves changing taxes and government spending. D) involves changing the money supply. Answer: C Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6) Fiscal policy attempts to achieve all of the following objectives EXCEPT ________. A) a stable money supply B) price level stability C) full employment D) sustained economic growth Answer: A Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) Changes in which of the following is included as part of fiscal policy? A) the quantity of money B) the level of interest rates C) monetary policy D) tax rates Answer: D Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

8) All of the following are part of fiscal policy EXCEPT A) setting tax rates. B) setting government spending. C) choosing the size of the government deficit. D) controlling the money supply. Answer: D Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 9) The budget process includes the A) President proposing and Congress passing the budget. B) President passing the budget as proposed by Congress. C) House of Representatives proposing and the Senate passing the budget. D) Senate proposing and the House of Representatives passing the budget. Answer: A Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 10) Which branches of the government play a role in the enacting the federal budget? I. the President. II. the House of Representatives. III. the Senate. A) I and II B) II and III C) I, II and III D) I Answer: C Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 11) Which of the following government bodies does NOT participate directly in formulating U.S. fiscal policy? A) the President and his cabinet B) the Federal Reserve Board C) the House of Representatives D) the Senate Answer: B Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3 Copyright © 2014 Pearson Education, Inc.

12) The purpose of the Employment Act of 1946 was to A) establish goals for the federal government that would promote maximum employment, purchasing power, and production. B) establish an unemployment compensation system. C) set up the Federal Reserve System. D) set targets for the unemployment rate to be achieved by the president. Answer: A Topic: The Employment Act of 1946 Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 13) The Employment Act of 1946 made it the responsibility of the federal government to A) balance its budget because that policy would create the maximum level of employment. B) promote maximum employment. C) provide full employment and a stable balance of payments. D) improve the distribution of income. Answer: B Topic: The Employment Act of 1946 Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 14) The Employment Act of 1946 states that it is the responsibility of the federal government to A) promote full employment. B) promote economic equality. C) maintain the inflation rate at below 10 percent per year. D) All of the above answers are correct. Answer: A Topic: The Employment Act of 1946 Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 15) The Council of Economic Advisers A) proposes the president's budget each year. B) approves fiscal policy changes. C) helps the president and the public stay informed about the state of the economy. D) helps the president make changes in monetary policy. Answer: C Topic: Council of Economic Advisers Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

16) The Council of Economic Advisors advises the A) President. B) Congress. C) Senate. D) House of Representatives. Answer: A Topic: Council of Economic Advisers Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 17) The largest source of government revenues is ________. A) personal income taxes B) indirect taxes C) corporate income taxes D) social security taxes Answer: A Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 18) What is the largest source of revenue for the federal government? A) Social Security taxes B) corporate income taxes C) personal income taxes D) sales tax Answer: C Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 19) Which of the following is the largest source of federal government revenue? A) corporate income taxes B) Social Security taxes C) personal income taxes D) borrowing Answer: C Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

20) The government receives tax revenues from several sources. Rank the following sources from largest to the smallest. I. corporate income taxes II. personal income taxes III. Social Security taxes A) I, II, III B) II, III, I C) I, III, II D) III, II, I Answer: B Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 21) Which of the following is NOT a revenue source for the Federal government? A) personal income taxes B) indirect taxes C) interest on corporate bond holdings D) social security taxes Answer: C Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 22) The largest item of government outlays is ________. A) debt interest B) transfer payments C) expenditures on goods and services D) debt reduction Answer: B Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 23) Expenditures such as Social Security benefits, farm subsidies and grants are considered A) expenditures on goods and services B) transfer payments C) debt reduction D) debt interest Answer: B Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6 Copyright © 2014 Pearson Education, Inc.

24) Social Security benefits and expenditures on Medicare and Medicaid are classified as A) debt interest. B) purchases of goods and services. C) production of goods and services. D) transfer payments. Answer: D Topic: Government Expenditures Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 25) Rank the following federal government outlays from the largest to the smallest. I. debt interest II. transfer payments III. expenditure on goods and services A) I, II, III B) III, II, I C) III, I, II D) II, III, I Answer: D Topic: Government Expenditures Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 26) Which of the following is NOT a government outlay? A) transfer payments B) expenditure on goods and services C) debt interest on the government's debt D) purchases of foreign bonds Answer: D Topic: Government Expenditures Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 27) All of the following are government outlays EXCEPT A) interest on the government's debt. B) transfer payments. C) purchases of corporate bonds. D) expenditure on goods and services. Answer: C Topic: Government Expenditures Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7 Copyright © 2014 Pearson Education, Inc.

28) Federal government outlays as a percentage of GDP are approximately A) 10 percent. B) 25 percent. C) 50 percent. D) 66 percent. Answer: B Topic: Government Expenditures Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking Component Personal income taxes Social security taxes Corporate income taxes Indirect taxes Transfer payments Expenditure on goods and services Debt interest

Dollars (billion) 500 400 150 75 1,200 225 75

29) The table above has data for a country's government budget. The country has government revenues of ________ billion. A) $900 B) $1125 C) $725 D) $1700 Answer: B Topic: Tax Revenues Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 30) The table above has data for a country's government budget. Government outlays for the economy equal ________ billion. A) $1200 B) $1275 C) $1500 D) $1425 Answer: C Topic: Government Expenditures Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 8 Copyright © 2014 Pearson Education, Inc.

31) The table above has data for a country's government budget. The data show the government is running a ________ billion. A) budget surplus of $300 B) budget deficit of $375 C) budget deficit of $550 D) budget surplus of $650 Answer: B Topic: Budget Surplus and Deficit Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 32) The largest source of revenue for the federal government is ________ and the largest outlay is for ________. A) corporate taxes; Social Security B) personal income taxes; Medicare C) personal income taxes; interest on national debt D) personal income taxes; transfer payments Answer: D Topic: Government Revenues and Expenditures Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 33) The government's budget deficit or surplus equals the A) change in outlays divided by change in revenue. B) average outlay divided by average revenue. C) change in revenue minus change in outlays. D) total tax revenue minus total government outlays. Answer: D Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 34) A budget surplus occurs when government A) outlays exceeds tax revenues. B) tax revenues exceeds outlays. C) tax revenues equals outlays. D) tax revenues equal social security expenditures. Answer: B Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

35) Whenever the federal government spends more than it receives in tax revenue, then by definition it A) runs a budget surplus. B) operates a balanced budget. C) runs a budget deficit. D) increases economic growth. Answer: C Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 36) The budget deficit A) is the total outstanding borrowing by the government. B) is the difference between government outlays and tax revenues. C) decreased during the Obama Administration. D) reached its peak in the year 2000. Answer: B Topic: Budget Surplus and Deficit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 37) A government incurs a budget deficit when A) taxes are greater than government outlays. B) taxes are less than government outlays. C) exports are greater than imports. D) exports are less than imports. Answer: B Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 38) In January 2013 certain tax rates increased, which were predicted to increase the federal government's tax revenue. An increase in tax revenue ________ the government's budget deficit and over time thereby ________ the amount of government debt. A) increases; decreases B) decreases; decreases C) decreases; increases D) increases; increases Answer: B Topic: Budget Surplus and Deficit Skill: Conceptual Status: New AACSB: Reflective Thinking 10 Copyright © 2014 Pearson Education, Inc.

39) If taxes exactly equaled government outlays the A) federal government debt would be zero. B) federal government debt would decrease. C) budget deficit would not change. D) budget deficit would be zero. Answer: D Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 40) If the federal government's tax revenues are greater than its outlays, then the federal budget has a A) deficit. B) surplus. C) transfer payment. D) balanced budget. Answer: B Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 41) By definition, a government budget deficit is the situation that occurs when the A) government outlays exceed what it receives in taxes. B) government miscalculated how much it will receive in taxes. C) government spends money on things which do not produce revenue, such as schools. D) economy goes into a recession. Answer: A Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 42) The U.S. government's budget A) must be balanced each year. B) has mostly been in surplus during the past 30 years. C) has mostly been in deficit during the past 30 years. D) has always been in deficit during the past 30 years. Answer: C Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

43) When tax revenues exceed outlays, the government has a ________, and when outlays exceed tax revenues, the government has a ________. A) budget surplus; budget debt B) budget deficit; budget surplus C) budget debt; budget surplus D) budget surplus; budget deficit Answer: D Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 44) A government that currently has a budget deficit can balance its budget by ________. A) increasing tax revenues by more than it increases outlays B) increasing both tax revenues and outlays by the same amount C) decreasing tax revenues by more than it decreases outlays D) decreasing tax revenues by more than it increases outlays Answer: A Topic: Budget Surplus and Deficit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 45) In 2013, the U.S. government budget had a deficit. By definition, then, A) tax revenues were less than government outlays. B) tax revenues were equal to government outlays. C) tax revenues were greater than government outlays. D) the government debt became negative. Answer: A Topic: Budget Surplus and Deficit Skill: Conceptual Status: Revised AACSB: Reflective Thinking 46) Suppose the only revenue taken in by the government is in the form of income tax, and the tax rate is 10 percent. If aggregate income is $800 billion, and government outlays are $100 billion then the government budget has A) a deficit of $20 billion. B) a surplus of $20 billion. C) neither a surplus nor a deficit. D) a deficit of $80 billion. Answer: A Topic: Budget Surplus and Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 12 Copyright © 2014 Pearson Education, Inc.

47) In 2013, the federal government of Happy Isle had tax revenues of $1 million, and spent $500,000 on transfer payments, $250,000 on goods and services and $300,000 on debt interest. In 2011, the government of Happy Isle had a ________. A) balanced budget B) budget deficit of $50,000 C) budget surplus of $50,000 D) budget deficit of $1,050,000 Answer: B Topic: Budget Surplus and Deficit Skill: Analytical Status: Revised AACSB: Analytical Skills 48) The federal government debt is equal to the A) obligations of benefits from federal taxes and expenditures. B) sum of all annual federal government outlays. C) sum of past budget deficits minus the sum of past budget surpluses. D) annual difference between federal government tax revenues and outlays. Answer: C Topic: Deficits and Debt Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 49) The sum of past budget deficits minus the sum of past budget surpluses refers to A) the national debt. B) the cyclically unbalanced budget. C) the structural national debt. D) the federal government net worth. Answer: A Topic: Deficits and Debt Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 50) If the government has a balanced budget, the total amount of government debt is A) increasing. B) decreasing. C) constant. D) zero. Answer: C Topic: Deficits and Debt Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

51) If the government runs a surplus, the total amount of government debt is A) increasing. B) decreasing. C) constant. D) zero. Answer: B Topic: Deficits and Debt Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 52) If the government runs a deficit, the total amount of government debt is A) increasing. B) decreasing. C) constant. D) zero. Answer: A Topic: Deficits and Debt Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 53) An increase in the government ________ reduces the government's ________. A) budget deficit; debt B) budget surplus; debt C) debt; budget deficit D) None of the above answers is correct. Answer: B Topic: Deficits and Debt Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 54) Suppose a country has been running a persistent government budget deficit. If the deficit is reduced, but remains positive, A) government debt will increase. B) government debt will decrease. C) the country will experience a budget surplus. D) interest payments on the debt immediately will decrease. Answer: A Topic: Deficits and Debt Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

55) If tax revenue equal $1.5 billion and government outlays equal $1.6 billion, then the A) government budget has a deficit of $0.1 billion. B) government budget has a surplus of $0.1 billion. C) government debt is equal to $0.1 billion. D) government debt declines by $0.1 billion. Answer: A Topic: Deficits and Debt Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 56) The gross public debt was approximately $6 trillion in 2002 and approximately $16 trillion in 2012. These numbers definitely indicate that in the 10 years between 2002 and 2012, A) the government had budget deficits that totaled about $10 trillion. B) the government had budget deficits of about $10 trillion per year. C) government outlays increased by about $1 trillion per year. D) government receipts decreased by about $1 trillion per year. Answer: A Topic: Deficits and Debt Skill: Conceptual Status: New AACSB: Analytical Skills 57) A country has been in existence for only two years. In the first year, tax revenues were $1.0 million and outlays were $1.5 million. In the second year, tax revenues were $1.5 million and outlays were $2.0 million. At the end of the second year, the total government debt was ________. A) $0.5 million B) $1 million C) $2.5 million D) $3.5 million Answer: B Topic: Deficits and Debt Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Year 1 2 3 4 5

Government Government tax revenues expenditures (billions of (billions of dollars) dollars) 240 240 250 245 260 255 300 320 325 340

58) What is the amount of the surplus or deficit incurred in year 1 by the government shown in the above table? A) $0 B) $25 billion deficit C) $25 billion surplus D) $240 billion surplus Answer: A Topic: Budget Surplus or Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 59) What is the amount of the surplus or deficit incurred in year 2 by the government shown in the above table? A) $0 B) $5 billion surplus C) $5 billion deficit D) $250 billion surplus Answer: B Topic: Budget Surplus or Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 60) What is the amount of the surplus or deficit incurred in year 3 by the government shown in the above table? A) $0 B) $5 billion surplus C) $5 billion deficit D) $260 billion surplus Answer: B Topic: Budget Surplus or Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 16 Copyright © 2014 Pearson Education, Inc.

61) What is the amount of the surplus or deficit incurred in year 4 by the government shown in the above table? A) $20 billion deficit B) $35 billion surplus C) $5 billion surplus D) $320 billion surplus Answer: A Topic: Budget Surplus or Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 62) What is the amount of the surplus or deficit incurred in year 5 by the government shown in the above table? A) $15 billion deficit B) $35 billion surplus C) $5 billion surplus D) $325 billion surplus Answer: A Topic: Budget Surplus or Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 63) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 1? A) $0 B) $25 billion C) $240 billion D) Not enough information is provided to answer the question. Answer: B Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 64) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 2? A) $245 billion B) $5 billion C) $250 billion D) $20 billion Answer: D Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 17 Copyright © 2014 Pearson Education, Inc.

65) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 3? A) $15 billion B) $5 billion C) $20 billion D) $260 billion Answer: A Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 66) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 4? A) -$20 billion (The government has net saving rather than debt.) B) $35 billion C) $5 billion D) $320 billion Answer: B Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 67) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 5? A) -$20 billion (The government has net saving rather than debt.) B) $35 billion C) $50 billion D) $325 billion Answer: C Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 68) The U.S. federal budget over the past 30 years has been A) in balance most years. B) in deficit most of the years. C) in surplus most of the years. D) in surplus about half the time and deficit the other half. Answer: B Topic: Federal Budget History Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 18 Copyright © 2014 Pearson Education, Inc.

69) Comparing the U.S. budget position for 2012 to the rest of the world, we see that as a percentage of GDP, the ________ than in most other countries. A) U.S. budget deficit is smaller B) U.S. budget deficit is larger C) U.S. budget surplus is smaller D) U.S. budget surplus is larger Answer: B Topic: Federal Budget History Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 70) If the government's outlays are $1.5 trillion and its tax revenues are $2.2 trillion, the government is running a budget A) surplus of $0.7 trillion. B) surplus of $3.7 trillion. C) deficit of $0.7 trillion. D) deficit of $3.7 trillion. Answer: A Topic: Study Guide Question, Budget Surplus and Deficit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

2 Supply-Side Effects of Fiscal Policy 1) 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. Answer: D Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) Once supply side effects are taken into account, tax cuts for labor income can change I. the supply of labor II. potential GDP. A) I only B) I and II C) II only D) Neither I nor II. Answer: B Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3) Taking account of the supply-side effects, a tax cut on labor income ________ employment and ________ potential GDP. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) If a tax cut increases people's labor supply, then A) tax cuts increase potential GDP. B) tax cuts decrease aggregate demand. C) tax cuts cannot affect aggregate demand. D) Both answers A and B are correct. Answer: A Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 5) The supply side effects of a change in taxes on labor income means that ________ in taxes on labor income shift the ________. A) an increase; labor supply curve rightward B) an increase; labor supply curve leftward C) a decrease; labor demand curve rightward D) a decrease; labor demand curve leftward Answer: B Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6) An increase in taxes on labor income ________ the labor supply curve and ________ the labor demand curve. A) shifts; does not shift B) shifts; shifts C) does not shift; does not shift D) does not shift; shifts Answer: A Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) 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 rises D) rightward; before-tax wage rate falls Answer: A Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 21 Copyright © 2014 Pearson Education, Inc.

8) An income tax ________ potential GDP by shifting the ________ curve ________. A) increases; labor demand; rightward B) decreases; labor demand; leftward C) increases; labor supply; rightward D) decreases; labor supply; leftward Answer: D Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 9) On January 1, 2013 the income tax rate for single taxpayers making more than $400,000 per year increased from 35 percent to 39.6 percent. This tax increase ________ potential GDP. A) increases B) does not change C) decreases D) None of the above answers are correct because the tax increase might increase, decrease, or not change potential GDP. Answer: C Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: New AACSB: Analytical Skills 10) The difference between the before-tax and after-tax rates is referred to as the A) tax plug. B) deadweight gain. C) tax wedge. D) taxation penalty. Answer: C Topic: Tax Wedge Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 11) In January 2013 the Social Security payroll tax increased by 2 percentage points. This increase ________ the U.S tax wedge. A) decreased B) did not change C) increased D) More information about the total amount of the tax is needed to determine the impact on the tax wedge. Answer: C Topic: Tax Wedge Skill: Conceptual Status: New AACSB: Reflective Thinking 22 Copyright © 2014 Pearson Education, Inc.

12) If we compare the United States to France, the U.S. tax wedge is ________ the French tax wedge. A) larger than B) equals to C) smaller than D) not comparable to Answer: C Topic: Tax Wedge Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 13) If we compare the United States to France, we see that potential GDP per person in France is ________ than that in the United States because the French tax wedge is ________ than the U.S. tax wedge. A) greater; larger B) greater; smaller C) less; larger D) less; smaller Answer: C Topic: Tax Wedge Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 14) An increase in taxes on interest income ________ supply of loanable funds curve and ________ the demand for loanable funds curve. A) shifts; does not shift B) does not shift; shifts C) does not shift; does not shift D) shifts; shifts Answer: A Topic: Fiscal Policy and Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

15) The supply side effects of a cut in tax rates include ________ in the supply of labor and ________ in the supply of loanable funds. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: A Topic: Fiscal Policy and Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 16) When interest income is taxed and the inflation rate rises, the tax revenue collected by the government A) increases. B) doesn't change. C) decreases. D) could either increase or decrease. Answer: A Topic: After-Tax Real Interest Rate Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 17) Suppose the tax rate on interest income is 50 percent, the real interest rate is 3 percent, and the inflation rate is 4 percent. In this case, the real after-tax interest rate is A) -0.5 percent. B) 3.5 percent. C) 3.0 percent. D) 4.0 percent. Answer: A Topic: After-Tax Real Interest Rate Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 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) 4.0 percent. D) 2.0 percent. Answer: D Topic: After-Tax Real Interest Rate Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 24 Copyright © 2014 Pearson Education, Inc.

19) The Laffer curve is the relationship between A) government purchases and potential GDP. B) tax rates and potential GDP. C) tax revenue and potential GDP. D) tax rates and tax revenue. Answer: D Topic: Laffer Curve Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 20) During the Reagan administration in the 1980s, tax rates were ________ and the budget deficit ________. A) raised; increased B) raised; decreased C) cut; increased D) cut; decreased Answer: C Topic: Laffer Curve Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 21) According to the Laffer curve, raising the tax rate A) always increases the amount of tax revenue. B) always decreases the amount of tax revenue. C) does not change the amount of tax revenue. D) might increase, decrease, or not change the amount of tax revenue. Answer: D Topic: Laffer Curve Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 22) The Laffer curve shows that increasing ________ increases ________ when ________ low. A) tax revenue; potential GDP; tax revenue is B) tax rates; tax revenue; tax rates are C) potential GDP; tax revenue; tax revenue is D) None of the above answers is correct. Answer: B Topic: Laffer Curve Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

23) A decrease in the income tax rate A) decreases potential GDP. B) increases the supply of labor. C) increases the tax wedge. D) decreases the demand for labor. Answer: B Topic: Study Guide Question, Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 24) An increase in the income tax rate ________ employment and ________ potential GDP. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Topic: Study Guide Question, Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 25) An increase in the tax on interest income ________ the supply of loanable funds and ________ the equilibrium investment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Topic: Study Guide Question, Supply Side Effects of Tax on Interest Income Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

3 Generational Effects of Fiscal Policy 1) The system that measures the lifetime tax burden and benefits of each generation is called A) actuarial genealogy. B) generational actuary. C) generational accounting. D) actuarial accounting. Answer: C Topic: Generational Accounting Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) Generational accounting does NOT investigate issues involving A) the budget deficit B) government obligations such as Social Security C) the ownership of corporate stock D) the burden of taxes Answer: C Topic: Generational Accounting Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3) The ________ the interest rate, the ________ the present value of a given future amount. A) higher; larger B) higher; smaller C) lower; lower D) None of the above answers is correct because the interest rate has nothing to do with the present value. Answer: C Topic: Present Value Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 4) If $1,000 is invested at 3 percent per year for 10 years the investment grows to $1,343.92. This means the present value $1,343.92 at an interest rate of 3 percent 10 years from now is A) 3 percent. B) $1,000. C) $343.92. D) $1,343.92. Answer: B Topic: Present Value Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 27 Copyright © 2014 Pearson Education, Inc.

5) The present value of the government's commitments to pay benefits minus the present value of its tax revenues is called A) calculated fiscal obligations. B) fiscal imbalance. C) fiscal balance. D) fiscal obligations. Answer: B Topic: Fiscal Imbalance Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6) The largest component of the fiscal imbalance is A) Social Security. B) Medicare. C) Defense spending. D) none of the above Answer: B Topic: Fiscal Imbalance Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) Splitting the fiscal imbalance between current and future generations is called A) genealogical accounting. B) actuarial accounting. C) generational imbalance. D) actuarial balance. Answer: C Topic: Fiscal Imbalance Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 8) Comparing the fiscal imbalance for the current generation versus future generations, it is the case that A) future generations pay a larger share of the fiscal imbalance. B) the current generation pays a larger share of the fiscal imbalance. C) each generation pays half of the fiscal imbalance. D) each generation pays all of its fiscal imbalance. Answer: A Topic: Fiscal Imbalance Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 28 Copyright © 2014 Pearson Education, Inc.

9) For the years 2011 and 2012, the Social Security payroll tax was reduced by 2 percentage points. This reduction ________ the fiscal imbalance. A) increased B) did not change C) decreased D) None of the above answers are correct because the impact on the fiscal imbalance depends on factors other than the Social Security tax. Answer: A Topic: Fiscal Imbalance Skill: Analytical Status: New AACSB: Reflective Thinking 10) Beginning in 2013, Americans will pay an additional Medicare tax of 0.9 percent on all wage income that exceeds $200,000. By increasing the amount the current generation pays for Medicare, this tax ________ the generational imbalance. A) increased B) did not change C) decreased D) None of the above answers are correct because the impact on the generational imbalance depends on factors other than the Medicare tax. Answer: A Topic: Fiscal Imbalance Skill: Analytical Status: New AACSB: Reflective Thinking 11) To eliminate the fiscal imbalance the government could A) lower benefits and lower tax revenues. B) increase benefits and increase tax revenues. C) lower benefits and increase tax revenues. D) increase benefits and lower tax revenues. Answer: C Topic: Fiscal Imbalance Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

12) In order for the United States to repay its international debt, the United States would need to A) have a current account deficit. B) cut taxes. C) have a surplus of imports over exports. D) have a surplus of exports over imports. Answer: D Topic: International Debt Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 13) In January 2013 the Chinese government held approximately $1 trillion U.S. government debt. The Chinese government accumulated such a large amount of U.S. government debt because for the past decade the United States A) government made substantial foreign aid available to the Chinese government. B) has grown more rapidly than has the Chinese economy. C) has exported more to China than it has imported from China. D) has imported more from China than it has exported to China. Answer: D Topic: International Debt Skill: Conceptual Status: New AACSB: Reflective Thinking 14) Generational accounting shows that the present value of the government's commitments to pay benefits are ________ the present value of its taxes. A) greater than B) less than C) equal to D) not comparable to Answer: A Topic: Study Guide Question, Fiscal Imbalance Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4 Fiscal Stimulus 1) Taxes and government expenditures that, without need for additional government action, change in response to changes in the level of economic activity are examples of A) discretionary fiscal variables. B) automatic fiscal policy. C) built-in monetary stabilizers. D) cyclically balanced budgets. Answer: B Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) One characteristic of automatic fiscal policy is that it A) requires no legislative action by Congress to be made effective. B) automatically produces surpluses during recessions and deficits during inflation. C) has no effect on unemployment. D) reduces the size of the federal government debt during times of recession. Answer: A Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3) A fiscal action that is triggered by the state of the economy is called A) the government expenditure multiplier. B) discretionary fiscal policy. C) automatic fiscal policy. D) generational fiscal policy. Answer: C Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 4) A discretionary fiscal policy is a fiscal policy that A) involves a change in government defense spending. B) is triggered by the state of the economy. C) requires action by the Congress. D) involves a change in corporate tax rates. Answer: C Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 31 Copyright © 2014 Pearson Education, Inc.

5) A fiscal action that is initiated by an act of Congress is called A) the government expenditure multiplier. B) discretionary fiscal policy. C) automatic fiscal policy. D) generational fiscal policy. Answer: B Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6) Deliberate changes in government expenditures and taxes to influence GDP A) are examples of automatic fiscal policy because the politicians automatically respond. B) are discretionary fiscal policy. C) are enacted by the Council of Economic Advisers. D) operate without time lags. Answer: B Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) The stimulus package passed by Congress in 2009 is an example of A) automatic fiscal policy B) discretionary fiscal policy C) monetary policy D) increased taxation Answer: B Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 8) The difference between automatic fiscal policy and discretionary fiscal policy is that A) Congress initiates automatic fiscal policy. B) the President has nothing to do with discretionary fiscal policy. C) Congress must pass laws implementing discretionary fiscal policy. D) the President initiates discretionary fiscal policy. Answer: C Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

9) When the economy is hit by spending fluctuations, the government can try to minimize the effects by A) changing government expenditures on goods. B) changing taxes. C) changing government expenditures on services. D) all of the above Answer: D Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 10) An example of a discretionary fiscal policy is when A) tax receipts fall as incomes fall. B) unemployment compensation payments rise with unemployment rates. C) food stamp payments rise when the economy is in a recession. D) Congress passes a law that raises personal marginal tax rates. Answer: D Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 11) An increase in the tax rates as a result of a new tax law passed by Congress is an example of ________. A) discretionary fiscal policy B) increasing the government debt C) increasing the government deficit D) needs-tested taxing change. Answer: A Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 12) The tax rebates passed by Congress in 2008 to help move the economy more rapidly toward potential GDP are an example of A) automatic fiscal policy. B) discretionary fiscal policy. C) non-needs spending. D) contractionary fiscal policy. Answer: B Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Revised AACSB: Reflective Thinking 33 Copyright © 2014 Pearson Education, Inc.

13) Unemployment insurance are payments made to unemployed workers. Typically workers are paid for no more than 26 weeks. In December 2012, the federal government passed legislation that would extend the payments to a maximum of 73 weeks. This extension is an example of A) automatic fiscal policy. B) discretionary fiscal policy. C) non-needs spending. D) contractionary fiscal policy. Answer: B Topic: Discretionary Fiscal Policy Skill: Conceptual Status: New AACSB: Reflective Thinking 14) Tax revenues A) are autonomous. B) are independent of real GDP. C) vary with real GDP. D) are fixed over time. Answer: C Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 15) A fall in income that results in a decrease in tax revenues is an example of ________. A) automatic fiscal policy B) needs-tested tax programs C) a recession D) discretionary fiscal policy Answer: A Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 16) When the economy grows, ________ increase because real GDP ________. A) tax revenues; decreases B) tax revenues; increases C) structural deficits; decreases D) recognition lags; increases Answer: B Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

17) Income taxes in the United States are part of automatic fiscal policy because A) tax revenues increase when income increases, thus offsetting some of the increase in aggregate demand. B) tax revenues decrease when income increases, intensifying the increase in aggregate demand. C) the President can increase tax rates whenever the President deems such a policy appropriate. D) tax rates can be adjusted by the Congress to counteract economic fluctuations. Answer: A Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 18) An example of automatic fiscal policy is when A) tax revenues decrease as real GDP decreases. B) Congress passes a law that raises tax rates. C) Congress decides to cut government expenditure. D) the president drafts a bill to reduce defense spending. Answer: A Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 19) Tax revenues ________ during recessions and ________ during expansions. A) decrease; decrease B) decrease; increase C) increase; expansions D) increase; increase Answer: B Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 20) Spending on programs that result in transfer payments that depend on the economic state of individuals and businesses is called ________. A) transfer spending B) welfare C) needs-tested spending D) business subsidies Answer: C Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

21) Needs-tested spending ________ during recessions and ________ during expansions. A) decreases; decreases B) decreases; increases C) increases; decreases D) increases; increases Answer: C Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 22) If the economy falls into a recession, which of the following responses constitutes the use of automatic fiscal policy? A) an income tax cut voted on by Congress and quickly signed by the President B) an existing system to make government payments to the growing ranks of unemployed workers C) a new program to fund local governments' hiring of 100,000 street sweepers within a year D) All of the above answers are correct. Answer: B Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 23) Automatic fiscal policy occurs A) because monetary policy is effective. B) because tax revenues and transfer payments fluctuate with real GDP. C) because government expenditures on goods and services fluctuate with real GDP. D) when the Congress makes changes to transfer payment programs. Answer: B Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 24) Automatic fiscal policy is at work if, as real GDP increases, ________. A) transfer payments decrease and interest rates decrease B) transfer payments increase and tax revenues decrease C) tax revenues increase and transfer payments decrease D) tax revenues decrease and interest rates increase Answer: C Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

25) Because of automatic fiscal policy, when real GDP decreases A) government expenditures decrease and tax revenues increase. B) government expenditures increase and tax revenues decrease. C) government expenditures equal tax revenues. D) the economy will automatically go to full employment. Answer: B Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 26) Government transfer payments ________ during expansions and ________ during recessions. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Topic: Budget Deficit Over the Business Cycle Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 27) During an expansion, tax revenues ________, while during a recession, tax revenues ________. A) decrease; increase B) increase; decrease C) remain stable; decrease D) fail to cover expenditures; fail to match transfer payments Answer: B Topic: Budget Deficit Over the Business Cycle Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 28) During an expansion, tax revenues ________ and government transfer payments ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: Budget Deficit Over the Business Cycle Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

29) The government budget deficit tends to decrease during the expansion phase of a business cycle because tax revenues ________ and government transfer payments ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: Budget Deficit Over the Business Cycle Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 30) The structural deficit or surplus is the A) difference between actual government outlays and actual government receipts. 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 potential GDP. D) actual government budget deficit or surplus minus expenditures for capital improvements. Answer: C Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 31) 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. Answer: C Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 32) The structural deficit is the deficit that occurs when A) real GDP departs from potential GDP. B) real GDP equals potential GDP. C) aggregate demand is greater than short-run aggregate supply. D) short-run aggregate supply is greater than aggregate demand. Answer: B Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

33) 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 potential GDP. C) is, by definition, equal to the negative of the cyclical deficit. D) is legally required to be positive. Answer: B Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 34) A structural deficit occurs when the government budget has a deficit A) even though real GDP is less than potential GDP. B) even though real GDP is greater than structural GDP. C) even though real GDP is equal to potential GDP. D) that is nominal, as opposed to a real budget deficit. Answer: C Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 35) The structural deficit is that deficit that would exist A) with the taxes and outlays that would occur if the economy was at the equilibrium level of real GDP. B) with the taxes and outlays that would occur if the economy was at the full employment level of real GDP. C) if tax rates were set to maximize tax revenues. D) if there were no discretionary fiscal interventions into the economy. Answer: B Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

36) At the start of 2013, the U.S. government predicted that economic growth would rise by 2016 and that the government's deficit would also increase. The government therefore was predicting that in 2016 the cyclical deficit would ________ and the structural deficit would ________. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease Answer: B Topic: Cyclical and Structural Balances Skill: Conceptual Status: New AACSB: Reflective Thinking 37) 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 potential real GDP. D) the result of discretionary federal spending. Answer: A Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 38) A cyclical surplus is a A) budget surplus only because real GDP is less than potential GDP. B) budget surplus only because real GDP is greater than potential GDP. C) budget surplus only because real GDP is equal to potential GDP. D) nominal, as opposed to real, budget surplus. Answer: B Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

39) In early 2013, economists predicted that the U.S. economy would grow more rapidly than had been predicted. If this prediction comes true, then the structural deficit will ________ than had been predicted. A) shrink more rapidly B) shrink more slowly C) increase more slowly D) None of the above are correct because the growth of the economy does not affect the size of the structural deficit. Answer: D Topic: Cyclical and Structural Balances Skill: Conceptual Status: New AACSB: Reflective Thinking 40) In early 2013, economists predicted that the U.S. economy would grow more rapidly than had been predicted. If this prediction comes true, then the cyclical deficit will ________ than had been predicted. A) shrink more rapidly B) shrink more slowly C) increase more slowly D) None of the above are correct because the growth of the economy does not affect the size of the cyclical deficit. Answer: A Topic: Cyclical and Structural Balances Skill: Conceptual Status: New AACSB: Reflective Thinking 41) Which of the following relationships is correct? A) actual budget deficit = structural deficit - cyclical deficit B) cyclical surplus = actual budget deficit - cyclical deficit C) actual budget deficit = structural deficit + cyclical deficit D) cyclical deficit = actual budget deficit + structural deficit Answer: C Topic: Cyclical and Structural Balances Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

42) 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 structural deficit minus the cyclical deficit C) is equal to the cyclical deficit minus the structural deficit D) is less than the structural deficit Answer: D Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 43) The actual budget deficit is equal to the A) structural deficit. B) cyclical deficit. C) structural deficit minus the cyclical deficit. D) structural deficit plus the cyclical deficit. Answer: D Topic: Cyclical and Structural Balances Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 44) 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 Answer: B Topic: Cyclical and Structural Deficits Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 45) 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) $25 B) $50 C) $75 D) $100 Answer: D Topic: Cyclical and Structural Deficits Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 42 Copyright © 2014 Pearson Education, Inc.

46) In December 2012 the structural deficit was estimated to be $325 billion and the cyclical deficit was estimated to be $700 billion. The total deficit equaled ________ billion. A) $1,025 B) $375 C) $700 D) None of the above answers are correct. Answer: A Topic: Cyclical and Structural Deficits Skill: Analytical Status: New AACSB: Analytical Skills

47) Economic data for a mythical economy in the years 2006-2010 are summarized in the figure above. Assume that the spending formulas and tax schedules are identical for all years. When the economy is at full employment, the government has a A) budget surplus. B) balanced budget. C) budget deficit. D) procyclical policy. Answer: B Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

48) Economic data for a mythical economy in the years 2006-2010 are summarized in the figure above. Assume that the spending formulas and tax schedules are identical for all years. When the economy is above full employment, the government has a A) budget surplus. B) balanced budget. C) budget deficit. D) procyclical policy. Answer: A Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 49) Economic data for a mythical economy in the years 2006-2010 are summarized in the figure above. Assume that the spending formulas and tax schedules are identical for all years. When the economy is at less than full employment, the government has a A) budget surplus. B) balanced budget. C) budget deficit. D) procyclical policy. Answer: C Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

50) Using the above figure, if full employment occurs at $15 trillion and the economy is actually producing $15 trillion, then there is a A) cyclical deficit. B) cyclical surplus. C) structural deficit. D) structural surplus. Answer: D Topic: Cyclical and Structural Deficits Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 51) Using the above figure, if full employment occurs at $13 trillion, but the economy is actually producing $15 trillion, then there is a A) cyclical deficit. B) cyclical surplus. C) structural deficit. D) structural surplus. Answer: B Topic: Cyclical and Structural Deficits Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

52) In the above figure, if actual GDP = $15 trillion, there is a budget ________ equal to ________. A) surplus; $0.2 trillion B) surplus; $1.3 trillion C) deficit; $0.2 trillion D) deficit; $1.1 trillion Answer: A Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 53) In the above figure, A) the structural deficit equals zero. B) any surpluses are cyclical surpluses. C) any deficits are cyclical deficits. D) All of the above answers are correct. Answer: D Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

54) The figure above shows tax revenues and government expenditures in the economy of Meadowlake. Potential GDP is $13 trillion. If real GDP is $13 trillion, then the government has a ________. A) cyclical surplus B) structural surplus C) balanced budget D) cyclical deficit Answer: C Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 55) The figure above shows tax revenues and government expenditures in the economy of Meadowlake. Potential GDP is $15 trillion. If real GDP is $11 trillion, then the government has a ________. A) cyclical deficit B) structural deficit C) structural surplus D) cyclical surplus Answer: A Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

56) In the short run, an increase in government expenditure will I. shift the aggregate demand curve rightward. II. increase real GDP. III. increase the government expenditure multiplier. IV. increase the tax multiplier. A) I and II B) I and III C) I, II and III D) III and IV Answer: A Topic: Government Expenditure Multiplier Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 57) A reason the government expenditure multiplier is larger than 1 is because A) investment increases when government expenditure increases. B) government expenditure always increases. C) government expenditure generates changes in consumption expenditure. D) taxes are left unchanged. Answer: C Topic: Government Expenditure Multiplier Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 58) The magnitude of the tax multiplier ________ the magnitude of the government expenditure multiplier. A) is smaller than B) is larger than C) is equal to D) is not comparable to Answer: A Topic: Tax Multiplier Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

59) Suppose the government increases taxes. One effect of this change is that it decreases A) disposable income, which decreases consumption expenditure and aggregate demand. B) government expenditure, which decreases aggregate demand. C) the size of the government expenditure multiplier. D) disposable income which then decreases aggregate supply. Answer: A Topic: Tax Multiplier Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 60) The demand-side effect of a change in taxes is less than the same sized change in government expenditure because A) only part of the increase in disposable income from the tax cut is spent. B) the amount by which taxes change is affected by the MPC. C) changes in government expenditure do not directly affect consumption. D) tax rates are the same regardless of income levels. Answer: A Topic: Tax Multiplier Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 61) The aggregate demand curve is shifted rightward by A) an increase in tax rates. B) a decrease in government expenditure. C) an increase in the federal budget surplus. D) an increase in government expenditure. Answer: D Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 62) An increase in government expenditure shifts the AD curve ________ and an increase in taxes shifts the AD curve ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: B Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

63) Suppose the government of Japan increases its expenditure on goods and services. In the short run, this increase will A) shift the AD curve in Japan rightward. B) shift the AD curve in Japan leftward. C) cause the price level in Japan to fall. D) None of the above answers is correct. Answer: A Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 64) If the government wants to engage in fiscal policy to increase real GDP, it could A) increase government expenditure in order to increase short-run aggregate supply. B) decrease government expenditure in order to increase short-run aggregate supply. C) increase government expenditure in order to increase aggregate demand. D) decrease government expenditure in order to decrease aggregate demand. Answer: C Topic: Fiscal Stimulus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 65) If real GDP is less than potential GDP, which of the following fiscal policies would increase real GDP? A) only a decrease government expenditure B) only an increase taxes C) increase government expenditure and/or decrease taxes D) decrease government expenditure and/or increase taxes Answer: C Topic: Fiscal Stimulus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 66) Using the AD-AS model, an increase in government expenditure A) has no impact on real GDP. B) has no impact on real GDP, but will increase potential GDP. C) increases both real GDP and the price level. D) has a full multiplier effect on real GDP, leaving the price level unchanged in the long run. Answer: C Topic: Fiscal Stimulus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

67) Using fiscal policy, to increase real GDP and employment the government could ________ government expenditure on goods and services or ________ taxes. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: Fiscal Stimulus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 68) When real GDP is less than potential GDP, an increase in government expenditures will ________ real GDP and ________ the price level. A) increase; raise B) increase; lower C) decrease; raise D) decrease; lower Answer: A Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 69) Suppose the economy is at a short-run equilibrium with real GDP greater than potential GDP. Which of the following fiscal policies would decrease real GDP and the price level? A) an increase in government expenditure B) a decrease in taxes C) an increase in taxes D) None of the above answers is correct. Answer: C Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 70) Suppose real GDP exceeds potential real GDP. If the government decreases its expenditures on goods and services, then real GDP ________ and the price level ________. A) decreases; rises B) increases; falls C) decreases; falls D) increases; rises Answer: C Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 51 Copyright © 2014 Pearson Education, Inc.

71) Suppose that the government decreases its expenditures on goods and services. Within the AS-AD model, the result will be ________ in real GDP and ________ in the price level. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: D Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

72) In the above figure, if the economy is initially at point D and government expenditure increases, the economy will move to point A) move to point C. B) move to point A. C) move to point B. D) stay at point D. Answer: A Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

73) In the above figure, if the economy is initially at point B and government expenditure decreases, the economy will A) move to point C. B) move to point A. C) move to point D. D) stay at point B. Answer: B Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 74) In the above figure, if the economy is initially at point D and taxes are cut, if potential GDP does not change then the economy will move to point A) move to point C. B) move to point A. C) move to point B. D) stay at point D. Answer: A Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 75) In the above figure, if the economy is initially at point B and taxes are raised, if potential GDP does not change then the economy will move to point A) move to point C. B) move to point A. C) move to point D. D) stay at point B. Answer: B Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

76) In the above figure, if the economy initially is at point A and government expenditure increases, in the short run the economy will move to point A) B. B) C. C) A, that is, the equilibrium will NOT change. D) None of the above answers is correct. Answer: A Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

77) The figure above illustrates the aggregate demand, short-run aggregate supply, and long-run aggregate supply in Lotus Land. The economy is currently at point D and the government increases its expenditure on goods and services. The economy will move to ________. The price level will ________, and the change in real GDP will be ________ the increase in aggregate demand. A) point A; fall; less than B) point D; rise; less than C) point C; rise; less than D) point B; remain constant; the same as Answer: C Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 78) The figure above illustrates the aggregate demand, short-run aggregate supply, and long-run aggregate supply in Lotus Land. The economy is currently at point D and the government decreases its taxes. The economy will move to ________. The price level will ________, and the change in real GDP will be ________ the increase in aggregate demand. A) point A; fall; less than B) point D; rise; less than C) point C; rise; less than D) point B; remain constant; the same as Answer: C Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

79) In the above figure, which fiscal policy could help move the economy to potential GDP? A) decreasing government expenditure B) decreasing autonomous taxes C) increasing government expenditure D) Both answers A and B are correct. Answer: A Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 80) In the above figure, which of the following policies could move the economy to potential GDP? A) decreasing government expenditures and increasing taxes B) decreasing taxes and not changing government expenditures C) increasing government expenditures and decreasing taxes D) None of the above answers is correct. Answer: A Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

81) Suppose that real GDP equals potential GDP, but the government believes that the economy is in a below full-employment equilibrium. As a result, the government increases its expenditure on goods and services. In response to the government's fiscal policy, A) aggregate demand will increase. B) an equilibrium with real GDP less than potential GDP will occur. C) potential GDP decreases. D) None of the above answers is correct. Answer: A Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 82) The use of fiscal policy is limited because A) there is never a long enough time lag. B) the economy is almost always at full employment. C) the President may have different goals than Congress. D) time lags associated with fiscal policy may cause the policy to take effect too late to solve the problem it was supposed to address. Answer: D Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 83) The use of discretionary fiscal policy to end a recession is limited because A) the legislative process is slow. B) potential GDP changes too rapidly. C) the real-world multiplier is too small to have an impact on real GDP. D) in the real world, taxes are not induced. Answer: A Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

84) Which of the following are a limitation of fiscal policy? I. There is a lag between recognizing that fiscal policy might be needed and when it actually takes effect. II. Economic forecasts might be incorrect. III. Monetary policy might counter fiscal policy. A) I only B) I and II C) I and III D) I, II and III Answer: B Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 85) Which of the following policies shifts the AD curve the farthest leftward? A) a rise in taxes of $10 billion B) a cut in taxes of $10 billion C) a decrease in government expenditure of $10 billion D) a decrease in both government expenditure and taxes of $10 billion Answer: C Topic: Study Guide Question, Multipliers Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 86) If the government's budget is in surplus even when the economy is at full employment, the surplus is said to be A) persisting. B) cyclical. C) discretionary. D) structural. Answer: D Topic: Study Guide Question, Cyclical and Structural Balances Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

5 News Based Questions 1) In 2007, Norway's government had revenue of $226.3 billion and expenditures of $158.7 billion. At the same time, GDP totalled $392 billion and government debt was about 67 percent of GDP. In 2007, Norway's government ran a government budget ________ and government debt ________. A) surplus; decreased B) deficit; decreased C) surplus; increased D) deficit; increased Answer: A Topic: Deficits and Debt Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) In 2007, France's government had revenue of $1.287 trillion while expenditures totalled $1.356 trillion. GDP was $2.56 trillion. In 2007, the government budget balance was ________ and government debt ________. A) -$0.69 billion; increased B) $1.27 trillion; increased C) $0.69 billion; decreased D) $1.02 trillion; decreased Answer: A Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3) In 2007, Denmark's government had expenditures of $157 billion and spending of $171 billion. GDP in 2007 was $312 billion. The government ran a budget ________ and government debt ________. A) deficit; decreased B) deficit; increased C) surplus; decreased D) surplus; increased Answer: B Topic: Deficits and Debt Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) In October 2008, President Bush enacted the Alternative Minimum Tax Relief Act of 2008, which resulted in lower taxes on labor income. According the supply-side view, this would result in A) an increase in the tax wedge. B) a leftward shift in the supply of labor curve. C) a movement along the supply of labor curve. D) a rightward shift in the supply of labor curve. Answer: D Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 5) In October 2008, President Bush enacted the Alternative Minimum Tax Relief Act of 2008, which resulted in lower taxes on labor income. According the supply-side view, as a result of this act the incentive to work ________ and the tax wedge ________. A) decreases; increases B) increases; does not change C) increases; decreases D) increases; increases Answer: C Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 6) In 2007, Germany increased the value added tax (VAT) on consumption from 16 percent to 19 percent. The supply-side view, this will ________. A) increase the tax wedge and lower the incentive to work. B) decrease the tax wedge and lower the incentive to work. C) shift the labor supply curve to the right. D) increase the incentive to work in order to pay the higher tax. Answer: A Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

7) In 2007, Germany increased the value added tax (VAT) on consumption from 16 percent to 19 percent. According to the supply-side view, A) the incentive to work increases. B) the supply of labor increases. C) there will be an increase in potential GDP due to the increase tax revenue. D) the after-tax wage rate falls. Answer: D Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 8) In 2008, Britain decided to cut its value added tax (VAT) to 15 percent from 17.5 percent. The VAT is similar to a sales tax. According to the supply-side view, this change will increase I. the after-tax wage II. the incentive to work III. the supply of labor A) II only. B) I and II only. C) I, II and III. D) II and III only. Answer: C Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 9) A report on the EU economic stimulus plan suggested that "... Governments must consider ... cutting VAT [value added tax] and labor taxes ..." The VAT is similar to a sales tax. If governments follow the suggestions, there will be ________ according to the supply-side view. A) an increase in labor supply and a decrease in the tax wedge B) an upward shift in the aggregate production function C) an increase in the labor supply and an increase in the tax wedge D) an increase in saving and an increase in the tax wedge Answer: A Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

10) In response to the economic crisis in 2008, President Merkel "highlighted in her speech what the German government has already done: a financial sector rescue package worth up to €500 billion, and a proposed stimulus package of tax breaks [on income] and spending measures aimed at triggering investments of up to €50 billion over the next two years." www.iht.com, 11/26/2008 Which parts of the stimulus plan will increase labor supply? A) financial sector rescue package B) spending measures targeted at investment C) tax breaks D) all of the above Answer: C Topic: Fiscal Policy and Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 11) Norway has a lower tax on dividend and interest income than does United Kingdom. We would expect Norway to have a ________ tax wedge and a ________ growth rate of real GDP. A) smaller; slower B) larger; faster C) larger; slower D) smaller; faster Answer: D Topic: Supply-Side Effects of Fiscal Policy Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 12) Between 2000 and 2005, Finland increased its tax on interest income. As a result, the supply curve for loanable funds shifted ________ and the tax wedge ________. A) leftward; increased B) rightward; increased C) leftward; decreased D) rightward; decreased Answer: A Topic: After-Tax Real Interest Rate Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

13) Between 2000 and 2005, Finland increased its tax on interest income. As a result, the tax wedge ________ and the growth rate of real GDP ________. A) decreased; slowed B) increased; slowed C) decreased; increased D) increased; increased Answer: B Topic: Fiscal Policy and Aggregate Supply Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 14) "More than 9,000 laid-off Nevada workers will qualify for a second 13-week round of extended unemployment benefits, under federal legislation signed by President Bush. [The] workers exhausted their first 13 weeks of extended benefits and will now be eligible for the new benefits, which pay an average of $293 a week." www.mercurynews.com 11/24/2008 Unemployment benefits are considered part of ________ fiscal policy. The extension of benefits would ________ fiscal policy. A) automatic; be discretionary B) discretionary; be automatic C) automatic; also be considered automatic D) discretionary; also be considered discretionary Answer: A Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 15) In response to the economic downturn, New Zealand's government had enacted a $3.8 stimulus package. www.iht.com, 11/26/2008 The stimulus plan is considered A) automatic fiscal policy. B) contractionary fiscal policy. C) discretionary fiscal policy. D) needs-tested spending. Answer: C Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

16) "European Economic Recovery Plan" "The European Commission urged EU governments to jointly combat the economic slowdown with 200 billion euros ($256 billion) in spending and tax cuts to boost growth and consumer and business confidence." The plan "...would see the 27 EU governments spend 1.5 percent of the bloc's gross domestic product to halt the slowdown that has already pushed some European nations into recession." www.iht.com, 11/26/2008 Which of the following describe the EU's plan? I. It is discretionary fiscal policy II. It will generate a cyclical surplus. A) I and II. B) II only. C) I only. D) neither I nor II. Answer: C Topic: Cyclical and Structural Deficits Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 17) In response to the 2008 recession, New Zealand's Finance Minister Bill English stated that "... the 7 billion New Zealand dollars would be allocated to new infrastructure spending, providing financial aid to workers hit by layoffs as the economy slows and includes tax cuts planned for April." www.iht.com, 11/26/2008 New Zealand's government expects the policies to shift the ________ but at this point in time the ________ might weaken its ability to affect real GDP. A) AD curve rightward; recognition lag B) LAS curve leftward; impact lag. C) SAS curve rightward; law-making lag D) AD curve rightward; impact lag Answer: D Topic: Stabilizing the Business Cycle Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

18) "European Economic Recovery Plan" "The European Commission urged EU governments to jointly combat the economic slowdown with 200 billion euros ($256 billion) in spending and tax cuts to boost growth and consumer and business confidence." The plan "...would see the 27 EU governments spend 1.5 percent of the bloc's gross domestic product to halt the slowdown that has already pushed some European nations into recession." www.iht.com, 11/26/2008 The plan is expected to A) shift the AD curve rightward and increase real GDP. B) shift the AD curve leftward and decrease the recessionary gap. C) decrease the recessionary gap and decrease the price level. D) use the autonomous tax multiplier to eliminate the inflationary gap. Answer: A Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 19) "Obama Considers Delaying Tax Increase" "U.S. President-elect Barack Obama is considering delaying his proposal to repeal the Bush tax cuts for the wealthiest Americans in light of the economic downturn." www.nytimes.com 11/23/2008 Obama's possible decision to delay the tax increase recognizes the fact that a tax increase will ________ disposable income and ________ real GDP. A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease Answer: B Topic: Stabilizing the Business Cycle Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

20) In January 2008, the unemployment rate was only 4.9 percent and real GDP was growing. But President Bush "acknowledged that Americans were 'anxious about the economy.' As a result, it was reported that "...the Bush administration and Congressional leaders, increasingly concerned about a possible recession, are moving closer to agreeing that an economic stimulus package is needed soon." In order for the package to be approved, the leaders in Washington implied that "... they might be able to put aside longstanding partisan differences." www.nytimes.com 1/12/2008 Which of the following lags are government officials trying to avoid? A) the recognition lag B) the impact lag C) the law-making lag D) all of the above Answer: D Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication 6 Essay Questions 1) What is fiscal policy and what are its purposes? Answer: Fiscal policy is the use of the federal budget (for instance, government expenditure or government taxes) to achieve macroeconomic objectives such as full employment or low inflation. Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) What does the Employment Act of 1946 specify? Why is it an important economic milestone? Answer: The Employment Act of 1946 said that the Federal Government would use all practicable means to promote maximum employment, production, and purchasing power. It also established the President's Council of Economic Advisors. The Employment Act of 1946 is an important economic milestone because it explicitly recognizes that the Federal government has a role to play in attempting to stabilize the business cycle. Topic: The Employment Act of 1946 Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

3) According to tax receipt and outlay categories, what are the main components of the federal government budget? Answer: The budget is divided between the tax receipt side and the outlay side. On the taxation side, the largest components are personal income taxes and social security taxes. Between them they account for over 80 percent of total government tax receipts. The remainder of tax revenue comes from corporate income taxes and indirect taxes, such as taxes on items such as gasoline. On the outlay side, the major three categories are transfer payments, the expenditure on goods and service, and interest payments on the government debt. The first category is the largest and continues to grow, accounting for well over half of all payments. These include payments to individuals, businesses, other levels of government, and governments around the world. These payments come in the form of Social Security benefits, unemployment payments, and subsidies, grants and loans to farmers, local and state governments and foreign governments. The last category, debt interest, is the smallest and even fell during the late 2000s because the interest rate was low. Topic: The Federal Budget Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 4) Depending on the relative size of the federal government's outlays and tax receipts, 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 outlays and tax receipts 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 receipts are greater than government outlays; a deficit occurs when tax receipts are less than government outlays; and a balanced budget occurs when tax receipts are equal to government outlays. Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 5) What is the difference between budget surplus, budget deficit and a balanced budget? Which of these three budget outcomes is currently the case in the United States? Answer: A budget surplus occurs if tax revenues exceed outlays; a budget deficit occurs if tax revenues are less than outlays; and a balanced budget occurs if tax revenues equal outlays. Currently the United States is running a budget deficit. Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

6) "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: The Federal Budget Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) How has the federal government debt as a percentage of GDP changed since the end of World War II? Answer: As a percentage of GDP, the federal government debt hit its high at the end of World War II when it was about 120 percent of GDP. The percentage then fell steadily into the 1970s. The large deficits of the 1980s raised the percentage during the 1980s and into the 1990s. From 1995 to 2001, the percentage feel but since then has risen, rapidly in the last few years. Topic: Federal Government Debt Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 8) How does a tax on labor income affect potential GDP? Answer: The income tax reduces the incentive to work by driving a wedge between gross and net income. The tax shifts the supply of labor curve leftward and decreases the supply of labor as workers decide to work fewer hours. The decrease in the supply of labor decreases the equilibrium level of employment, which decreases potential GDP. Topic: Tax on Labor Income Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 9) What is the Laffer curve? Where on their Laffer curves are the United States, the United Kingdom and France located? Answer: The Laffer curve is graphed with tax revenue on the y-axis and tax rates on the x-axis. The Laffer curve captures the concept that raising the tax rate eventually leads to lower tax revenues being collected. At low tax rates, an increase in the tax rate raises the total tax revenue collected. But if government raises the tax rate high enough, an increase in the tax rate leads to lowers the total tax revenue collected. This effect takes place because when the tax rate is high enough, the disincentive effect of the tax becomes so large that enough people give up working and saving so that the total tax revenue declines. While most economists believe the United States is on the upward sloping part of its Laffer curve, so that an increase in the tax rate raises total tax revenue. The United Kingdom is believed to be also on the upward sloping part of its Laffer curve. But France might be at the peak of its curve or even on the downward sloping part, where an increase in the tax rate lowers total tax revenue. Topic: Laffer Curve Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication 68 Copyright © 2014 Pearson Education, Inc.

10) 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 capital decrease saving and so decrease the supply of capital, which decreases equilibrium investment and capital and so decreases economic growth. Topic: Supply Side Effects Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 11) What is the difference between discretionary fiscal policy and automatic fiscal policy? Answer: Discretionary fiscal policy is a policy action initiated by an act of Congress. Automatic fiscal policy are mechanisms that help stabilize GDP and operate without the need for explicit action. Both taxes (such as income taxes, whose receipts rise when the economy expands and fall when the economy contracts) and needs-tested spending (such as welfare spending, which decreases when the economy expands and increases when the economy contracts) are examples of automatic fiscal policy. Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 12) What is automatic fiscal policy? How does it affect the budget deficit and/or budget surplus during a recession and during an expansion? Answer: Automatic fiscal policy are features of fiscal policy that stabilize real GDP without the need for explicit policy action by the government. Automatic fiscal policy includes automatic changes in taxes and needs-tested spending. The government often sets tax rates rather than a total dollar amount of taxes. During a recession, taxes receipts automatically decrease and needstested spending increases, so the budget deficit increases (or the budget surplus decreases). During an expansion, tax receipts automatically increase and means-tested spending decreases, so the budget deficit decreases (or the budget surplus increases). Topic: Automatic Fiscal Policy Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

13) What is the government expenditure multiplier? Answer: The government expenditure multiplier is the magnification effect of a change in government expenditure on aggregate demand. It exists because an increase in government expenditure increases aggregate and thereby increases real GDP. In turn the increase in real GDP induces increases in consumption expenditure which future increase aggregate expenditure and real GDP. So the ultimate increase in aggregate demand exceeds the initiating increase in government expenditure. Topic: Government Expenditure Multiplier Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 14) What is needs-tested spending and how does it affect the government expenditure multiplier? Answer: Needs-tested spending is government spending that changes when GDP changes. Unemployment compensation payments is an example: They decrease when the economy expands and increase when the economy contracts. Needs-tested spending decreases the magnitude of the government expenditure multiplier. For instance, when government expenditure increases, people's disposable income increases but needs-tested spending thereby decreases. The decrease in needs-tested spending offsets some of the initial increase in disposable income, thereby decreasing the multiplier. Topic: Government Expenditure Multiplier Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking 15) 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 expenditure has an initial effect on aggregate demand of $1. In other words, a $1 increase in government expenditure 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: Fiscal Policy Multipliers Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

16) 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: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 17) If employment is less than full employment, what fiscal policy should the government pursue? Answer: To restore full employment, the government should increase its expenditure on goods or services or decrease its taxes. Topic: Fiscal Stimulus Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 18) How can discretionary fiscal policy be used to close a recessionary gap? Answer: If real GDP is less than potential GDP, then the economy is experiencing a recessionary gap. To close this gap the government could use discretionary fiscal policy. In this case, the proper fiscal policy is either an increase in government expenditure or a cut in taxes. Topic: Fiscal Stimulus Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 19) If employment exceeds full employment, what fiscal policy actions could eliminate the gap? Answer: To restore the economy to full employment, the government could decrease its expenditure on goods and services, increase its taxes, or do both. Both a decrease in government expenditure and an increase in taxes decrease aggregate demand and move the economy back toward full employment. Topic: Contractionary Fiscal Policy Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking 20) What are some of the limitations of fiscal policy? Briefly discuss them. Answer: One limitation of fiscal policy is the fact that implementing fiscal policy is slow and so it is difficult to have the proper policy in place. Another limitation is that at times it is difficult to determine if GDP is less than, equal to, or greater than potential GDP. As a result, it is difficult to determine if fiscal policy should be expansionary or contractionary. Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 71 Copyright © 2014 Pearson Education, Inc.

7 Numeric and Graphing Questions 1) A country reports that its government outlays total $1.8 trillion and its receipts total $1.6 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 Surplus and Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Year 2007 2008 2009 2010 2011

Government Tax receipts outlays (trillions of (trillions of 2005 dollars) 2005 dollars) 0.75 0.80 0.80 0.83 0.87 0.86 0.95 0.95 1.06 1.02

2) The above table gives a country's government outlays and tax receipts for 2007 through 2011. During which years did the country have a balanced budget, budget surplus, and budget deficit? Answer: The country had a balanced budget in 2010 because in that year government outlays equaled tax receipts. The country had a budget surplus in 2007 and 2008 because in those years tax receipts exceeded government outlays. The country had a budget deficit in 2009 and 2011 because in those years government outlays exceeded tax receipts. Topic: Budget Surplus and Deficit Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

3) 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 $13 trillion but real GDP equals only $12.5 trillion. In order to restore real GDP back to potential GDP using fiscal policy, the government could increase government expenditure on goods and services and/or decrease taxes. Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

4) 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 inflationary gap occurs when real GDP is less than potential GDP, which is precisely what the figure illustrates. In the figure, potential GDP equals $13 trillion but real GDP equals $13.5 trillion. In order to restore real GDP back to potential GDP using fiscal policy, the government could decrease government expenditure on goods and services and/or increase taxes. Topic: Fiscal Policy and Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 8 True or False 1) Each president can decide when to submit a budget to Congress. Answer: FALSE Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) Government expenditure on goods and services is the largest component of total federal government expenditures. Answer: FALSE Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

3) Corporate income taxes are the largest source of revenue for the federal government. Answer: FALSE Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 4) Personal income taxes are the largest source of revenue for the federal government. Answer: TRUE Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 5) Federal government expenditures as a percentage of GDP are currently equal to approximately 10 percent. Answer: FALSE Topic: Government Expenditures Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6) If tax receipts are greater than government outlays the government has a budget surplus. Answer: TRUE Topic: Financing Investment Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) If tax receipts exactly equaled government outlays in a year, the federal government debt would be zero. Answer: FALSE Topic: Budget Surplus and Deficit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 8) If tax receipts exactly equaled government outlays in a year, the budget deficit would be zero. Answer: TRUE Topic: Budget Surplus and Deficit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

9) The main goal of fiscal policy is to produce a balanced budget. Answer: FALSE Topic: Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 10) All developed countries have about the same ratio of government deficit to GDP. Answer: FALSE Topic: The Budget Deficit in Global Perspective Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 11) An increase in taxes on labor income decreases potential GDP. Answer: TRUE Topic: Supply Side Effects Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 12) An increase in taxes on labor income shifts the labor supply curve leftward and the after-tax wage rate falls. Answer: TRUE Topic: Supply Side Effects Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 13) A tax cut decreases government saving and can thereby crowd out investment. Answer: TRUE Topic: Fiscal Policy and Crowding Out Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 14) The Ricardo-Barro effect implies that a budget deficit will not raise interest rates or reduce investment. Answer: TRUE Topic: Ricardo-Barro Effect Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

15) Deliberate changes in government expenditures and taxes to influence GDP are discretionary fiscal policy. Answer: TRUE Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 16) Discretionary policy requires an act of Congress. Answer: TRUE Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 17) The structural surplus measures whether a budget surplus is cyclical or structural. Answer: TRUE Topic: Cyclical and Structural Balances Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 18) By its very definition, every budget deficit is structural in nature. Answer: FALSE Topic: Cyclical and Structural Balances Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 19) A fiscal stimulus is used to increase production and employment. Answer: TRUE Topic: Fiscal Policy Skill: Recognition Status: New 10th edition AACSB: Reflective Thinking 20) An increase in government expenditure leads to rightward shift of the AD curve. Answer: TRUE Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

21) The aggregate demand curve is shifted rightward by an increase in tax rates. Answer: FALSE Topic: Expansionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 22) The aggregate demand curve is shifted rightward by an increase in government expenditure. Answer: TRUE Topic: Expansionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 23) Automatic fiscal policy is not subject to all the same time lags to which discretionary fiscal policy is subject. Answer: TRUE Topic: Limitations of Fiscal Policy Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

9 Extended Problems Labor (millions of hours per year) 200 240 280 320 360

Real GDP (millions of 2005 dollars) 6,800 7,680 8,400 8,960 9,360

1) The table above shows the aggregate production function in the economy of Prescottia. The people of Prescottia pay no taxes and are willing to work 248 million hours a year for a real wage rate of $8 an hour, and for each dollar increase in the real wage, they are willing to work 4 million additional hours per year. a) Draw the economy's aggregate production function. Wage rate Quantity of labor demanded (dollars per hour) (millions of hours per year) 24 200 20 240 16 280 12 320 b) Prescottia's demand for labor schedule is in the table above. Draw Prescottia's demand for labor and supply of labor curves. c) What are the economy's full-employment quantity of labor and real wage rate? What is the country's potential GDP? d) Suppose that Prescottia's government introduces a 25 percent income tax. Using your graph, what happens to the demand for labor? What happens to the supply of labor? Explain. e) After the tax is imposed, what happens to Prescottia's full-employment quantity of labor? What happens to Prescottia's potential GDP?

Answer:

a) See the figure above.

b) See the figure above. Prescottia's demand for labor curve is LD and the supply of labor curve is LS. c) As shown in the second figure, the labor market is in equilibrium when the quantity of labor employed is 280 million hours and the real wage rate is $16 per hour. So the economy's fullemployment quantity of labor is 280 million hours at a real wage rate of $16 per hour. Potential GDP is the level of real GDP at full employment. The production function in the first figure shows that if 280 million hours of labor are employed, the country's real GDP is $8,400 million. So the economy's potential GDP is $8.4 billion.

d) The income tax has no effect on the demand for labor because the quantity of labor that firms plan to hire depends only on how productive labor is and what it costs—its real wage. But the tax weakens the incentive to work and decreases the supply of labor. When the income tax is imposed, workers look at the after-tax wage rate and, to supply the same quantity of labor as with no tax, they demand a before-tax wage rate that is 25 percent higher than before. So the supply of labor decreases and the supply of labor curve shifts from LS to LST. e) As shown in the second figure illustrating the labor market, with the tax Prescottia's fullemployment quantity of labor decreases from 280 to 270 million hours per year. And the production function shown in the first figure illustrates that as the full-employment quantity of labor decreases from 280 to 270 million hours per year, the economy's potential GDP falls from $8,400 million to (approximately) $8,235 million. Topic: Supply Side Effects of an Income Tax Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 14 Monetary Policy 1 Monetary Policy Objectives and Framework 1) Which of the following is one of the Fed's policy goals? A) help the President win reelection B) exchange rate C) monetary base D) price level stability Answer: D Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 2) The Fed's goals include A) open market operations. B) price level stability. C) the monetary base. D) the federal funds rate. Answer: B Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 3) Federal Reserve monetary policy goals include A) ensuring banks can meet their profit maximization objectives. B) discount rate stability C) zero percent unemployment in the domestic economy. D) price level stability Answer: D Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

4) The Federal Reserve monetary policy goals of maximum employment means A) a zero percent unemployment rate. B) a zero percent natural unemployment rate. C) keeping the unemployment rate close to the natural unemployment rate. D) cyclical unemployment should not necessarily be minimized. Answer: C Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5) Which of the following are NOT Federal Reserve monetary policy goals? A) moderate long-term interest rates B) price level stability C) maximum employment D) zero percent unemployment. Answer: D Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 6) The key goal of monetary policy is to A) reverse the productivity growth slowdown. B) keep the budget deficit small and/or the budget surplus large. C) lower taxes. D) maintain low inflation. Answer: D Topic: Policy Goals Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 7) The key aim of monetary policy is to A) change government spending to spur innovation. B) maintain price stability. C) change tax rates to boost investment. D) change tax rates to boost saving. Answer: B Topic: Policy Goals Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

8) Which of the following is the most important Federal Reserve monetary policy goal? A) moderate long-term interest rates B) minimum unemployment C) maximum employment D) price level stability Answer: D Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 9) In the short run, the Federal Reserve faces a tradeoff between A) economic growth and employment. B) inflation and price stability. C) inflation and unemployment. D) real GDP growth and potential GDP growth. Answer: C Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 10) In the short run, the Federal Reserve faces a tradeoff between A) economic growth and employment. B) inflation and price stability. C) inflation and real GDP. D) interest rates and unemployment. Answer: C Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 11) The core inflation rate, measured by the core PCE deflator, 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. Answer: C Topic: Price Stability Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

12) To determine whether the goal of stable prices is being achieved, the Federal Reserve monitors the ________ but uses as its operational guide the ________. A) core CPI; core inflation rate B) core inflation rate; CPI inflation rate C) CPI; core inflation rate D) GDP price deflator; CPI Answer: C Topic: Price Stability Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 13) Ben Bernanke has been more precise than his predecessor, suggesting a core inflation rate of ________ per year is the same as price stability. A) 0 to 1 percent B) 0 to 2 percent C) 1 to 2 percent D) 1 to 4 percent Answer: C Topic: Price Stability Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 14) Federal Reserve Chairman Ben Bernanke has defined price stability as occurring when core inflation is A) exactly 0 percent. B) less than 10 percent. C) between 1 and 2 percent. D) used in wage-setting contracts. Answer: C Topic: Price Stability Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 15) Ben Bernanke has suggested that a core inflation rate of ________ is the equivalent of price stability. A) between 1 percent to 2 percent B) zero C) less than 5 percent D) less than zero Answer: A Topic: Price Stability Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 4 Copyright © 2014 Pearson Education, Inc.

16) In 2012, U.S. core inflation was 2.1 percent. This inflation rate A) is lower than the inflation rate the Fed accepts as creating stable prices. B) is about equal to the inflation rate the Fed accepts as creating stable prices. C) is more than 2 percentage points higher than the inflation rate the Fed accepts as creating stable prices. D) None of the above answers are correct because the Fed has never associated an inflation rate with stable prices. Answer: B Topic: Price Stability Skill: Recognition Status: New AACSB: Reflective Thinking 17) The output gap is the A) percentage deviation of real GDP from potential GDP. B) difference between actual inflation and core inflation. C) difference in graduation levels between high school and college. D) percentage increase in the economic growth rate of real GDP. Answer: A Topic: Output Gap Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 18) 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 Answer: C Topic: Output Gap Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 19) The output gap can be used to estimate the extend to which the Fed misses its goal of A) maximum employment. B) stable prices. C) moderate long-term interest rates. D) monetary policy. Answer: A Topic: Output Gap Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5 Copyright © 2014 Pearson Education, Inc.

20) Which of the following bodies are responsible for the conduct of monetary policy? A) the Federal Reserve System B) Congress C) the President D) Congress and the President, jointly Answer: A Topic: The Federal Reserve System Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 21) Monetary policy is controlled by A) Congress. B) the president. C) the Federal Reserve. D) the Treasury Department. Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 22) The current chairman of the Federal Reserve is A) Ben Bernanke. B) Alan Greenspan. C) Paul Volcker. D) Milton Friedman. Answer: A Topic: The Federal Reserve System Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 23) The Federal Open Market Committee meets ________ times per year. A) 8 B) 2 C) 26 D) 52 Answer: A Topic: The Federal Reserve System Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

24) Read the following statements and determine if they are true or false. I. The Federal Reserve's monetary policy must be approved by the President of the United States. II. The Federal Reserve Board of Governors meets approximately every six months to review the state of the economy and determine monetary policy. A) I and II are both true. B) I and II are both false. C) I is true and II is false. D) I is false and II is true. Answer: B Topic: The Federal Reserve System Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 25) Price level stability A) has no relationship to growth in potential GDP. B) is thought by most economists to be reached with a measured inflation rate of between 0 and 2 percent a year. C) is the most important tool of the Federal Reserve. D) was attained by the Fed for the period between 1979 and 2001. Answer: B Topic: Study Guide Question, Price Stability Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

2 The Conduct of Monetary Policy 1) Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic goals? I. government expenditures 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) II and III D) II only Answer: B Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 2) Which of the following is a potential monetary policy instrument for the Fed? A) federal funds rate B) government budget deficit C) income tax rates D) profit rates Answer: A Topic: Policy Instruments Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 3) The monetary policy instrument the Federal Reserve choose to use is the A) quantity of money. B) exchange rate. C) federal funds rate. D) required reserves rate. Answer: C Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

4) The federal funds rate is the interest rate A) banks charge each other on overnight loans. B) on the 3-month Treasury bill. C) on the 30-year treasury bond. D) also known as the prime rate. Answer: A Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5) Currently the Fed targets A) both the monetary base and the federal funds rate simultaneously. B) the exchange rate. C) the federal funds rate. D) the price level. Answer: C Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 6) Usually, the Federal Reserve changes its target for the federal funds rate in units of A) 1/4 of 1 percentage point. B) 1 percentage point. C) 2 percentage points. D) 5 percentage points. Answer: A Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 7) Federal Reserve open market operations directly influence A) firms. B) consumers. C) banks. D) Congress. Answer: C Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

8) 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; decreases Answer: A Topic: The Market for Reserves Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 9) In 2012, the federal funds rate was 0.15 percent, which means that the opportunity cost of holding reserves was ________ and consequently banks had a ________ incentive to economize on reserves. A) low; small B) low; large C) high; small D) high; large Answer: A Topic: The Market for Reserves Skill: Recognition Status: New AACSB: Reflective Thinking 10) Equilibrium in the market for bank reserves determines the A) federal funds rate. B) inflation rate. C) 30-year Treasury bond rate. D) exchange rate. Answer: A Topic: The Market for Reserves Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 11) If the federal funds rate is greater than the federal funds rate target, there is a ________ of reserves and the federal funds rate ________. A) surplus; falls B) surplus; rises C) shortage; falls D) shortage; rises Answer: A Topic: The Market for Reserves Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 10 Copyright © 2014 Pearson Education, Inc.

12) Within the market for reserves, an increase in the quantity of reserves results in a A) rise in the equilibrium federal funds rate. B) fall in the equilibrium federal funds rate. C) rise in the equilibrium real wage rate. D) fall in the equilibrium money wage rate. Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 13) If the demand for reserves is unchanged, an increase in the quantity of reserves will A) increase the federal funds rate. B) lower the federal funds rate. C) not affect the federal funds rate. D) None of the above answers is correct. Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 14) 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 the demand for D) decrease the demand for Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 15) Open market operations by the Fed lead to A) changes in the number of banks. B) immediate changes in aggregate supply. C) changes in the federal funds rate. D) shifts in the demand curve for reserves. Answer: C Topic: Changing the Interest Rate, Fed Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

16) If the Fed sells U.S. government securities, A) the federal funds rate rises. B) the U.S. Treasury gains some revenue. C) bank reserves increase. D) None of the above answers is correct. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 17) 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) falls; decreases D) rises; decreases Answer: D Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 18) An increase in the quantity of reserves leads to a A) fall in the federal funds rate. B) decrease in the price level. C) reduction in the velocity of circulation. D) leftward shift in the demand curve for reserves. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 19) An open market sale of government securities by the Federal Reserve shifts the ________ reserves curve ________. A) supply of; leftward B) supply of; rightward C) demand for; rightward D) demand for; leftward Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

20) The Fed engages in open market operations and sells government securities. The result is A) a lower federal funds rate. B) a higher federal funds rate. C) an unchanged federal funds rate because other interest rates did not change. D) More information is needed to determine what happens to the federal funds rate. Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 21) If the Fed wants to raise the federal funds rate it will A) buy government securities in order to increase the quantity of reserves. B) sell government securities in order to decrease the quantity of reserves. C) buy government securities in order to decrease the quantity of reserves. D) sell government securities in order to increase the quantity of reserves. Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 22) If the Fed buys U.S. government securities, A) the federal funds rate will fall. B) the federal funds rate will rise. C) bank reserves will decrease. D) the discount rate will rise. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 23) If the Fed carries out an open market operation to buy U.S. government securities, the federal funds rate ________ and the quantity of reserves ________. A) falls; increases B) rises; increases C) falls; decreases D) rises; decreases Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

24) The Fed buys U.S. government securities from banks in order to A) lower the federal funds rate. B) reduce the government's budget deficit. C) decrease banks' reserves. D) None of the above answers are correct. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 25) If the Fed wants to lower the federal funds rate, it can A) decrease the budget deficit. B) sell government securities in the open market. C) instruct banks to print more money. D) buy government securities on the open market. Answer: D Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 26) An open market purchase of government securities by the Federal Reserve shifts the ________ reserves curve ________. A) supply of; leftward B) supply of; rightward C) demand for; rightward D) demand for; leftward Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 27) In 2012 the Fed announced it would purchase $40 billion of mortgage securities per month. These purchases shifted the ________ reserves curve ________. A) supply of; leftward B) supply of; rightward C) demand for; rightward D) demand for; leftward Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: New AACSB: Reflective Thinking

28) 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. Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 29) To lower the federal funds rate, the Federal Reserve should A) buy government securities. B) raise the Treasury bill rate. C) raise the exchange rate. D) decrease bank reserves. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

30) 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 $100 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) None of the above answers is correct. Answer: C Topic: Changing the Interest Rate, Fed Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 31) 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 $100 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) None of the above answers is correct. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

32) 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. Answer: A Topic: The Market for Reserves Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 33) When the federal funds interest rate is 6 percent, the quantity of reserves demanded is $100 billion. If the quantity of reserves is actually $110 billion, then the A) demand for reserves increases and the demand for reserves curve shifts rightward. B) demand for reserves decreases and the demand for reserves curve shifts leftward. C) federal funds rate rises. D) federal funds rate falls. Answer: D Topic: Study Guide Question, The Market for Reserves Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 3 Monetary Policy Transmission 1) Monetary policy affects real GDP by A) changing aggregate supply. B) creating budget surpluses. C) changing aggregate demand. D) creating budget deficits. Answer: C Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 2) Monetary policy includes adjustments in ________ so as to change ________. A) the federal funds rate; short-run aggregate supply B) open market operations; long-run aggregate supply C) the quantity of money; short-run aggregate supply D) the federal funds rate; aggregate demand Answer: D Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 17 Copyright © 2014 Pearson Education, Inc.

3) Monetary policy produces ripple effects, some of which happen quickly and some that can take years to produce change. Which of the following takes the longest to change? A) inflation rate B) federal funds rate C) exchange rate D) monetary base Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 4) If the interest rate on Treasury bills is higher than the federal funds rate, the quantity of overnight loans supplied ________ and the ________ for Treasury bills increases. A) decreases; demand B) decreases; supply C) increases; demand D) increases; supply Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5) Long-term interest rates are ________ than short-term because long-term loans are ________ than short-term loans. A) higher; riskier B) higher; safer C) lower; safer D) lower; riskier Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 6) If the Fed lowers the federal funds rate, then A) investment and consumption expenditure decrease. B) the price of the dollar rises on the foreign exchange market and so net exports decrease. C) a multiplier process that affects aggregate demand occurs. D) All of the above answers are correct. Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 18 Copyright © 2014 Pearson Education, Inc.

7) When the Fed lowers the federal funds rate, aggregate demand A) increases. B) decreases. C) stays the same. D) could increase, decrease or stay the same. Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 8) To increase the quantity of money in the economy, the Federal Reserve is likely to A) print more money and give it to the banks. B) lower tax rates C) sell government securities in an open market operation. D) buy government securities in an open market operation. Answer: D Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 9) If the Fed wants to increase the quantity of money, it can A) lower income tax rates. B) purchase U.S. government securities. C) increase the government budget deficit. D) raise the exchange rate. Answer: B Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 10) If the Fed wants to decrease the quantity of money, it can A) decrease the government budget deficit. B) purchase U.S. government securities. C) sell U.S. government securities. D) raise income tax rates. Answer: C Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

11) Which of the following increases the quantity of money? A) an individual's cash withdrawal from a bank B) an individual's purchase of a government security from the Fed C) the Fed's purchase of a government security D) an increase in the government's budget deficit Answer: C Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 12) Open market purchases by the Federal Reserve System (the Fed) A) raise the federal funds rate. B) increase bank reserves. C) occur when the Fed wants to decrease the quantity of money. D) All of the above answers are correct. Answer: D Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 13) When the Fed raises the federal funds rate, A) net exports increase. B) the value of the dollar falls on the foreign exchange market. C) the value of the dollar rises on the foreign exchange market. D) consumption increases. Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 14) At the end of 2012, the Fed was buying about $100 billion of securities per month, a much higher amount than normal. These purchases would ________ the value of the dollar on foreign exchange markets thereby ________ U.S. exports. A) raise; increasing B) raise; decreasing C) lower; increasing D) lower; decreasing Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: New AACSB: Reflective Thinking

15) If the Fed raises the federal funds rate so that the exchange rate rises, then imports ________ and exports ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 16) If the Fed lowers the federal funds rate so that the exchange rate falls, then imports ________ and exports ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 17) If the U.S. interest rate rises, the exchange rate ________ and net exports ________. A) rises; increase B) rises; decrease C) falls; increase D) falls; decrease Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 18) When the Fed lowers the federal funds rate, the U.S. dollar ________ on the foreign exchange market and ________. A) depreciates; aggregate demand decreases B) appreciates; aggregate demand decreases C) depreciates; the increase in imports is greater than the increase in exports D) depreciates; aggregate demand increases Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 21 Copyright © 2014 Pearson Education, Inc.

19) The ripple effects that occur when the Fed changes the federal funds rate include ________. A) a decrease in consumption and investment B) an increase in net exports C) a decrease in interest rates D) an increase in short-run aggregate supply Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 20) When the Fed raises the federal funds rate, in the foreign exchange market people ________ dollars and the price of the dollar ________ on the foreign exchange market. A) sell; rises B) sell; falls C) buy; rises D) buy; falls Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 21) If the Federal Reserve lowers the Federal funds rate, A) other short-term interest rates fall. B) other short-term interest rates rise. C) the exchange rate falls. D) Both answers A and C are correct. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 22) When the Federal Reserve increases the Federal funds rate, the U.S. interest rate differential ________ and the U.S. exchange rate ________. A) rises; appreciates B) rises; depreciates C) falls; appreciates D) falls; depreciates Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

23) If the Federal Reserve decreases the Federal funds rate, other short-term interest rates ________ and the exchange rate ________. A) fall; falls B) fall; does not change C) fall; rises D) do not change; falls Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 24) When the Fed raises the federal funds rate, other A) interest rates fall, consumption, investment and net exports increase, and the aggregate demand curve shifts rightward. B) interest rates fall, consumption, investment and net exports decrease, and the aggregate demand curve shifts leftward. C) interest rates rise, consumption, investment and net exports decrease, and the aggregate demand curve shifts leftward. D) interest rates rise, consumption, investment and net exports increase, and the aggregate demand curve shifts rightward. Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 25) 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 demand for loanable funds, lowers the real interest rate, and decreases aggregate demand. Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

26) In 2012, the Federal Reserve announced it would hold the federal rates near 0 percent "at least through mid-2015." This policy attempted to shift the A) aggregate demand curve leftward. B) aggregate demand curve rightward. C) aggregate supply curve leftward. D) aggregate supply curve rightward. Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: New AACSB: Reflective Thinking 27) A decrease in the federal funds rate leads to A) an increase in the quantity of money. B) a fall in the exchange rate. C) an increase in exports. D) All of the above answers are correct. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 28) If the Fed increases the quantity of reserves, the federal funds rate ________ and the quantity of money ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 29) Suppose that the market for reserves is in equilibrium and then the Federal Reserve decreases the quantity of reserves by $2 billion. The federal funds rate will ________ and the supply of loanable funds will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 24 Copyright © 2014 Pearson Education, Inc.

30) In the short run, an increase in the federal funds rate ________ the real interest rate and ________ investment. A) lowers; increases B) raises; increases C) lowers; decreases D) raises; decreases Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 31) When the Federal Reserve increases the Federal funds rate, A) the quantity of reserves, the quantity of deposits, and bank loans all decrease. B) the quantity of reserves decreases, while the quantity of deposits and bank loans both increase. C) both the quantity of reserves and the quantity of deposits decrease, while bank loans increase. D) the quantity of reserves, the quantity of deposits, and bank loans all increase. Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 32) When the Federal Reserve increases the Federal funds rate, A) both the supply of bank loans and the supply of loanable funds decrease, thereby increasing the real interest rate. B) the supply of bank loans decreases, while the supply of loanable funds and the real interest rate both increase. C) both the supply of bank loans and the supply of loanable funds increase, while the real interest rate increases. D) both the supply of bank loans and the supply of loanable funds increase, thereby decreasing the real interest rate. Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

33) When the Fed lowers the federal funds rate, A) consumption expenditures decrease. B) the dollar increases in value on foreign exchange markets. C) net exports decrease. D) investment expenditures increase. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 34) The Fed lowers the federal funds rate. A mechanism through which aggregate demand increases is that the lower federal funds rate A) increases other short-term interest rates, which decreases investment, thereby decreasing aggregate demand. B) decreases other short-term interest rate, which decreases investment, thereby increasing aggregate demand. C) raises the exchange rate so that net exports decrease, which increases investment, thereby increasing aggregate demand. D) decreases other short-term interest rates, which increases investment, thereby increasing aggregate demand. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 35) In the short run, a decrease in the federal funds rate by the Fed A) lowers the real interest rate, decreases investment, and shifts the AD curve rightward. B) lowers the real interest rate, increases investment, and shifts the AD curve leftward. C) raises the real interest rate, decreases investment, and shifts the AD curve rightward. D) None of the above answers is correct. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

36) In the short run, monetary policy can A) raise the federal funds rate, thereby decreasing the supply of loanable funds, 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) raise the federal funds rate and shift the aggregate demand curve leftward. D) All of the above answers are correct. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 37) In the short run, a cut in the federal funds rate A) raises other interest rates as people increase their saving. B) increases potential GDP. C) increases aggregate demand. D) decreases aggregate demand. Answer: C Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 38) When the Federal Reserve lowers the federal funds rate, in the short run A) the long-run aggregate supply curve shifts leftward. B) the aggregate demand curve shifts rightward. C) the economy moves along a given aggregate demand curve. D) banks decrease the quantity of loans they make. Answer: B Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 39) If the Fed lowers the federal funds rate, the Fed's goal is to A) increase aggregate demand. B) decrease aggregate supply. C) increase aggregate supply. D) decrease the inflation rate as firms produce more goods and services. Answer: A Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

40) In an AS/AD figure, lowering the federal funds rate initially shifts the A) AD curve leftward. B) AD curve rightward. C) long-run AS curve leftward. D) long-run AS curve rightward. Answer: B Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 41) In the aggregate supply-aggregate demand model, raising the federal funds rate initially A) increases aggregate demand. B) decreases aggregate demand. C) increases long-run aggregate supply. D) decreases long-run aggregate supply. Answer: B Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 42) Which of the following is NOT a short-run effect of a decrease in the federal funds rate? A) Aggregate demand increases. B) Net exports increase. C) Aggregate supply increases. D) Inflation rate increases. Answer: C Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 43) In 2012, Ben Bernanke said that Fed policy had raised real GDP by almost 3 percent. Mr. Bernanke believes that the Fed's policy of keeping the federal funds rate ________ had resulted in an increase in ________. A) high; aggregate demand B) high; aggregate supply C) low; aggregate demand D) low; aggregate supply Answer: C Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: New AACSB: Reflective Thinking

44) In the above figure, if the economy is initially at point a, the short-run effect of a cut in the federal funds rate is given by movement from point A) a to point b, increasing output and the unemployment rate. B) a to point b, increasing output and decreasing the unemployment rate. C) a to point d, decreasing output and increasing the unemployment rate. D) a to point c, keeping output and the unemployment rate constant. Answer: B Topic: Effect of Monetary Policy on Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 45) In the above figure, if the economy is initially at point c, the short-run effect of a hike in the federal funds rate is given by movement from point A) c to point d, decreasing output and increasing the unemployment rate. B) c to point d, increasing output and decreasing the unemployment rate. C) c to point b, increasing output and decreasing the unemployment rate. D) c to point a, keeping output and the unemployment rate constant. Answer: A Topic: Effect of Monetary Policy on Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

46) In the above figure, if the economy is initially at point d, the short-run effect of a cut in the federal funds rate is given by movement from point A) d to point c, increasing output and decreasing the unemployment rate. B) d to point a, increasing output and decreasing the unemployment rate. C) d to point b, increasing output and decreasing the unemployment rate. D) d to point b, keeping output and the unemployment rate constant. Answer: A Topic: Effect of Monetary Policy on Aggregate Demand Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 47) To fight a recession the Fed will A) raise the federal funds rate. B) lower the federal funds rate. C) increase the budget deficit. D) decrease taxes. Answer: B Topic: Fed Eases to Fight Recession Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 48) If the Fed is concerned with recession it will ________ the federal funds rate in order to ________ aggregate demand. A) raise; increase B) lower; increase C) raise; decrease D) lower; decrease Answer: B Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 49) The Federal Reserve fights recession via open market operations, the supply of loanable funds curve shifts ________ and the aggregate demand curve shifts ________. A) leftward; leftward B) leftward; rightward C) rightward; leftward D) rightward; rightward Answer: D Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 30 Copyright © 2014 Pearson Education, Inc.

50) If the Fed wanted to stimulate the economy to limit the effects of a recessionary gap, then it should ________ the federal funds rate in order to ________ the real interest rate and thereby ________ investment. A) lower; lower; increase B) lower; raise; increase C) raise; raise; decrease D) lower; lower; decrease Answer: A Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 51) If the Fed lowers the federal funds rate, the first effect in an AS/AD figure is a ________ shift of the ________ curve. A) rightward; AD B) leftward; AD C) rightward; SAS D) leftward; SAS Answer: A Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 52) In the short-run, lowering the federal funds rate will shift the ________ and ________ real GDP. A) aggregate demand curve leftward; decrease B) aggregate demand curve rightward; increase C) aggregate supply curve rightward; increase D) aggregate demand curve leftward; increase Answer: B Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

53) The central bank of Cobra sells securities in an open market operation. In the short run, aggregate demand ________, real GDP ________, and the price level ________. A) does not change; increases; falls B) decreases; decreases; falls C) increases; increases; rises D) does not change; decreases; rises Answer: B Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 54) The short-run effect of lowering the federal funds rate A) raises the price level and increases real GDP. B) raises the price level and decreases real GDP. C) lowers the price level and increases real GDP. D) lowers the price level and decreases real GDP. Answer: A Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 55) When the Fed cuts the Federal funds rate, real GDP growth ________ and the inflation rate ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 56) The Federal Reserve fights recession via open market operations, the supply of reserves curve shifts ________ and the supply of money curve shifts ________. A) leftward; leftward B) leftward; rightward C) rightward; leftward D) rightward; rightward Answer: D Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 32 Copyright © 2014 Pearson Education, Inc.

57) In the short run, ________ in the federal funds rate ________ the price level and ________ real GDP. A) lowering; increases; decreases B) lowering; increases; does not change C) lowering; increases; increases D) raising; decreases; does not change Answer: C Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 58) Suppose the economy is in a recession and the Fed lowers the federal funds rate. Then A) real GDP and the price level will both decrease. B) real GDP will increase and the price level will decrease. C) real GDP will decrease and the price level will increase. D) real GDP and the price level will both increase. Answer: D Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 59) Which of the following describes the chain of events the Fed uses to fight recession? A) Raise the federal funds rate target, sell government securities, decrease reserves and loans, increase aggregate demand. B) Raise the federal funds rate target, buy government securities, increase reserves and loans, decrease aggregate demand. C) Lower the federal funds rate target, buy government securities, decrease reserves and loans, decrease aggregate demand. D) Lower the federal funds rate target, buy government securities, increase reserves and loans, increase aggregate demand. Answer: D Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

60) In order to combat a recession, the Fed will ________ the federal funds rate thereby ________ the quantity of money. A) raise; increase B) lower; increase C) raise; decrease D) lower; decrease Answer: B Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 61) In September 2012 unemployment was high and the Fed was concerned that the economy would re-enter a recession. Therefore the Fed announced it would ________ its purchases of securities in an effort to ________. A) decrease; keep the federal funds rate low B) increase; keep the federal funds rate low C) decrease; raise the federal funds rate D) increase; raise the federal funds rate Answer: B Topic: Fed Eases to Fight Recession Skill: Conceptual Status: New AACSB: Reflective Thinking 62) If the aggregate demand curve shifts rightward following a decrease in the federal funds rate, what can be concluded if the short-run aggregate supply curve is rather steep? A) There will be a significant increase in real GDP with little impact on the price level. B) There will be a significant increase in both real GDP and the price level. C) There will be little increase in real GDP but a significant increase in the price level. D) There is significant unemployment and slack in the economy. Answer: C Topic: Fed Eases to Fight Recession Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 63) In response to an inflationary gap, the Fed A) waits until the price level falls before acting. B) lowers the federal funds rate by buying U.S. government securities. C) raises the federal funds rate by selling U.S. government securities. D) raises the federal funds rate by buying U.S. government securities. Answer: C Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 34 Copyright © 2014 Pearson Education, Inc.

64) If the Fed wished to eliminate an inflationary gap, which of the following would be an appropriate policy? A) raise the federal funds rate B) lower the federal funds rate C) buy government securities D) decease the government budget deficit Answer: A Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 65) If the Fed is concerned with inflation it will ________ the federal funds rate in order to ________ aggregate demand. A) raise; increase B) lower; increase C) raise; decrease D) lower; decrease Answer: C Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 66) If the Fed fears inflation it will undertake an open market ________ of securities, the federal funds rate will ________ and the long-term real interest rate will ________. A) sale; rise; fall B) sale; rise; rise C) purchase; rise; fall D) purchase; fall; rise Answer: B Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

67) In March 2013 the Fed announced that it might decrease its open market purchases of securities by the end of the year. This announcement suggests that the Fed is concerned that A) the unemployment rate will increase. B) the inflation rate will rise. C) the federal funds interest rate will fall too low for the Fed to control it. D) the federal funds interest rate will rise too high for the Fed to control it. Answer: B Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: New AACSB: Reflective Thinking 68) The Federal Reserve fights inflation via open market operations, the supply of reserves curve shifts ________ and the supply of money curve shifts ________. A) leftward; leftward B) leftward; rightward C) rightward; leftward D) rightward; rightward Answer: A Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 69) The Federal Reserve fights inflation via open market operations, the supply of loanable funds curve shifts ________ and the aggregate demand curve shifts ________. A) leftward; leftward B) leftward; rightward C) rightward; leftward D) rightward; rightward Answer: A Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 70) If the Fed raises the interest rate, the first effect in an AS/AD figure is a ________ shift of the ________ curve. A) rightward; AD B) leftward; AD C) rightward; SAS D) leftward; SAS Answer: B Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 36 Copyright © 2014 Pearson Education, Inc.

71) If the Fed wants to fight inflation, it will ________ the federal funds rate, which in the short run shifts the ________. A) lower; AD curve rightward B) lower; AD curve leftward C) raise; AD curve rightward D) raise; AD curve leftward Answer: D Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 72) In the short run, the Fed's actions to fight inflation shift the A) aggregate demand curve rightward. B) aggregate demand curve leftward. C) short-run aggregate supply curve rightward. D) short-run aggregate supply curve leftward. Answer: B Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 73) According to the AS/AD model, in the short run an increase in the federal funds rate will A) decrease the price level and decrease real GDP. B) increase the price level and decrease real GDP. C) decrease the price level but leave real GDP unchanged. D) decrease real GDP but leave the price level unchanged. Answer: A Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

74) In the above figure, suppose the economy is at point D. Which of the following occurs as a result of an open market purchase of government securities by the Fed? A) a decrease in the real interest rate B) an increase in exports C) an increase in investment D) All of the above occur. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 75) In the above figure, suppose the economy was initially in an equilibrium at point D. Where would the economy move if the Fed makes an open market purchase of government securities? A) A B) B C) C D) D, that is, the economy would not change its equilibrium. Answer: C Topic: Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

76) In the above figure, suppose the economy is at point B. Which of the following policy options for the Fed will move the economy toward its LAS? A) lower the federal funds rate B) raise the federal funds rate C) decrease the government's budget deficit D) decrease taxes Answer: B Topic: Fed Tightens to Fight Inflation Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 77) In the above figure, if the economy is initially at point D, then if the Fed lowers the federal funds rate A) the supply of loanable funds decreases, the real interest rate falls, and the AD curve shifts rightward. B) other short-term interest rates fall, net exports increase, and the AD curve shifts rightward. C) the exchange rate rises, investment increases, and the SAS curve shifts rightward. D) the demand for loanable fund and supply of loanable funds both increase by the same amount so that the AD curve shifts rightward. Answer: B Topic: Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 78) In the above figure, suppose the economy is at point D. If the Fed eases to fight the recession, the economy will move to A) point A. B) point B. C) point C. D) Either point A or point C, depending on precisely how the Fed eased. Answer: C Topic: Fed Eases to Fight Recession Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

79) Suppose that several European countries enter a recession decreasing U.S. exports. To move U.S. GDP back to potential GDP, the Fed should A) lower the federal funds rate. B) raise the federal funds rate. C) increase the government's budget deficit. D) decrease the government's budget deficit. Answer: A Topic: Stabilizing Aggregate Demand Shocks Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 80) Consumer confidence in the economy rises, and as a result, real GDP increases above potential GDP. To move U.S. GDP back to potential GDP, the Fed should A) lower the federal funds rate. B) raise the federal funds rate. C) increase the government's budget deficit. D) decrease the government's budget deficit. Answer: B Topic: Stabilizing Aggregate Demand Shocks Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 81) A worldwide recession reduces the amount of U.S. exports, and as a result, aggregate demand decreases. To move U.S. GDP back to potential GDP, the Fed should A) lower the federal funds rate. B) raise the federal funds rate. C) increase the government's budget deficit. D) decreasing the quantity of money of money. Answer: A Topic: Stabilizing Aggregate Demand Shocks Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

82) In the above figure, suppose point C is the original equilibrium. If the Fed hikes the federal funds rate, the new equilibrium is given by point A) A. B) B. C) C (that is, the equilibrium does not change). D) D. Answer: A Topic: Fed Tightens to Fight Inflation Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

83) Which aggregate supply-aggregate demand diagram above shows the effect on real GDP and the price level of monetary policy when it is used to fight a recession? A) Only Figure A B) Only Figure B C) Both Figure A and Figure B D) Neither Figure A nor Figure B Answer: A Topic: Stabilizing Aggregate Demand Shocks Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

84) In the above figure, the economy experiences a decrease in aggregate demand so that the aggregate demand curve shifts from AD0 to AD1. If the Fed wants to offset this change, it would ________. A) purchase government securities on the open market B) sell government securities on the open market C) lower taxes D) increase government expenditures Answer: A Topic: Stabilizing Aggregate Demand Shocks Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 85) In the above figure, the economy experiences an increase in aggregate demand so that the aggregate demand curve shifts from AD0 to AD2. If the Fed wants to offset this change, it would ________. A) purchase government securities on the open market B) sell government securities on the open market C) raise taxes D) increase government expenditures Answer: B Topic: Stabilizing Aggregate Demand Shocks Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

86) Suppose that initially real GDP equals potential GDP. Then an increase in aggregate demand occurs. According to the Taylor rule, the Fed should ________ the federal funds rate by ________ government securities in the open market. A) raise; selling B) lower; selling C) raise; buying D) lower; buying Answer: A Topic: Stabilizing Aggregate Demand Shocks Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 87) Suppose that initially real GDP equals potential GDP. Then a decrease in aggregate demand occurs. According to the Taylor rule, the Fed should ________ the federal funds rate by ________ government securities in the open market. A) raise; selling B) lower; selling C) raise; buying D) lower; buying Answer: D Topic: Stabilizing Aggregate Demand Shocks Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 88) 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 cannot control the federal funds rate. D) None of the above answers is correct. Answer: D Topic: Problems with Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

89) 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) the tight relationship between that the Federal funds rate has to aggregate spending. D) the frequent misalignment of the spread between the Federal funds rate and the Federal funds rate target. Answer: A Topic: Problems with Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 90) In order to combat inflation, the Fed will ________ the federal funds rate thereby ________ the quantity of money. A) raise; increase B) lower; increase C) raise; decrease D) lower; decrease Answer: C Topic: Study Guide Question, Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 91) In the short run, the Fed's actions to fight an inflationary gap shift the A) aggregate demand curve rightward. B) aggregate demand curve leftward. C) short-run aggregate supply curve rightward. D) short-run aggregate supply curve leftward. Answer: B Topic: Study Guide Question, Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 92) In the short run, a rise in the federal funds rate shifts the A) AD curve leftward. B) SAS curve leftward. C) LAS curve leftward. D) None of the above because a decrease in the quantity of money does not shift a curve. Answer: A Topic: Study Guide Question-Monetary Policies Effect on Agg. Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 45 Copyright © 2014 Pearson Education, Inc.

93) The Fed's actions to fight an inflation shift the A) aggregate demand curve rightward. B) aggregate demand curve leftward. C) long-run aggregate supply curve rightward. D) long-run aggregate supply curve leftward. Answer: B Topic: Study Guide Question, Fed Tightens to Fight Inflation Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 94) In the short run, a rise in the federal funds rate ________ the price level and ________ real GDP. A) lowers; decreases B) lowers; does not change C) lowers; increases D) does not change; increases Answer: A Topic: Study Guide Question, Fed Tightens to Fight Inflation Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 95) Businesses become convinced that future profits from investment will be less than initially believed. This conviction leads to a change in aggregate ________ and so the Fed should ________ the federal funds rate if it wants to try to offset this change. A) demand; raise B) demand; lower C) supply; raise D) supply; lower Answer: B Topic: Study Guide Question, Stabilizing Aggregate Demand Shocks Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 96) A rise in the federal funds rate A) raises the long-term real interest rate. B) does not change the long-term real interest rate. C) lowers the long-term real interest rate. D) may raise or lower the long-term real interest rate, depending on whether the demand for loanable funds curve has a negative or a positive slope. Answer: A Topic: Study Guide Question, Changing the Interest Rate Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 46 Copyright © 2014 Pearson Education, Inc.

4 Extraordinary Monetary Stimulus 1) A widespread fall in asset prices means that banks might become A) insolvent. B) solvent. C) illiquid. D) too liquid. Answer: A Topic: Financial Crisis Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 2) During the financial crisis of 2008-2009, the Fed was concerned about A) the bubble that was forcing asset prices higher. B) the publics rush to deposit its currency into banks. C) keeping the federal funds rate from falling too far. D) providing the banking system with enough liquidity. Answer: D Topic: Financial Crisis Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 3) During the financial crisis of 2008-2009, the Fed's actions to supply reserves to the banking system was an attempt to A) limit the troubling rise in asset prices. B) increase the public's belief that their deposits were insured. C) help the U.S. Treasury finance the TARP. D) make certain that banks had enough liquidity to avoid collapse. Answer: D Topic: Financial Crisis Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 4) Uncertainty about monetary policy A) was the factor that started the financial crisis in 2008. B) can keep investment low. C) is why the Fed does not use inflation rate targeting. D) makes deposits in banks more desirable because they become safer. Answer: B Topic: Financial Crisis Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 47 Copyright © 2014 Pearson Education, Inc.

5) In September 2012 the Fed announced that because of weak labor market conditions, it would ________ $40 billion of mortgage backed securities per month. Critics of the action said that banks have ________ excessive reserves so the action would be futile. A) sell; huge amounts of B) buy; huge amounts of C) buy; very little D) sell; very little Answer: B Topic: At Issue: QE3 Skill: Conceptual Status: New AACSB: Reflective Thinking 6) In September 2012 the Fed announced that it would buy $40 billion of mortgage backed securities per month. One goal of this policy was to ________ the price of these securities and thereby help ________. A) raise; prices of housing to fall to their new equilibrium B) raise; lower long-term interest rates C) lower; make the short-term interest rate more responsive to Fed actions D) raise; raise long-term interest rates Answer: B Topic: At Issue: QE3 Skill: Conceptual Status: New AACSB: Reflective Thinking 7) The Taylor rule A) focuses on only fluctuations in real GDP. B) ignores price level stability to focus on responding to fluctuations in real GDP. C) is the rule actually followed by the Fed. D) shows how the Fed could set the federal funds rate. Answer: D Topic: Taylor Rule Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

8) The Taylor Rule states that the A) Fed should target the monetary base and not the federal funds rate. B) use of an exchange rate target, although costly, is economically efficient. C) Fed should adjust the federal funds rate to take account of deviations of inflation from its target and real GDP from potential GDP. D) None of the above is correct. Answer: C Topic: The Taylor Rule Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 9) The Taylor rule uses three variables to determine the target for the federal funds rate. Which of the following is NOT one of those variables? A) monetary base B) equilibrium real interest rate C) inflation rate D) output gap Answer: A Topic: Taylor Rule Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 10) 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) increase government expenditures. D) None of the above answers are correct. Answer: A Topic: Taylor Rule Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 11) Suppose the equilibrium real interest rate is 2 percent per year, inflation is 2.5 percent and the output gap is 1 percent. Using the Taylor rule, what is the federal funds rate? A) 3 percent B) 3.5 percent C) 5.25 percent D) 5.5 percent Answer: C Topic: The Taylor Rule Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 49 Copyright © 2014 Pearson Education, Inc.

12) Suppose the inflation rate is 3 percent and the output gap is -1 percent. Assuming the equilibrium real interest rate is 2 percent, using the Taylor rule, what target should the Fed set for the federal funds rate? A) 5 percent B) 6 percent C) 4 percent D) 1 percent Answer: A Topic: Taylor Rule Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 13) An inflation rate targeting rule A) reduces uncertainty about monetary policy. B) will not work if the Fed continues to sue open market operations. C) has been adopted the by the Fed in response to the financial crisis of 2008-2009. D) means that the inflation rate must exceed 5 percent in order for the rule to be effective. Answer: A Topic: Inflation Rate Targeting Rule Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Analytical Skills

5 News Based Questions 1) The People's Bank of China announced that it was lowering by 1.08 percentage points the one-year lending rate in response to the slowdown in the Chinese economy. This rate is the Chinese equivalent of the federal funds rate in the United States. www.nytimes.com, 11/26/2008 This policy ________ the supply of loanable funds. As a result, the long-term real interest rate ________, and planned expenditures ________. A) increases; increases; increase B) decreases; decreases; decrease C) increases; decreases; increase D) decreases; increases; increase Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 2) The People's Bank of China announced that it was lowering by 1.08 percentage points the one-year lending rate in response to the slowdown in the Chinese economy. This rate is the Chinese equivalent of the federal funds rate in the United States. www.nytimes.com, 11/26/2008 Other things remaining the same, there will be ________ in the exchange rate, ________ in imports and ________ in exports. A) a decrease; a decrease; an increase B) a decrease; an increase; a decrease C) an increase; a decrease; a increase D) an increase; an increase; a decrease Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

3) The People's Bank of China announced that it was lowering by 1.08 percentage points the one-year lending rate in response to the slowdown in the Chinese economy. This rate is the Chinese equivalent of the federal funds rate in the United States. www.nytimes.com, 11/26/2008 Other things remaining the same, which of the following components will decrease in response to the bank's actions? I. exchange rate II. interest rate III. investment A) I and II only. B) I, II and III. C) II and III only. D) II only. Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 4) In October 2008, central banks around the world coordinated a decrease in interest rates. Ben Bernanke, Chairman of the Federal Reserve stated that "policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant." If all the banks enacted the policy simultaneously, the U.S. interest rate differential would ________ and so the U.S. exchange rate would ________. A) increase; fall B) decrease; rise C) not change; not change D) not change; rise Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

5) In October 2008, central banks around the world coordinated a decrease in interest rates. Ben Bernanke, Chairman of the Federal Reserve stated that "policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant." If all the banks enacted the policy simultaneously, which of the following expenditure components would increase in the United States? I. exports II. consumption III. investment A) I, II and III. B) II and III only. C) II only. D) I and III only. Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 6) In November 2008, the Reserve Bank of India (RBI) lowered its "repo" rate, the rate at which it lends to banks, from 8 percent to 7.5 percent. Only two weeks earlier, it had lowered the rate from 9 percent to 8 percent. The Economist, 11/6/2008 The Reserve Bank of India is lowering its rates to fight A) inflation B) recession C) rising net exports. D) a decrease in money demand. Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

7) In November 2008, the Reserve Bank of India (RBI) lowered its "repo" rate, the rate at which it lends to banks, from 8 percent to 7.5 percent. Only two weeks earlier, it had lowered the rate from 9 percent to 8 percent. The Economist, 11/6/2008 In its attempt to change real GDP, which of following sequences correctly describes the transmission of RBI's monetary policy? I. the real interest rate falls II. the money supply increases III. bank reserves increase IV. supply of loanable funds increases V. aggregate demand increases A) III, II, IV, I,V. B) II, I, III, V, IV. C) V, I, II, IV, III D) III, IV, I, III, V Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 8) "As the Fed Chases Inflation, Critics Shout, 'Faster!' "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake." www.nytimes, 7/1/2004 By increasing the federal funds target, the Fed will ________ reserves and ________ the quantity of money. A) increase; increase B) decrease; decrease C) decrease; increase D) increase; decrease Answer: B Topic: How an Open Market Operation Works Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

9) "As the Fed Chases Inflation, Critics Shout, 'Faster!' "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake." www.nytimes, 7/1/2004 Economists estimate that if the Fed's policy was enacted in July 2004, the impact on the economy A) will occur to its fullest extent within one month. B) can be expected to stretch over one to two years. C) will not be evident in the exchange rate market until 2005. D) will reach its fullest extent, affecting real GDP, in three to six months. Answer: B Topic: Monetary Policy Skill: Conceptual Status: Modified 10th edition AACSB: Communication 10) "As the Fed Chases Inflation, Critics Shout, 'Faster!' "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake" www.nytimes, 7/1/2004 The Fed's policy will ________ the quantity of money and ________ the supply of loanable funds. A) decrease; decrease B) increase; decrease C) decrease; increase D) increase; increase Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

11) "As the Fed Chases Inflation, Critics Shout, 'Faster!' "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake" www.nytimes, 7/1/2004 As a result of the Fed's policy, which of the rates will increase? A) the long-term interest rate B) the short-term interest rate C) the exchange rate D) All of the above answers are correct. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 12) "As the Fed Chases Inflation, Critics Shout, 'Faster!' "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake" www.nytimes, 7/1/2004 The goal of the Fed's policy in 2004 was to decrease A) the exchange rate B) consumption expenditure C) the long-term interest rate D) the short-term interest rate Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

13) In December, the Bank of England reduced interest rates by another 50 basis points (a basis point is 0.01 percentage point) after it had cut them by 150 basis points in November. But the rate cut may even be larger. Economists "... expect the Monetary Policy Committee [MPC] to cut rates to 2.5 percent,"...while others "...saw a bigger 75 point cut"...or "a 100 basis point move." Reuters, 11/27/2008 In order to ________, the Bank of England's rate cut must ________. A) decrease consumption; increase the long-run interest rate B) increase real GDP; decrease the nominal long-run interest rate C) decrease real GDP; increase the real long-run interest rate D) increase consumption; decrease the real long-run interest rate Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 14) In December, the Bank of England reduced interest rates by another 50 basis points after points (a basis point is 0.01 percentage point) it had cut them by 150 basis points in November. But the rate cut may even be larger. Economists "... expect the Monetary Policy Committee [MPC] to cut rates to 2.5 percent,"...while others "...saw a bigger 75 point cut"...or "a 100 basis point move." Data show that "... inflation staged its biggest drop since records began ...potentially opening the door to even bigger cuts." Reuters, 11/27/2008 If the Bank's policies given above can ________ the real long-term interest rate, the Bank will be able to ________. A) lower; decrease investment B) lower; increase aggregate demand C) raise; increase short-run aggregate supply D) lower; raise the exchange rate Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

15) "The Bank of Israel lowered its benchmark lending rate by half a percentage point, the fourth cut in seven weeks, as the global financial turmoil slows economic growth and inflation expectations ease." www.bloomberg.com 11/24/2008 The Bank of Israel's actions ________ bank reserves and have the goal of ________ consumption. A) decrease; decreasing B) increase; decreasing C) increase; increasing D) decrease; increasing Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 16) In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008 The "interest rates" the Fed is cutting is the ________. A) reserve interest rate B) Federal Funds rate C) nominal long-term interest rate D) real long-term interest rate Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

17) In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008 The Fed's rate cuts will ________ bank reserves and ________. A) increase; increase the money supply and real GDP B) decrease; decrease the money supply and real GDP C) increase; increase the exchange rate and real GDP D) decrease bank reserves; decrease the exchange rate and real GDP Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 18) In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008 The Fed's rates cuts will initially impact ________ and eventually ________. A) bank reserves; government spending B) the money supply; bank reserves C) bank reserves; real GDP D) investment; the real interest rate Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

19) In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008 These rate cuts are designed to A) decrease the real long-term interest rate and increase real GDP. B) increase the exchange rate and decrease government spending. C) increase bank reserves and the exchange rate. D) decrease the exchange rate and investment. Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 6 Essay Questions 1) Why does the Fed pursue price stability as its ultimate goal? Answer: The economy works best when the price level is stable and is predictable. Uncertainty increases if the inflation rate fluctuates unpredictably because these fluctuations increase the risk to borrowers and lenders and to employers and employees. In both instances, long-term agreements are made and if inflation differs from what was expected, one person wins and the other loses. With the lower risk from the lower inflation, more transactions are conducted, which means more economic activity and more rapid economic growth. Topic: Price Stability Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 2) Describe how open market operations change the quantity of money. Answer: Open market operations affect the quantity of banks' reserves. Suppose the Fed buys U.S. government securities. When the Fed buys government securities, banks' reserves increase. (These reserves rise whether the Fed buys securities from a bank or from a member of the public.) The rise in banks' reserves leads them to increase their lending, so the quantity of money increases. Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

3) 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: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 4) Suppose in the money market the equilibrium interest rate is 5 percent and quantity of money demanded and supplied are both equal to $2 trillion dollars. If the Fed increases the quantity of money, what is the effect on the interest rate? Answer: If the Fed increases the quantity of money, the supply of money curve shifts rightward and the interest rate falls. Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5) Assume the Fed is concerned with a possible recession so it 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 lowers the federal funds rate by increasing banks' reserves. With the increase in reserves, the quantity of money increases. In the short run, when the quantity of money increases, the interest rate falls. Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 6) What is the effect of lowering the interest rate on net exports? Explain your answer. Answer: A decrease in the interest rate increases net exports. Net exports equals the value of exports minus the value of imports. Lowering the interest rate makes U.S. securities less attractive to foreign buyers. As a result, the demand for U.S. dollars decreases because foreigners no longer need to purchase as many dollars in order to buy U.S. securities. The decrease in the demand for the U.S. dollar lowers the exchange rate on the foreign exchange market. The fall in the exchange rate makes U.S. exports less expensive to foreigners because it now takes less foreign currency to buy a U.S. dollar and hence less foreign currency to buy U.S. exports. Simultaneously, the price of U.S. imports rises to U.S. residents. Therefore U.S. exports increase and U.S. imports decrease, both of which increase net exports. Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

7) List and briefly explain the steps in how monetary policy affects real GDP in the AS/AD model. Tell what is the impact 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 increases, which then lowers the interest rate. Next the fall in the 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: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 8) Discuss how the Fed raising the federal funds rate ripples through the different sectors of the economy. Answer: To raise the federal funds rate, the Fed sells securities in the open market. When the Fed sells securities in the open market, banks' reserves decrease, which raises the federal funds. In addition, the decrease in reserves decreases the quantity of money. The decrease in the quantity of money leads to a higher interest rate. A higher interest rate decreases investment and consumption expenditure, especially consumption expenditure on durable goods. In the foreign exchange market, the higher interest rate increase the attractiveness of U.S. securities. Foreigners increase their demand for U.S. dollars in order to purchase these securities and so the exchange rate of the dollar rises on the foreign exchange market. The rise in the exchange rate 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: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 9) Explain the ripple effects of a sale of securities in an open market operation. Answer: The Fed's actions ripple through the economy. For instance, if the Fed tries to fight a recession, the Fed lowers the federal funds rate by buying securities in open market operations. The Fed pays for its purchases of securities by increasing banks' reserves, which lowers the federal funds rate. In addition, the increase in banks' reserves increases the quantity of money. The interest rate falls and thereby consumption expenditure and investment increase. In addition, the value of the dollar on the foreign exchange market falls as fewer foreign investors demand dollars to purchase assets in the United States. As a result, net exports increase. All these changes in expenditure lead to a multiplier effect that increases aggregate demand, thereby raising the price level and increasing real GDP. Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 62 Copyright © 2014 Pearson Education, Inc.

10) Suppose the economy is in recession. Write a letter to the brand-new chairman of the Federal Reserve suggesting how the Fed might help end the recession. Be sure to explain how a change in monetary policy will affect economic activity. Answer: The Fed needs to lower the federal funds rate. It can do so by conducting open market operations that buy government securities. This action supplies banks with new excess reserves that result in lowering the federal funds rate and allowing banks to make additional loans, thereby expanding the quantity of money. When the quantity of money increases, the interest rate falls. The fall in the interest rate stimulates consumption expenditure and investment, and also reduce the value of the dollar in foreign exchange markets, thereby stimulating net exports. These increases in spending will shift the AD curve rightward and real GDP will increase, although the price level might also rise, depending on the slope of the SAS curve. Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 11) In the aggregate demand/aggregate supply framework, lowering the federal funds rate has what short-run effects on real GDP? Answer: In the aggregate demand/aggregate supply framework, lowering the federal funds rate increases the quantity of money and lowers the interest rate, which then increases aggregate demand. In the short run, the economy moves along its short-run aggregate supply curve so that the price level rises and real GDP increases. Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 12) Explain how the Fed's response to inflation works its 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 shifts the supply of money curve leftward and the interest rate rises. The higher 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: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

13) "When the Fed is concerned with inflation, it buys government securities." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. When the Fed is concerned with inflation, the Fed wants to decrease aggregate demand and thereby decrease inflation. 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 inflation is to sell government securities and thereby raise the federal funds rate. Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 14) If the Fed is concerned about inflation, in the short run what is the proper monetary policy to restore price stability? What actions can the Fed undertake to restore price stability? Answer: In order to avoid the inflation, the Fed needs to decrease aggregate demand. To decrease aggregate demand, the Fed must raise the federal funds rate and decrease the quantity of money. To do so, the Fed will sell government securities, which decreases banks' reserves because the reserves are used to pay the Fed for the government securities. The decrease in banks' reserves raises the federal funds rate and decreases the quantity of money. Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 15) 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. 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. In this situation, 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: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

16) Explain how the Fed's response to a recession works its through the economy to ultimately affecting real GDP and the price level. Answer: When the Fed is concerned with recession, the Fed lowers the federal funds rate target. To then lower the federal funds rate to the new target, the Fed conducts open market operations that buy government securities. The Fed pays for its purchases by increasing banks' reserves. The increase in reserves lowers the federal funds rate. It also increases the quantity of money. The increase in the quantity of money shifts the supply of money curve rightward and the interest rate falls. The lower interest rate leads to an increase in the demand for investment and other interestsensitive sectors of the economy. These increases mean that aggregate demand increases so that the AD curve shifts rightward. Following the original increase in aggregate demand, a multiplier process begins which increases aggregate demand even further, so that there is a further rightward shift of the AD curve. As a result of the increase in aggregate demand, the price level rises and real GDP increases. Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 17) In the short run, if the Fed wants to fight a recession, should it buy or sell government securities? Why? Answer: The Fed should buy government securities. When the Fed buys government securities, the federal funds rate falls and banks' reserves increase. The increase in reserves increases the quantity of money and the 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 is in a recession. Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 18) When the economy is in recession, does the Fed want to raise the interest rate so as to increase aggregate demand and increase real GDP? Explain your answer. Answer: When the economy is in a recession, the Fed wants to increase aggregate demand and hence GDP, but raising the interest rate is the wrong policy. A boost in the interest 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 interest rate. Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

7 True or False 1) The core inflation rate is more volatile than the total CPI inflation rate. Answer: FALSE Topic: Core CPI Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 2) A positive output gap is an inflationary gap. Answer: TRUE Topic: Output Gap Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 3) The President of the United States is also the chairman of the Federal Reserve. Answer: FALSE Topic: The Federal Reserve System Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 4) The Fed targets the 30-year bond rate as its monetary policy instrument. Answer: FALSE Topic: Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5) When the Fed purchases U.S. government securities in the open market, the federal funds falls. Answer: TRUE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 6) If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rate falls and the quantity of money increases. Answer: FALSE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

7) If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rises and the quantity of money decreases. Answer: TRUE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 8) If the federal funds rate is below the Fed target, the Fed will conduct an open market sale to increase the federal funds rate to the desired level. Answer: TRUE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 9) Long-term interest rates fluctuate more than short-term rates. Answer: FALSE Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 10) If the Fed sells bonds in the open market, net exports will increase. Answer: FALSE Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 11) If the Fed sells bonds in the open market, net exports will decrease. Answer: TRUE Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 12) A decrease in the supply of loanable funds decreases the real interest rate. Answer: FALSE Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

13) When the Fed lowers the federal funds rate, it increases reserves and increases the quantity of deposits and loans created. Answer: TRUE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 14) To decrease inflation, the Federal Reserve would adjust its target for the federal funds rate upward. Answer: TRUE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 15) If the Fed lowers the federal funds rate, aggregate demand decreases. Answer: TRUE Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 16) The less sensitive to the interest rate are consumption expenditure and investment, the smaller is the shift in the AD curve when the Fed changes the federal funds rate. Answer: TRUE Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 17) In the short run, the Fed's actions to fight inflation shift the aggregate demand curve leftward. Answer: TRUE Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 18) The Taylor Rule maintains that the Fed should set the growth rate of the quantity of money equal to the growth rate of real GDP. Answer: FALSE Topic: The Taylor Rule Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 68 Copyright © 2014 Pearson Education, Inc.

8 Extended Problems

1) The figure above shows the demand for money in Kiteland. a) If the Kiteland Central Bank has set the quantity of money so that the equilibrium interest rate is 4 percent, draw the supply of money curve. b) Suppose that Kiteland's Central Bank wants to raise the interest rate by 1 percentage point. By how much must it change the quantity of real money? c) In order to change the quantity of money to raise the interest rate by one percentage point, if the Central Bank uses an open market operation, does it make an open market purchase or an open market sale? Explain your answer.

Answer:

a) See the figure above. When the supply of money is 250 billion yuks, or MS0, the interest rate is 4 percent b) See the figure above. To raise the interest rate from 4 percent to 5 percent, the Central Bank decreases the supply of money from 250 billion yuks, MS0, to 150 billion yuks, MS1. So the Central Bank decreases the quantity of real money by 100 billion yuks. c) The Central Bank conducts an open market sale. As it does so, the bank reserves decrease, the banks cut their lending until the amount of loans is consistent with the new level of reserves. As bank loans decrease, the quantity of money decreases. Topic: Changing the Interest Rate, Fed Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 2) The figure above shows the demand for money in Kiteland. a) If the Kiteland Central Bank has set the quantity of money so that the equilibrium interest rate is 4 percent, draw the supply of money curve. b) Suppose Kiteland's real GDP increases so that the demand for money changes by 100 billion yaks. The Kiteland Central Bank takes no actions. Show the effects of this event on your figure. What happens to the interest rate? What happens to the quantity of money in the economy? c) If the Central Bank wants to prevent the interest rate from changing, what must it do to the quantity of money? Draw the new supply of money curve. d) In order to change the quantity of money to keep the interest rate constant, suppose the Kiteland Central Bank uses open market operations. Does it make an open market purchase or an open market sale? Explain your answer.

Answer:

a) See the figure above. When the demand for of money is the initial demand, MD0, and the supply of money is MS, 250 billion yuks, then the interest rate is 4 percent. b) When real GDP increases, the demand for money increases. In this case, the increase in real GDP increases the demand for money so that the demand for money curve shifts rightward from MD0 to MD1. Because the Kiteland Central Bank takes no action, the quantity of money remains the same, 250 billion yuks, and the supply of money curve remains MS0. With no change in the quantity of money, the increase in the demand for money raises the interest rate from 4 percent to 5 percent. c) To prevent the interest rate from rising, the Kiteland Central Bank increases the quantity of money from MS0 to MS1. d) The Kiteland Central Bank makes an open market purchase. As it does so, the bank reserves increase, the banks increase their lending and so the quantity of money increases. Topic: Changing the Interest Rate, Fed Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

3) In the economy of Rulewania, the current inflation rate is 6 percent and the Central Bank's target inflation rate is 2 percent. Real GDP exceeds potential GDP by 1 percent, and the longterm growth rate of real GDP is 5 percent. The medium-term growth rate of the velocity of circulation of the monetary base is 2 percent. According to the Taylor rule, what federal funds rate should the Central Bank set? Answer: The Taylor rule is to set the federal funds rate equal to 2 percent plus the inflation rate plus one half of the gap between the actual inflation rate and the target inflation rate plus one half of the percentage deviation of real GDP from potential GDP. So the federal funds rate is equal to: . Topic: Taylor Rule and McCallum Rule Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

Macroeconomics, 11e (Parkin) Chapter 15 International Trade Policy 1 How Global Markets Work 1) The fundamental force that generates international trade is A) absolute advantage. B) comparative advantage. C) law of diminishing returns. D) law of increasing costs. Answer: B Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 2) The fundamental force that drives international trade is: A) Comparative advantage B) Absolute advantage C) Countries' desire to increase their trade surplus D) Cheap labor in countries like China or India Answer: A Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 3) Comparative advantage implies that a country will A) import those goods in which the country has a comparative advantage. B) export those goods in which the country has a comparative advantage. C) find it difficult to conclude free trade agreements with other nations. D) export goods produced by domestic industries with low wages relative to its trading partners. Answer: B Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

4) Prior to international trade, if country A has a lower price of good X than does country B, then we know definitely that A) country B has an absolute advantage in the production of good X. B) country B has a comparative advantage in the production of good X. C) country A has an absolute advantage in the production of good X. D) country A has a comparative advantage in the production of good X. Answer: D Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 5) When the principle of comparative advantage is used to guide trade, then a country will specialize by producing only A) goods with the highest opportunity cost. B) goods with the lowest opportunity costs. C) goods for which production takes fewer worker-hour than another country. D) goods for which production costs are more than average total costs. Answer: B Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 6) The United States decides to follow its comparative advantage and specialize in the production of airplanes. Which of the following will occur? A) more airplanes will be produced in the United States B) there will be no change in the price of airplanes in the United States C) the world price of airplanes will increase D) the quantity of airplanes demanded in the United States will increase Answer: A Topic: Gains from Trade, Changes in Production Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 7) A country specializes in the production of goods for which it has a comparative advantage. We find that A) some producers and consumers win, some lose, but overall the gains exceed the losses B) all producers win C) all consumers win D) producers win, consumers lose, but overall the gains exceed the losses Answer: A Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 2 Copyright © 2014 Pearson Education, Inc.

8) Consider a market that sells some of its goods as exports. Who does NOT benefit? A) domestic consumers B) domestic producers C) workers in the industry D) foreign consumers Answer: A Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 9) Who benefits from imports? A) domestic consumers B) domestic producers C) foreign consumers D) domestic workers in the industry Answer: A Topic: Gains from Trade, Imports Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 10) Consider a market that, with no international trade, is initially in equilibrium with quantity demanded equal to quantity supplied at a price of $20. If the world price of the good is $10 and the country opens up to international trade then in this market A) imports will increase, price will fall, and quantity supplied will fall B) exports will increase, price will be unchanged, and quantity supplied will increase C) imports will increase, price will decrease, and the supply curve will shift to the left D) quantity demanded will decrease, quantity supplied will decrease, and price will decrease Answer: A Topic: Gains from Trade, Imports Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

11) Based on the table below, at what world price would the country import? Price 2 4 6 8 10 12

QDemanded 100 95 90 85 80 75

QSupplied 70 75 80 85 90 95

A) all prices below $8 B) at exactly $8 C) all prices above $8 D) it is impossible to say Answer: A Topic: Imports Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 12) Suppose the world price of a good is $4. Based on the table below, the country will Price 2 4 6 8 10 12

QDemanded 100 95 90 85 80 75

QSupplied 70 75 80 85 90 95

A) import 20 units B) export 20 units C) import 10 units D) export 10 units Answer: A Topic: Imports Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

13) In a market open to international trade, at the world price the quantity demanded is 150 and quantity supplied is 200. This country will A) export 50 units. B) import 50 units. C) export 200 units. D) import 150 units. Answer: A Topic: Gains from Trade, Exports Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 14) Based on the table below, at what world price would the country export? Price 2 4 6 8 10 12

QDemanded 100 95 90 85 80 75

QSupplied 70 75 80 85 90 95

A) all prices above $8 B) at only $8 C) all prices below $8 D) it is impossible to say Answer: A Topic: Exports Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

The figure shows the market for shirts in the United States, where D is the domestic demand curve and S is the domestic supply curve. The world price is $20 per shirt. 15) In the figure above, with international trade Americans buy ________ million shirts per year. A) 48 B) 32 C) 16 D) 24 Answer: A Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills 16) In the figure above, with international trade ________ million shirts per year are produced in the United States. A) 48 B) 32 C) 16 D) 20 Answer: C Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills

17) In the figure above, with international trade the United States ________ million shirts per year. A) imports 32 B) imports 48 C) exports 16 D) exports 32 Answer: A Topic: Imports Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills

The figure shows the market for helicopters in the United States, where D is the domestic demand curve and S is the domestic supply curve. The United States trades helicopters with the rest of the world at a price of $36 million per helicopter. 18) In the figure above, with international trade U.S. companies buy ________ helicopters per year. A) 240 B) 480 C) 720 D) 360 Answer: A Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills 7 Copyright © 2014 Pearson Education, Inc.

19) In the figure above, with international trade ________ helicopters per year are produced in the United States. A) 360 B) 480 C) 720 D) 240 Answer: C Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills 20) In the figure above, the United States ________ helicopters per year. A) exports 480 B) exports 720 C) imports 480 D) imports 240 Answer: A Topic: Exports Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills 21) Which of the following statements about U.S. international trade in 2009 is correct? A) The value of U.S. exports exceeded the value of U.S. imports. B) The value of U.S. exports was about 33 percent of the value of total U.S. production. C) The United States imported only goods. D) The United States was the world's largest trader. Answer: D Topic: Study Guide Question, International Trade Today Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 22) The United States has a comparative advantage in producing cotton if the U.S. price of cotton before international trade is ________ the world price A) less than B) equal to C) greater than D) not comparable to Answer: A Topic: Study Guide Question, Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

23) Compared to the situation before international trade, after the United States exports a good production in the United States ________ and consumption in the United States ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Study Guide Question, Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 24) Compared to the situation before international trade, after the United States imports a good production in the United States ________ and consumption in the United States ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Topic: Study Guide Question, Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills

2 International Trade Restrictions 1) A tariff is a A) tax on an exported good or service. B) tax on an imported good or service. C) subsidy on an exported good. D) subsidy on an imported good. Answer: B Topic: Trade Restrictions Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 2) A tariff A) is a tax imposed on imported goods. B) is a tax imposed on exported goods. C) encourages worldwide specialization according to the principle of comparative advantage. D) has no effect on prices paid by domestic consumers even though it increases the revenue collected by domestic producers. Answer: A Topic: Trade Restrictions Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 3) A tariff is A) a licensing regulation that limits imports. B) a tax on an exported good. C) a tax on an imported good. D) an agreement to restrict the volume of exports. Answer: C Topic: Trade Restrictions Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 4) A tax that is imposed by the importing country when an imported good crosses its international boundary is called A) an import quota. B) dumping. C) a voluntary export restraint. D) a tariff. Answer: D Topic: Trade Restrictions Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 10 Copyright © 2014 Pearson Education, Inc.

5) A major purpose of tariffs is to A) encourage imports. B) encourage exports. C) discourage imports. D) discourage exports. Answer: C Topic: Trade Restrictions Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 6) Tariffs and import quotas differ in that A) one is a form of trade restriction, while the other is not. B) one is a tax, while the other is a limit. C) one is imposed by the government, while the other is imposed by the private sector. D) one is legal, while the other is not. Answer: B Topic: Trade Restrictions Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 7) Tariffs and import quotas both result in A) lower levels of domestic production. B) the domestic government gaining revenue. C) lower levels of imports. D) higher levels of domestic consumption. Answer: C Topic: Trade Restrictions Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 8) If the United States imposes a tariff on imported cars, the A) U.S. demand curve shifts rightward. B) U.S. demand curve shifts leftward. C) U.S. supply curve shifts rightward. D) price in the United States rises but neither the U.S. demand curve nor the U.S. supply curve shift. Answer: D Topic: Effects of a Tariff Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Analytical Skills

9) Suppose the country of Atlantica imposes a tariff on foreign-produced cars. As a result of the tariff, A) tariff revenue collected by the government in the Atlantica increases. B) there is an increase in the number of imported cars. C) the gains from trade rise. D) there are more efficient trade agreements between Atlantica and its trade partners. Answer: A Topic: Effects of a Tariff Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Analytical Skills 10) Which of the following statements concerning tariffs is NOT true? A) A tariff results in a loss for domestic consumers of the good. B) A tariff creates revenue for the government. C) A tariff decreases international trade. D) A tariff leaves the price of imports unchanged. Answer: D Topic: Effects of a Tariff Skill: Recognition Status: Modified 10th edition AACSB: Communication 11) If a country imposes a tariff on an imported good, the tariff ________ the price in the importing country and ________ the quantity of imports. A) raises; decreases B) raises; increases C) raises; does not change D) lowers; does not change Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 12) A tariff ________ the quantity of the good imported and ________ the domestic price of the imported good. A) decreases; decreases B) decreases; increases C) increases; lowers D) does not change; increases Answer: B Topic: Effects of a Tariff Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Analytical Skills 12 Copyright © 2014 Pearson Education, Inc.

13) A tariff imposed by the United States on Japanese cars ________ the price of cars in the United States and ________ the quantity of Japanese cars imported into the United States. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases Answer: B Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 14) If a tariff is imposed, the price paid by domestic consumers will ________ and the amount imported will ________. A) increase; decrease B) increase; not change C) not change; increase D) increase; increase Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 15) If the United States imposes a tariff of $1 per imported shirt, the higher tariff A) raises the price of a shirt to U.S. consumers. B) benefits U.S. shirt consumers. C) increases imports of shirts into the United States. D) None of the above Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 16) If the United States imposes a tariff on imported steel, the tariff will A) raise the U.S. price of imported steel. B) decrease the U.S. production of steel. C) increase the total U.S. consumption of steel. D) decrease employment in the U.S. steel industry. Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills

17) Suppose the country of Mooland imposes tariffs on imported beef from the country of Aqualand. As a result of the tariffs, the A) price of beef in Mooland falls. B) quantity of beef exported by Mooland increases. C) quantity of beef imported by Mooland decreases. D) quantity of beef imported by Mooland increases. Answer: C Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 18) Lowering the tariff on good X will A) increase domestic employment in industry X. B) increase the domestic imports of good X. C) increase the domestic price of good X. D) have no effect unless the nation's trading partner also lowers its tariff on good X. Answer: B Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 19) Reducing a tariff will ________ the domestic production of the good and ________ the total domestic consumption of the good. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 20) In 2013 the United States reduced the tariff on ethanol. This tariff reduction ________ the U.S. production of ethanol and ________ the total U.S. consumption of ethanol. A) increased; increased B) increased; decreased C) decreased; increased D) decreased; decreased Answer: C Topic: Effects of a Tariff Skill: Conceptual Status: New AACSB: Analytical Skills 14 Copyright © 2014 Pearson Education, Inc.

21) Increasing a tariff will ________ the domestic quantity consumed of the good, while ________ the domestic production of the good. A) increase; increasing B) increase; decreasing C) decrease; increasing D) decrease; decreasing Answer: C Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 22) A U.S. tariff on textiles would ________ U.S. clothing prices and ________ jobs in the U.S. textile industry. A) reduce; decrease B) reduce; increase C) raise; decrease D) raise; increase Answer: D Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 23) Tariffs A) generate revenue for consumers. B) generate revenue for the government. C) encourage domestic consumers to buy more imports. D) encourage domestic producers to produce less. Answer: B Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 24) The United States imports cars from Japan. If the United States imposes a tariff on cars imported from Japan, American A) consumers will lose and Japanese producers will gain. B) tariff revenue will equal the loss inflicted on American consumers. C) consumers will lose and American producers will gain. D) car manufacturers will gain revenue equal to the revenue lost by Japanese car manufacturers. Answer: C Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills 15 Copyright © 2014 Pearson Education, Inc.

25) The winners from a tariff on imports are A) producers and government B) producers C) consumers D) consumers, producers, and government Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 26) In 2013 the United States reduced the tariff on ethanol. The winners from the tariff reduction are A) U.S. producers and the U.S. government. B) U.S. producers only. C) U.S. consumers only. D) U.S. consumers, U.S. producers, and the U.S. government. Answer: C Topic: Effects of a Tariff Skill: Conceptual Status: New AACSB: Ethical Reasoning 27) In 2013 the United States was considering imposing a tariff on solar panels imported from China. Which of the following groups would gain from this tariff? I. U.S. consumers of solar panels II. U.S. producers of solar panels III. Chinese producers of solar panels A) I only. B) I and II only. C) II only. D) I and III only. Answer: C Topic: Effects of a Tariff Skill: Conceptual Status: New AACSB: Ethical Reasoning

28) A tariff is imposed on a good. The tariff will ________ quantity supplied, ________ quantity demanded, and ________ price in the home country. A) increase; decrease; increase B) increase; remain unchanged; remain unchanged C) increase; increase; increase D) increase; decrease; decrease Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

The figure shows the market for shirts in the United States, where D is the domestic demand curve and S is the domestic supply curve. The world price is $20 per shirt. The United States imposes a tariff on imported shirts, $4 per shirt. 29) In the figure above, with the tariff Americans buy ________ million shirts per year. A) 40 B) 48 C) 32 D) 16 Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills 17 Copyright © 2014 Pearson Education, Inc.

30) In the figure above, with the tariff the United States imports ________ million shirts per year. A) 24 B) 8 C) 32 D) 16 Answer: D Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills 31) In the figure above, the tariff ________ U.S. imports of shirts by ________ million shirts per year. A) decreases; 16 B) decreases; 8 C) increases; 8 D) increases; 4 Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills 32) In the figure above, the tariff ________ the domestic production of shirts in the United States by ________ per year. A) increases; 8 million B) decreases; 16 million C) increases; 4 million D) decreases; 8 million Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills 33) In the figure above, the U.S. government's revenue from the tariff is ________. A) $64 million B) $32 million C) $128 million D) $48 million Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills 18 Copyright © 2014 Pearson Education, Inc.

34) During the Great Depression in the 1930s, the average tariff level in the United States peaked at about A) zero. B) 6 percent. C) 20 percent. D) 100 percent. Answer: C Topic: History of Tariffs Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 35) Average tariff levels in the United States in the last decade are A) about equal to the average since 1930. B) above the average since 1930. C) positive, but below the average since 1930. D) zero, as there are no longer any tariffs in the United States. Answer: C Topic: History of Tariffs Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 36) The Smoot-Hawley Act was enacted in A) 1980. B) 2000. C) 1930. D) 1950. Answer: C Topic: Smoot-Hawley Act Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 37) The Smoot-Hawley Act introduced A) opportunities for expanding U.S. foreign trade. B) the highest tariffs set by the United States in the last 80 years. C) a framework promoting international free trade. D) revenue tariffs as a major source of U.S. government revenues. Answer: B Topic: The History of Tariffs Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

38) The Smoot-Hawley Act A) made most tariffs illegal. B) greatly raised tariffs. C) gave the President the right to broker trade deals with other nations. D) recognized Congress's right to deny trade authorization powers to the President. Answer: B Topic: The History of Tariffs Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 39) U.S. tariffs in the peaked in A) 1992. B) 1961. C) 1940. D) 1933. Answer: D Topic: The History of Tariffs Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 40) Since 1930, tariff levels in the United States have A) generally declined. B) steadily risen. C) increased during expansions. D) decreased during recessions. Answer: A Topic: The History of Tariffs Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 41) Of the following, in which decade were U.S. tariffs at their lowest level? A) 2000s B) 1970s C) 1950s D) 1930s Answer: A Topic: The History of Tariffs Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

42) Which of the following best describes the history of tariffs in the United States over the past 70 years? A) Tariffs were at their highest level in the 1970s and now average just over 10 percent. B) Tariffs have declined overall since the early 1930s and now average just over 10 percent. C) Tariffs reached a maximum in the early 1930s and now average less than 5 percent. D) Average tariff rates have not changed much since the early 1930s and are less than 5 percent. Answer: C Topic: The History of Tariffs Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 43) The current U.S. average tariff rate A) less than 5 percent. B) greater than 10 percent. C) approximately 20 percent. D) over 50 percent. Answer: A Topic: The History of Tariffs Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 44) An import quota is A) a tariff that is a fixed percentage of the price of a good. B) a tariff that is a fixed dollar amount per unit of a good. C) an agreed upon price for a good to be imported at a specified future date. D) a restriction that specifies the maximum amount of a good that may be imported. Answer: D Topic: Import Quota Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 45) Import quotas A) are the same as tariffs. B) set the maximum number of units of a good that can be imported. C) are not used by the United States. D) set the minimum percentage of the value of a product that must consist of imported components. Answer: B Topic: Import Quota Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

46) An import quota is a A) tariff imposed on goods that are dumped in the country. B) law that prevents ecologically damaging goods from being imported into a country. C) market-imposed balancing factor that keeps prices of imports and exports in equilibrium. D) government-imposed restriction on the quantity of a specific good that can be imported. Answer: D Topic: Import Quota Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 47) An import quota specifies the A) highest price that can be charged for an imported good. B) per unit tax that must be paid on an imported good. C) maximum quantity of a good that may be imported during a specified time period. D) minimum quantity of a good that must be exported during a specified time period. Answer: C Topic: Import Quota Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 48) Import quotas A) encourage freer trade. B) are a tax on an imported good. C) set the number of units of a good that can be imported. D) set the minimum percentage of the value of a good that can consist of imported components. Answer: C Topic: Import Quota Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 49) An import quota protects domestic producers by A) setting a limit on the amount of imports. B) placing a prohibitive tax on imports. C) encouraging competition among domestic producers. D) increasing the total supply of the product. Answer: A Topic: Import Quota Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

50) The U.S. government limits the amount of sugar that can be imported into the United States. This policy is A) an import quota. B) a tariff. C) a comparative advantage limitation. D) None of the above answers are correct. Answer: A Topic: Import Quota Skill: Recognition Status: New AACSB: Reflective Thinking 51) The effect of an import quota is to A) increase the supply of the good and lower its price. B) increase the supply of the good and increase its price. C) increase the demand for the good and increase its price. D) decrease the supply of the good and raise its price. Answer: D Topic: Effects of an Import Quota Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 52) An import quota directly restricts ________ and are designed to protect domestic ________. A) exports; consumers B) exports; producers C) imports; consumers D) imports; producers Answer: D Topic: Effects of an Import Quota Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 53) The U.S. government imposes an import quota on sugar. This import quota helps ________ and harms ________. A) U.S. producers of sugar; U.S. consumers of sugar B) U.S. producers of sugar; the U.S. government C) the U.S. government; U.S. consumers of sugar D) U.S. consumers of sugar; U.S. producers of sugar Answer: A Topic: Effects of an Import Quota Skill: Conceptual Status: New AACSB: Analytical Skills

54) In 2012 the United States government tightened the import quota on sugar by decreasing the quantity of sugar that could be imported. Which of the following groups would gain from this change? I. U.S. consumers of sugar II. U.S. producers of sugar III. Foreign producers of sugar A) I only. B) I and II only. C) II only. D) I and III only. Answer: C Topic: Effects of an Import Quota Skill: Conceptual Status: New AACSB: Ethical Reasoning 55) Import quotas ________ the price of imported goods and ________ the quantity consumed in the nation imposing the quota. A) raise; increase B) raise; decrease C) lower; increase D) lower; decrease Answer: B Topic: Effects of an Import Quota Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 56) In 2012 the U.S. government reduced the quantity of sugar that can be imported from other nations. This action ________ the price of sugar in the United States and ________ the quantity consumed in the United States. A) raised; increased B) raised; decreased C) lowered; increased D) lowered; decreased Answer: B Topic: Effects of an Import Quota Skill: Conceptual Status: New AACSB: Analytical Skills

57) If a government imposes a quota on imports of a popular doll, the price of the doll in the country will ________ and the quantity purchased in the country will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease Answer: B Topic: Effects of an Import Quota Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 58) A key difference between tariffs and quotas is that A) consumers are hurt with quotas but not with tariffs. B) consumers are hurt with tariffs but not with quotas. C) the government receives revenue with tariffs, but the importer receives the added revenue with quotas. D) the government receives revenue with quotas, but the importer receives the added revenue with tariffs. Answer: C Topic: Tariffs and Import Quotas Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 59) A difference between a quota and a tariff is that with a quota the A) person who has the right to import the good captures an extra gain. B) exporting government collects an extra gain in the form of revenue. C) importing government collects an extra gain in the form of revenue. D) domestic consumers are not harmed. Answer: A Topic: Tariffs and Import Quotas Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 60) A difference between a quota and a tariff is that A) a tariff generates a higher price than does a quota. B) a tariff generates a greater reduction in exports than does a quota. C) a quota increases profits of domestic producers more than does a tariff. D) the government collects revenues from a tariff but does not collect revenues from a quota. Answer: D Topic: Tariffs and Import Quotas Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 25 Copyright © 2014 Pearson Education, Inc.

61) A key difference between a quota and a tariff is that A) a quota has a larger effect on quantity than on price. B) a tariff has a larger effect on quantity than on price. C) the government of the importing country gains revenue from a tariff, but the price gap caused by a quota benefits domestic importers. D) All of the above answers are correct. Answer: C Topic: Tariffs and Import Quotas Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 62) Voluntary export restraints (VERs) A) do not protect domestic producers. B) raise revenue for the governments involved. C) raise the prices paid by domestic consumers. D) Both answers B and C are correct. Answer: C Topic: Voluntary Export Restraints Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 63) A tariff is A) a government imposed limit on the amount of a good that can be exported from a nation. B) a government imposed barrier that sets a fixed limit on the amount of a good that can be imported into a nation. C) a tax on a good imported into a nation. D) an agreement between governments to limit exports from a nation. Answer: C Topic: Study Guide Question, How Tariffs Work Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 64) Who benefits from a tariff on a good? A) Domestic consumers of the good B) Foreign governments C) Domestic producers of the good D) Foreign producers of the good Answer: C Topic: Study Guide Question, How Tariffs Work Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills

65) Who benefits from an import quota on a good? A) Domestic consumers of the good B) Foreign governments C) Domestic producers of the good D) Foreign producers of the good Answer: C Topic: Study Guide Question, How Import Quotas Work Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 66) Tariffs ________ the domestic price of the good and import quotas ________ the domestic price of the good. A) lower; lower B) lower; raise C) raise; lower D) raise; raise Answer: D Topic: Study Guide Question, Effects of Tariffs and Import Quotas Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 67) When does the domestic government gain the MOST revenue? A) when it imposes a tariff B) when it imposes an import quota C) when it negotiates a voluntary export restraint D) The amount of revenue it gains is the same with a tariff and a voluntary export restraint. Answer: A Topic: Study Guide Question, How Tariffs Work Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

3 The Case Against Protection 1) Economists usually agree with which of the following arguments that favor protectionism? A) the competition with cheap foreign labor defense B) the job protection defense C) the dumping defense D) None of the above. Economists generally agree that arguments in favor of protection are flawed. Answer: D Topic: The Case Against Protection Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 2) Most economists agree that valid reasons for protecting trade include which of the following? I. The economies of scale argument. II. The saving jobs argument. III. The protection of high wages argument. A) I only B) I and II C) I and III D) None of the reasons are valid. Answer: D Topic: The Case Against Protection Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 3) Which of the following are valid reasons advanced by almost all economists? Protection A) saves jobs. B) prevents rich countries from exploiting poorer countries. C) is a good way for governments in developed nations to raise revenue. D) Economists would not support any of the above reasons. Answer: D Topic: The Case Against Protection Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning

4) Which of the following are reasons economists consider valid for trade protection? I. Protection penalizes countries that have weak environmental standards. II. Protection limits dumping of low-wage jobs into the domestic economy. III. Protection prevents low-wage jobs in foreign countries from lowering wages in the United States. A) I and II B) II and III C) I, II, and III D) none of the above Answer: D Topic: The Case Against Protection Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 5) The idea of dynamic comparative advantage is the basis for which of the following arguments for protection from foreign competition? A) the cheap foreign labor argument B) the infant-industry argument C) the dumping argument D) the saves jobs argument Answer: B Topic: The Case Against Protection; Infant Industry Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 6) The most efficient way to encourage the growth of an infant-industry is through a A) voluntary export restraint. B) tariff. C) subsidy. D) an import quota. Answer: C Topic: The Case Against Protection; Infant Industry Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

7) The infant industry argument is based on the idea of A) dynamic comparative advantage. B) absolute productivity advantage. C) global monopoly. D) countervailing duties. Answer: A Topic: The Case Against Protection; Infant Industry Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 8) Which of the following statements is true? A) The infant-industry argument is valid only if the benefits of learning-by-doing in the infant industry spill over to other parts of the economy. B) A subsidy to an infant industry is a more efficient way to protect it from foreign competition than a tariff on the competing foreign goods. C) Both statements are true. D) Neither of the statements is true. Answer: C Topic: The Case Against Protection; Infant Industry Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 9) An assumption behind the infant-industry argument for tariff protection is that A) foreign competitors are selling output below average cost. B) the domestic industry will be facing an upward adjustment in its average cost. C) the domestic industry will eventually gain a comparative advantage in producing the good. D) the market needs additional competition to satisfy consumer demand. Answer: C Topic: The Case Against Protection; Infant Industry Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 10) Dumping occurs when a foreign firm ________. A) pollutes international waters B) disposes of waste material internationally C) sells inferior output to foreigners D) sells its exports at a lower price than its cost of production Answer: D Topic: The Case Against Protection; Dumping Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

11) ________ occurs when a foreign firm sells its exports at a lower price than it costs to produce the goods. A) Dumping B) Comparative advantage C) Learning-by-doing D) A tariff Answer: A Topic: The Case Against Protection; Dumping Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 12) When a foreign firm sells its exports at a lower price than its cost of production, the firm is A) imposing an economies of scale cost. B) dumping. C) avoiding a tariff. D) competing in an infant industry. Answer: B Topic: The Case Against Protection; Dumping Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 13) In 2012 the U.S. government claimed that Chinese producers of solar panels were dumping panels in the United States, which means that the producers were accused of A) avoiding the U.S. tariff on solar panels. B) selling the panels in the United States at a price lower than their cost of production. C) selling the panels in the United States at a higher price than they were selling the panels in China. D) None of the above answers are correct. Answer: B Topic: The Case Against Protection; Dumping Skill: Recognition Status: New AACSB: Reflective Thinking 14) Which of the following statements is true? A) Dumping is illegal under the rules of the WTO. B) Dumping occurs when a foreign firm sells its exports at a higher price than its cost of production. C) Both statements are true. D) Neither of the statements is true. Answer: A Topic: The Case Against Protection; Dumping Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 31 Copyright © 2014 Pearson Education, Inc.

15) Suppose that the country of Pacifica sold its cars in Atlantica for less than it costs to produce the cars. Pacifica could be accused of A) avoiding import quotas. B) increasing its gains from trade. C) dumping. D) engaging in learning-by-doing. Answer: C Topic: The Case Against Protection; Dumping Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 16) When a firms "dumps" some of its products in another country, it A) creates an environmental hazard in the receiving country. B) sells its products abroad at a price lower than it costs to produce the goods. C) increases the total level of employment in the receiving country. D) is specializing according to comparative advantage. Answer: B Topic: The Case Against Protection; Dumping Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 17) Japan was accused of dumping in the steel industry within the United States when it A) negotiated an illegal agreement to raise prices with U.S. steel industries. B) prohibited imports of U.S. steel into Japan. C) sold steel in the United States at a price below its cost of production. D) negotiated a illegal trade deal with Canada. Answer: C Topic: The Case Against Protection; Dumping Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 18) Some observers opposing free trade argue that when we buy shoes from Brazil or shirts from Taiwan, U.S. workers lose their jobs. The fact of the matter is that A) no U.S. worker has actually lost a job because of free trade. B) most jobs lost because of free trade pay less than the poverty level. C) free trade creates jobs in export industries. D) the jobs lost are concentrated in restricted geographic areas. Answer: C Topic: The Case Against Protection; Saves Jobs Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 32 Copyright © 2014 Pearson Education, Inc.

19) Using calculations of the cost to Americans per job saved in protected industries, it can be concluded that A) import quotas are an efficient way to redistribute income. B) each job saved is worth more than the cost imposed on consumers per job saved. C) each job saved is worth less than the cost imposed on consumers per job saved. D) tariffs are an efficient way to redistribute income to disadvantaged groups. Answer: C Topic: The Case Against Protection; Saves Jobs Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 20) It is possible for the United States to compete against cheap foreign labor because expensive domestic workers A) pay U.S. taxes. B) receive subsidies. C) are more productive. D) belong to unions. Answer: C Topic: The Case Against Protection; Cheap Foreign Labor Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 21) In poorer countries, free trade ________ the demand for labor in these countries and ________ the wages paid in these countries. A) decreases; lowers B) decreases; raises C) increases; lowers D) increases; raises Answer: D Topic: The Case Against Protection; Cheap Foreign Labor Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

22) Which of the following statements is true? A) International trade raises wages in developing countries. B) International trade with reach industrial countries forces people in the developing countries to work for lower wages. C) International trade leads to job losses in both import competing industries and exporting industries. D) Unlike other types of international trade, offshoring does not bring any gains from trade. Answer: A Topic: The Case Against Protection; Cheap Foreign Labor Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 23) Which of the following is an effective counter argument to the claim that protectionism saves domestic jobs? A) Protectionism eliminates domestic jobs in export industries. B) Imports create jobs in this country for people selling and servicing imported items. C) The cost of saving domestic jobs through protectionism may be high. D) all of the above Answer: D Topic: The Case Against Protection; Saves Jobs Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 24) The reason that average labor costs are higher in the United States than in Haiti is that A) workers are more productive in the United States. B) U.S. workers have a comparative advantage. C) Haitian workers have a comparative advantage. D) Haitian workers do not have union representation. Answer: A Topic: The Case Against Protection; Cheap Foreign Labor Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

25) Which of the following are TRUE regarding the argument that trade barriers protect U.S. workers from cheap foreign labor? I. Low-wage foreigners are just as productive as U.S. workers. II. U.S. workers have a comparative advantage in low-wage jobs. A) I only B) II only C) I and II D) Neither I nor II is correct. Answer: D Topic: The Case Against Protection; Cheap Foreign Labor Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 26) The argument that protection ________. A) penalizes poor environmental standards is true B) allows us to compete with cheap foreign wages is true C) is necessary for infant industries is true D) saves jobs is flawed Answer: D Topic: The Case Against Protection Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 27) Which of the following is an explanation for the existence of trade restrictions? A) Tariffs generate revenue for the government. B) rent seeking C) inefficient quotas D) Both answers A and B are key explanations. Answer: D Topic: Why Is International Trade Restricted? Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 28) International trade is restricted because A) there is an uneven distribution of benefits and costs of free trade. B) free trade creates an inefficient use of resources. C) free trade leads to higher costs. D) free trade stifles diversity and stability. Answer: A Topic: Why Is International Trade Restricted? Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 35 Copyright © 2014 Pearson Education, Inc.

29) In industrial countries, there is more reliance on ________, as opposed to ________ for government revenue. A) tariffs; tax collection B) quotas; tariffs C) tax collection; tariffs D) tariffs; quotas Answer: C Topic: Tariff Revenues Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 30) In developing countries, there is more reliance on ________ as opposed to ________ for government revenue. A) tariffs; tax collection B) quotas; tariffs C) tax collection; tariffs D) tariffs; quotas Answer: A Topic: Tariff Revenues Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 31) Which of the following is a TRUE statement? A) Everyone benefits from free trade. B) Only exporters benefit from trade. C) All producers benefit from trade and but not all consumers benefit. D) Free trade harms domestic producers of goods that face import competition. Answer: D Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 32) Suppose that the country of Pacifica imposes a quota on bananas. The reason that the government imposed this trade restriction could be A) that the government of Pacifica needs to increase its revenue. B) lobbying from banana farmers in Pacifica. C) comparative advantage. D) Both answers A and B are correct. Answer: B Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 36 Copyright © 2014 Pearson Education, Inc.

33) in 2013 the U.S. government imposed a tariff on Chinese solar panels. The group that lobbied for this tariff was A) U.S. consumers of solar panels. B) only U.S. producers of solar panels. C) only Chinese producers of solar panels. D) Both U.S. and Chinese producers of solar panels. Answer: B Topic: Rent Seeking Skill: Recognition Status: New AACSB: Ethical Reasoning 34) Of the groups listed below, which is most likely to lobby for protection? A) workers in the import industry B) workers in the export industry C) consumers in the import industry D) producers in the export industry Answer: A Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 35) Rent seeking is one reason why countries choose to A) restrict trade. B) export and import the same goods. C) work for freer trade. D) follow the theory of comparative advantage. Answer: A Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 36) When a group lobbies for the prevention of free trade, the most likely reason is A) rent seeking. B) tariff revenue. C) defense against expensive domestic labor. D) preservation of the environment. Answer: A Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

37) When considering rent seeking, which of the following is TRUE? A) The anti-free trade group generally will lobby more than the pro-free trade group. B) The pro-free trade group generally will lobby more than the anti-free trade group. C) Usually only the anti-free trade group is concerned about what is best for society at large. D) Only the pro-free trade group is concerned about the government's revenue from tariffs. Answer: A Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 38) A tariff will benefit A) domestic producers by maintaining a higher than free-trade price. B) foreign producers by allowing them to sell at a higher price in markets with tariffs. C) consumers who are able to better afford domestically produced goods. D) All of the above answers are correct. Answer: A Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 39) A tariff hurts A) the government by decreasing its revenue. B) domestic producers who can't compete with cheaper imports. C) consumers who will pay more for the imported good. D) All of the above answers are correct. Answer: C Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 40) The reason tariffs and quotas are imposed is that A) their costs are spread among many people and their benefits are concentrated. B) their costs are concentrated and their benefits are spread among many people. C) they create net benefits in the long run. D) they reduce import dependence. Answer: A Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning

41) One reason that international trade is restricted is that A) the individual gain to parties who benefit from the protection will be much larger than the individual loss to parties who lose. B) the government completely pays the losers from international trade for their losses. C) protectionism benefits consumers. D) the government cannot measure the cost of protectionism. Answer: A Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 42) In 2013 the U.S. government removed its tariff on imported ethanol. Removing the tariff benefited ________ of ethanol, each of whom gained a ________. A) U.S. producers; little B) U.S. producers; lot C) U.S. consumers; little D) U.S. consumers; lot Answer: C Topic: Rent Seeking Skill: Conceptual Status: New AACSB: Ethical Reasoning 43) Usually the removal of trade barriers affecting a particular good benefits ________ people domestically, each of whom gains a ________. A) a few; little B) a few; lot C) many; little D) many; lot Answer: C Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 44) Usually the imposition of trade barriers affecting a particular good benefits ________ people domestically, each of whom gains a ________. A) a few; little B) a few; lot C) many; little D) many; lot Answer: B Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 39 Copyright © 2014 Pearson Education, Inc.

45) The gains from free trade are enjoyed by a ________ number of people and the costs of free trade are imposed by ________ number of people. A) small; large B) large; small C) small; small D) large; large Answer: B Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 46) Trade barriers are politically popular because A) they are a way to avoid trade wars and still protect domestic producers. B) people recognize their use as a negotiating tool in international relations. C) their benefits are widespread, while their costs are highly concentrated. D) their benefits are concentrated, while their costs are widespread. Answer: D Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 47) Which of the following reasons explains why rich countries persistently restrict textile imports from poor countries? A) The trade restrictions make textile consumers better off. B) The trade restrictions make workers in poor countries better off. C) The trade restrictions benefit an organized visible special interest in rich countries. D) Rich countries have a strong need for the revenue from these trade restrictions. Answer: C Topic: Rent Seeking Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning 48) When NAFTA was approved, Congress attempted to soften the losses suffered by some industries by A) creating new jobs to hire workers who lost their jobs because of NAFTA. B) setting aside funds to support and retrain workers who lost their jobs because of NAFTA. C) reducing tariffs. D) imposing quotas. Answer: B Topic: Compensating Losers Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 40 Copyright © 2014 Pearson Education, Inc.

49) Which of the following is a reason why only limited attempts are made to compensate those who lose from free international trade? A) Free trade advocates consistently lobby to eliminate compensation. B) It would be difficult to determine the extent to which someone's sufferings were because of free trade and not due to reasons under their own control. C) No one loses in the from free trade in the long run. D) None of the above answers are correct. Answer: B Topic: Compensating Losers Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 50) Selling a product in a foreign nation at a price less than its cost of production is called A) infant-industry exploitation. B) absolute advantage. C) dumping. D) net exporting. Answer: C Topic: Study Guide Question, Dumping Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 51) The (false) idea that an industry should be protected because of learning-by-doing until it is large enough to compete successfully in world markets is the ________ argument for protection. A) cheap foreign labor B) infant industry C) dumping D) comparative advantage Answer: B Topic: Study Guide Question, Infant Industry Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

52) When a rich nation buys a product made in a poor nation, in the poor nation the demand for labor ________ and the wage rate ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A Topic: Study Guide Question, Exploiting Poor Nations Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Analytical Skills 53) Which of the following is a valid reason for protecting an industry? A) The industry is unable to compete with low-wage foreign competitors. B) Protection penalizes lax environmental standards. C) Protection keeps richer nations from exploiting the workers of poorer countries. D) None of the above reasons is a valid reason for protection. Answer: D Topic: Study Guide Question, The Case Against Protection Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 54) Which of the statements about the gains from international trade is correct? A) Everyone gains from international trade. B) Some people gain from international trade and some lose, though overall the gains exceed the losses. C) Some people gain from international trade and some lose; overall the gains exceed the losses. D) Everyone loses from international trade. Answer: B Topic: Study Guide Question, Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Ethical Reasoning

4 News Based Questions 1) Between August 2007 and July 2008, Brazil exported more than 3.5 billion pounds of coffee to the rest of the world. Because of this, we know definitively that A) Brazil has comparative advantage in coffee production B) The rest of the world has comparative advantage in coffee production C) The rest of the world has absolute advantage in coffee production D) Brazil has absolute advantage in coffee production Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 2) Between August 2007 and July 2008, Brazil exported more than 3.5 billion pounds of coffee to the rest of the world. Because of this, we know that A) Brazilian coffee workers "gain" from this trade B) Brazilian producers "lose" from this trade C) Brazilian consumers "gain" from this trade D) Brazilian car manufacturers "lose" from this trade Answer: A Topic: Gains from Trade, Exports Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 3) During 2005-2006 Europe imported more than $70 million worth of US long-grain rice. How is the gain from trade distributed? A) European rice consumers gain from trade. B) There is no gain from trade. C) European rice producers gain from trade. D) American rice consumers gain from trade. Answer: A Topic: Gains from Trade, Imports Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

4) During 2005-2006 Europe imported more than $70 million worth of US long-grain rice. In 2006, the European Union threatened to restrict imports of long-grain rice because traces of genetically modified rice were found mixed in to commercial supplies. What would NOT be an effect in the European rice market if U.S. imports were banned? A) There would be a increase in long-grain rice consumption. B) There would be an increase in European rice production. C) The price of long-grain rice would increase. D) The quantity of long-grain rice imports would decrease. Answer: A Topic: Effects of an Import Quota Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 5) In 2006, the European Union (EU) threatened to ban imports of long-grain rice because traces of genetically modified rice were found mixed in to commercial supplies. Instead of a ban, suppose the EU placed a tariff on the import of long-grain rice. Which of the following would be an outcome of this tariff? A) The EU would gain tariff revenue. B) The social loss would decrease. C) European rice producers would decrease production. D) The price of long-grain rice in the EU would be higher with a tariff than if rice imports were completely banned. Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 6) In 2006, the European Union (EU) threatened to ban imports of long-grain rice because traces of genetically modified rice were found mixed in to commercial supplies. Instead of a complete ban, suppose the EU placed a tariff on the import of long-grain rice. Which of the following would be an outcome of this tariff? A) The price of long-grain rice in the EU would be lower with a tariff than if rice imports were completely banned, but higher than with free trade. B) The price of long-grain rice in the EU would be higher with a tariff than if rice imports were completely banned. C) The price of long-grain rice in the EU would be higher with a tariff than if rice imports were completely banned, but lower than with free trade. D) The price of long-grain rice in the EU would be lower with a tariff than if rice imports were completely banned, but lower than with free trade. Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Communication 44 Copyright © 2014 Pearson Education, Inc.

7) The European Union imports bananas from Latin America as well as imports from Europe's former colonies in the African, Caribbean and Pacific (ACP) group. In 2006 the tariff on bananas from Latin America was higher than on ACP bananas. Which of the following statements is NOT true? A) European consumers are better off with tariff than with free trade. B) For European consumers, the price of ACP bananas is lower than Latin American bananas. C) The gain from free trade is decreased because of banana tariffs. D) The price European consumers pay for bananas is higher with the tariff than the free trade price. Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 8) In 2007, European Union (EU) negotiators have offered to cut tariffs for Latin American bananas to avoid "banana wars." What are the effects of a cut in tariffs? A) The quantity of bananas imported into the EU will increase. B) The price of bananas for consumers will increase. C) The quantity of bananas produced in the EU (such as in France and Spain) will increase. D) Tariff revenue will increase. Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 9) In 2006, European Union tariff on imported bananas from Latin America was €176 a ton. Suppose 2.5 million tons of bananas were imported in 2006 but then the tariff decreased to €152 a ton in 2007 and as a result, 3 million tons were imported in 2007. What is the change in tariff revenue between 2006 and 2007? A) €1,000,000 B) €440,000,000 C) €445,000,000 D) - €1,000,000 Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Communication

10) In 2006, European Union tariff on imported bananas from Latin America was €176 a ton. Suppose 2.5 million tons of bananas were imported in 2006 but then the tariff decreased to €152 a ton in 2007 and as a result, 3 million tons were imported in 2007. What is the tariff revenue in 2007? A) €445,000,000 B) €528,000,000 C) €440,000,000 D) €375,000,000 Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Communication 11) During the first 6 months of 2008, the United States imported 1,655,740,870 pounds of coffee. Suppose the United States is considering placing trade restrictions on the importation of coffee. If the United States has a goal of raising tax revenue from coffee imports, what policy should they pursue? A) Tariff on imported coffee B) Subsidy on imported coffee C) Quota on imported coffee D) Voluntary export restraints on coffee Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 12) During the first 6 months of 2008, the United States imported more than 1.6 billion pounds of coffee. Suppose the United States is considering placing trade restrictions on the importation of coffee. What would be a potential consequence of such a trade restriction? A) The U.S. price of coffee would increase. B) U.S. consumers would drink more coffee. C) The quantity of coffee imported into the United States would increase. D) If the United States instead imposed a quota on coffee imports, government tax revenue would increase by more than with a tariff. Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

13) During the first 6 months of 2008, the United States imported from Africa, Asia, and Latin America more than 1.6 billion pounds of coffee and did not export any coffee. Based on this, we know definitively that: A) The Africa, Asia, and Latin America has comparative advantage in coffee production . B) The US has absolute advantage in coffee production. C) The Africa, Asia, and Latin America has absolute advantage in coffee production. D) The US has comparative advantage in coffee production. Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 14) During the first 6 months of 2008, the United States imported from Africa, Asia, and Latin America more than 1.6 billion pounds of coffee and did not export any coffee. How is the gain from imports distributed between consumers and domestic producers? A) U.S. producers are harmed and U.S. consumers are harmed. B) U.S. producers are harmed and U.S. consumers are helped. C) U.S. producers are helped and U.S. consumers are harmed. D) U.S. producers are harmed and U.S. consumers are helped. Answer: D Topic: Gains from Trade, Imports Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 15) Currently Belize, a country in Central America, has a small coffee industry but does not export any coffee. Suppose the government of Belize, in order to protect the new coffee industry to enable it to grow into a mature industry that can compete in world markets, places a tariff on the importation of coffee. What is the argument for placing the tariff on coffee? A) The infant-industry argument B) The dumping argument C) To protect Belize coffee workers D) To prevent rich countries from exploiting developing countries Answer: A Topic: The Case Against Protection; Infant Industry Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

16) Belize, a country in Central America, has a small coffee industry. Suppose Belize does not have free trade but it has comparative advantage in coffee production. If Belize allowed international trade, what would be the gains from trade? A) Belize coffee producers would gain from trade. B) Belize coffee consumers would gain from trade. C) Belize would gain tariff revenue from trade. D) All of these answers are gains from trade. Answer: A Topic: Gains from Trade, Exports Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 17) During the first 6 months of 2008, the European Union (EU) initiated an anti-dumping case against China for imports of taper candles. What is dumping? A) When China sells its candles to the EU at a lower price than China's cost of production B) When China does not pay the tariff on the candles C) When China sells its candles to the EU at a lower price than other producers D) When China tries to sell more candles to the EU than is allowed by the import quota Answer: A Topic: The Case Against Protection; Dumping Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 18) The U.S.-Colombia Trade Promotion Agreement was signed on November 22, 2006, in Washington, D.C. This comprehensive trade agreement eliminated tariffs and other barriers to goods and services. Currently, no U.S. agricultural exports enjoy tariff-free access to the Colombian market. If the United States has a comparative advantage in agricultural, which of the following is true? A) Columbian agricultural producers were better off before free trade. B) Columbian agricultural consumers were better off before free trade. C) Columbia was better off before the international trade. D) Columbia must have comparative disadvantage in all production. Answer: A Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

19) The U.S.-Colombia Trade Promotion Agreement was signed on November 22, 2006, in Washington, D.C. This comprehensive trade agreement eliminated tariffs and other barriers to goods and services. Colombia will immediately eliminate tariffs on wheat, barley, peanuts, and many other products in which Columbia does not have a comparative advantage. This policy means that the price of peanuts in Columbia will become A) equal to the free trade price B) lower than the free trade price C) higher than the price when a tariff was in place D) higher than the free trade price Answer: A Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 20) Agriculture Secretary Ed Schafer today announced that Chile's Livestock and Agricultural Service approved the U.S. inspection, control and certification systems for poultry, allowing these products to enter the Chilean market effective immediately. What is NOT an effect of this change in Chilean policy on the Chilean poultry market? A) Chile's tariff revenue will increase. B) The quantity of poultry consumed in Chile will increase. C) The quantity of Chilean imports will increase. D) The price for poultry in Chile will decrease. Answer: A Topic: Gains from Trade, Imports Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

5 Essay Questions 1) Define comparative advantage and discuss its role in international trade. Answer: Comparative advantage is the factor that drives international trade. A country has a comparative advantage in the production of a good if the country can produce it at a lower opportunity cost than any other country. Because the cost of production of a good is lower in the nation with the comparative advantage in the good, that country will export the good. The country will then gain by buying the goods from other nations that those nations produce at the lowest opportunity cost, that is, those goods in which the other nations have a comparative advantage. Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 2) "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: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 3) 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: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

4) During 2010, as oil and gas prices continued to increase, a growing number of Americans called for the United States to become less reliant on Middle-Eastern oil. Would it make sense for the United States to try to become totally self-reliant in the production of oil? Why or why not? Answer: It would be foolish for the United States to try to become totally self-reliant in oil production. There is a reason that approximately 58 percent of our oil comes from OPEC nations: Middle-Eastern countries can produce oil at a far lower opportunity cost than U.S. producers. In the Middle East the vast reserves of oil, combined with more lax regulations imposed by the government, have combined to drive down the per barrel opportunity cost of oil extraction to very low levels. Hence the United States gains from trade with these nations. Even though the price of oil in 2010 was higher than it was in 2001, that price was much less than what would be the opportunity cost of producing enough oil domestically so that the United States was totally self-reliant. Topic: Gains from Trade; Consumption Possibilities Skill: Conceptual Status: Revised AACSB: Communication 5) Give a brief description of the history of tariffs in the U.S. Answer: Today, U.S. tariffs are low compared to their historical levels. The average U.S. tariff was highest in the early 1930s when the Smoot-Hawley tariff was passed. The average tariff at that time was about 20 percent. Since then there has been a general downward trend so that today the average tariff is less than 5 percent. The downward trend was fairly rapid until 1950 and has slowed since then. Topic: History of Tariffs Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Communication 6) How does a tariff affect the domestic price of the import, the domestic consumption, the domestic production, and the quantity imported? Answer: A tariff raises the price of the good. As a result, domestic consumption decreases as domestic consumers decrease the quantity they demand. And, also as a result, domestic production increases as domestic producers increase the quantity they supply. Because domestic consumption decreases and domestic production increases, the quantity imported decreases. Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

7) The United States imposes a tariff on foreign limes. How does the tariff affect the U.S. price of a lime and the production of limes in the United States? Answer: The tariff raises the price of limes in the United States. As a result of the higher price, U.S. lime production increases. Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 8) What are the effects of a tariff? Answer: A tariff is a tax on goods that are imported into the country imposing the tariff. The tariff decreases the supply of the imported good, so the tariff raises the domestic price of the good and decreases the quantity imported. Because the price of the good rises, the quantity produced in the country imposing the tariff increases. Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 9) Explain the effects of a quota. Answer: A quota is a quantitative restriction on the maximum amount of a good that can be imported. Because quotas limit the supply of the good, they raise the prices of imported goods and decrease the quantities imported. Unlike a tariff, however, the government gets no revenue from a quota; the revenue from the higher price goes to importers. Topic: Quotas Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 10) Currently, the United States has a quota on the amount of sugar that is allowed to be imported into the United States. What would happen to the price of sugar in the United States if the quota was removed? What would happen to U.S. consumption and U.S. production of sugar? Answer: If the quota is removed, the price of sugar in the United States would fall, U.S. consumption of sugar would increase, and U.S. production of sugar would decrease. Topic: Quotas Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

11) How does a quota affect the domestic price of the import, the domestic consumption, the domestic production, and the quantity imported? Answer: A quota raises the price of the good because it decreases the amount that can be imported. As a result, domestic consumption decreases as domestic consumers decrease the quantity they demand. And, also as a result, domestic production increases as domestic producers increase the quantity they supply. Topic: Quotas Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 12) How does a tariff affect the government's revenue? How does a quota affect the government's revenue? Answer: A tariff is a tax on an imported good. Like all taxes, a tariff increases the government's revenue. However, a quota is quantitative restriction on the amount of a good that can be imported. As such, a quota has no effect on the government's revenue. Topic: Quotas Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 13) Discuss reasons why we see trade restrictions. Are any of these reasons valid? Answer: There are several reasons advanced to restrict trade. These include: the infant-industry argument (that the nation should protect a young industry that will reap learning-by-doing gains in productivity and eventually be able to compete successfully in the world market); dumping (the nation should protect an industry from foreign competitors who sell goods below cost); protection saves jobs (the claim that imports cost U.S. jobs); cheap foreign labor (the assertion that tariffs are necessary to compete with cheap foreign labor); lax environmental standards (the claim that protection is needed to compete against nations with weak environmental standards); and, rich nations exploit developing countries (the suggestion that protection prevents developed nations from forcing people in poor nations to work for slave wages). Economists reject all of these claims as valid reasons for protection. Topic: Why Is International Trade Restricted? Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

14) Two arguments used to promote trade barriers are the infant-industry argument, and the dumping argument. Explain each of these arguments and evaluate whether each one has any flaws. Answer: The infant-industry argument is that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets. The problem with this argument is that if an industry can eventually compete, then its backers should be willing to fund it until that time. In addition, if the industry has benefits that spill over to other industries, then the more efficient government policy is to subsidize the industry rather than protect it from competition. The dumping argument asserts that protection is needed to protect domestic industries from foreign dumping practices designed to eliminate competition. (Dumping is selling a good for a price that is less than its cost of production.) The problems with this argument are two-fold. First, it is extremely difficult to determine if a firm is dumping because determining the cost of production is difficult. Second, even if a firm is dumping, its success in establishing a monopoly is in doubt and its success in maintaining its global (!) monopoly is even more doubtful. Hence dumping to obtain a monopoly is likely a very uncommon practice. Topic: Why Is International Trade Restricted? Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 15) What is dumping? Answer: Dumping is the situation in which a firm sells its export goods and services for a lower price than its cost of production. Topic: The Case Against Protection; Dumping Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Communication 16) Because wage rates are so low in Africa, why don't Microsoft, Cisco and other major corporations close down their American operations and move to Africa? Answer: Wage rates must be weighed against productivity. It is not just wages that influence where production occurs. Wages divided by the productivity of the workers gives the average cost of production. In Africa, workers have low levels of skill, education, and training so their productivity is much less than in the United States. Therefore the cost of production would be far higher in Africa than in America. So even though U.S. wage rates are high, industries stay here because the cost of production is lower because U.S. productivity is so high. Topic: The Case Against Protection; Cheap Foreign Labor Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

17) Some people assert that protection from foreign competition prevents rich countries from exploiting developing countries. What is this argument in more detail and what is its flaw? Answer: The argument claims that rich nations will exploit poor nations by importing goods from the poor nations and that the workers in the poor nations are paid slave wages to produce these goods. This argument has a truly fatal flaw. Free trade increases the demand for the goods produced by workers in developing countries. Thus in order to produce more of these goods, the firms must hire more workers. Hence the demand for the labor used to produce the goods increases, which means that the wage rates paid the workers in the developing countries rises. Thus rather than exploiting the workers in the poor nations, free international trade is one of their few hopes for better lives! Topic: The Case Against Protection, Exploits Poor Countries Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 18) Explain how governments restrict international trade and who benefits as well as who loses from the restrictions. Answer: Governments use tariffs and nontariff barriers, such as quotas, to restrict trade. Tariffs and quotas both boost the domestic price of the protected good. Consumers in that country lose because of the higher price. The domestic suppliers, however, gain from the higher price. Tariffs are source of revenue for the government that imposes it on imported goods, so the domestic government gains from a tariff. Quotas, on the other hand, do not create revenue for government so the government does not gain from a quota. Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 19) What is "rent seeking?" How does it apply to restricting imports? Answer: Rent seeking is lobbying and other political activity that seeks to capture the gains from trade. When imports are restricted, some people gain from the restrictions. Rent seekers, such as domestic producers of import-competing goods or services, lobby the government to impose import restrictions because restrictions allow the rent seekers to gain revenue and/or profit. Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

20) Economics demonstrates that opening up unrestricted free international trade is beneficial to all nations. However, are there any losers from such a policy change? Answer: Yes, there are losers from opening up to free trade. Domestic suppliers of imported goods lose from allowing free trade. Owners of the businesses lose as do workers who had jobs in the import-competing industries. However, it is important to realize that although there are losers from free trade, there also are substantial gains and the gains exceed the loses so that the nation as a whole is made better off with free trade. Topic: Compensating Losers Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication 21) How does the United States attempt to compensate losers from lower trade restrictions? Answer: The U.S. government attempts to compensate workers who lose from lowering U.S. trade restrictions. For instance, the U.S. government set up a fund to support and retrain workers who lost their jobs because of NAFTA. Job losers can also collect unemployment compensation benefits. Topic: Compensating Losers Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Communication

6 Numeric and Graphing Questions Price Quantity supplied (dollars per (thousands of pound) pounds per year) 21 18 15 12 9

120 100 80 60 40

Quantity demanded (thousands of pounds per year) 60 100 140 180 220

1) The United States imports cheese from a variety of countries. The table above gives the domestic supply of, and demand for, cheese in the United States. The world price of cheese is $12 per pound, and trade is unrestricted. a) How many pounds of cheese are consumed in the United States? b) How many pounds of cheese are produced in the United States? c) How many pounds of cheese are imported into the United States? If a $3 per pound tariff is imposed, d) How many pounds of cheese are consumed in the United States? e) How many pounds of cheese are produced in the United States? f) How many pounds of cheese are imported into the United States? g) How much will the U.S. government collect in tariff revenue? h) Who benefits from the tariff? Who loses? Answer: a) 180,000 pounds of cheese are consumed. b) 60,000 pounds of cheese are produced. c) 120,000 pounds of cheese are imported. d) 140,000 pounds of cheese are consumed. e) 80,000 pounds of cheese are produced. f) 60,000 pounds of cheese are imported. g) The government collects $3 per pound × 60,000 pounds = $180,000. h) U.S. producers and the U.S. government gain while U.S. consumers and foreign producers lose. Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills

2) The above figure shows the domestic supply of and domestic demand for an imported good. The world price is $15 per unit. a) At the world price of $15 per unit, what is the domestic consumption and domestic production? b) At the world price of $15 per unit, what is the quantity imported? c) If the government imposes a tariff of $5 per unit, what is the domestic consumption and domestic production? d) With the $5 per unit tariff, what is the quantity imported? e) How much revenue does the government collect with a tariff of $5 per unit? Answer: a) Domestic consumption is 8 million units per year and domestic production is 0. b) The quantity imported is 8 million units per year. c) Domestic consumption is 6 million units per year and domestic production is 2 million units per year. d) The quantity imported is 4 million units per year. e) The government collects $5 per unit imported and 4 million units are imported, so the government's revenue from the tariff is $5 × 4 million = $20 million per year. Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills

3) Suppose that elimination of tariffs on agricultural products means that 1,000 farm workers lose jobs that pay an average of $20,000 per year. At the same time, because of the importation of relatively cheaper foreign vegetables, 150 million consumers save $2 per year on their grocery bills. a) What is the total income lost by farm workers because of the free trade? b) What is the total dollar amount saved by all consumers combined? c) Which is greater, the lost income or the consumer savings? Do the benefits of free trade outweigh the costs in this simple example? d) Which group is most likely to become politically involved over the issue of removing the tariffs, the farm workers or the consumers? Why? Answer: a) The total income lost by farm workers is 1,000 × $20,000 = $20,000,000. b) The total saving by all consumers is 150,000,000 × $2 = $300,000,000. c) The consumer savings is much larger than the lost income, so the benefits of free trade outweigh the costs. d) The farm workers are more likely to become involved, because their individual loss is much greater than an individual consumer's gain. Topic: Rent Seeking Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Analytical Skills 7 True or False 1) As a result of an increase in tariffs, imports decrease and government revenue increases. Answer: TRUE Topic: Trade Restrictions; Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 2) Tariffs and quotas both decrease the amount of a good consumed and raise the price paid by domestic residents for the good. Answer: TRUE Topic: Trade Restrictions; Effects of a Tariff and a Quota Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 3) Quotas are less damaging to an economy than are tariffs. Answer: FALSE Topic: Trade Restrictions; Quota Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

4) Dumping occurs when a foreign firm sells its exports at a lower price than it costs to produce them. Answer: TRUE Topic: The Case Against Protection; Dumping Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 5) Most economists would agree that "saving jobs" is a valid reason for restricting trade. Answer: FALSE Topic: The Case Against Protection; Saves Jobs Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 6) The infant-industry argument is the only perfectly valid argument for protection. Answer: FALSE Topic: The Case Against Protection; Infant Industry Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 7) Over the past 80 years, the United States has reduced its average tariff rate so today it is less than 5 percent. Answer: TRUE Topic: History of Tariffs Skill: Recognition Status: Previous edition, Chapter 15 AACSB: Reflective Thinking 8) Less developed countries, compared to industrialized ones, are more likely to have higher tariff rates. Answer: TRUE Topic: Why Is International Trade Restricted?; Tariff Revenue Skill: Conceptual Status: Previous edition, Chapter 15 AACSB: Reflective Thinking